There seems to be no stopping the Pakistan Stock market. It is like the bean stalk that keeps taking Jack up and up. Every day it reaches a new high, staying way ahead of its rival across the border. The other race horse -foreign exchange reserves - looks such a laggard in comparison. Not the same oomph and not free of scepticism.
We have had this sterile debate about GDP growth. Neither side really won. The official side was too convoluted and hiding behind methodology that was never in question. Its nemesis based its case on historical analyses that are not beyond question. Significantly, neither side bothered to assay the other elements of economic growth: capital accumulation, productivity growth, and private savings. GDP growth in itself is meaningless, even misleading, if the four growth indicators are not taken together.
The opposition could have attracted a greater audience had it recalled Indian Central Bank's former Governor Y.V. Reddy's quip "while the future is always uncertain, in India even the past is uncertain", as he reflected on the Indian Bureau of Statistics' frequent revision of economic data. We fully understand, with our own projected, estimated, provisional, and final figures - spread over at least three years, giving sufficient time to bureaucrats to adapt to shifting sands of politics.
The stock market index, its composition apart, is free of any controversies. We are thus surprised that neither side chose to use this uncontroverted fact as a proxy in support, or denial, of the case.
Is the health of a stock market indicative of the health of an economy? Does a thriving stock market spur economic growth? Most researchers say yes, though some argue that stock market growth is a prelude to economic growth - there is a considerable time lag - and not a certification of current health of the economy.
The theory is that a well developed market is an efficient creator of liquidity - and remarkably good at allocating capital, something that challenges governments. It is also argued that market liquidity is a robust sign of real per capita GDP growth.
The market's stellar performance apart, Pakistan stacks up well on causality, or the relationship between stock market performance and economic growth. It gets reasonable marks on the standard market liquidity measures: value traded (value of shares traded as share of GDP) and turnover ratio (value of shares traded as a share of market capitalization). Much of it has to do with our integration with the world through the liberalization measures (allowing easy repatriation of dividends etc) undertaken in the 90s.
Does this rest the case for the trumpeters of Pakistan's arrival? Well, let's not rush to the victory stand quite yet. There is the other school of thought, harking back to Joan Robinson all these years ago, that is not convinced if the stock market is a good reader of the state of the economy. Indeed, it is of the view that the liquidity that the market sucks-in creates distortions in the economy. It is also concerned that more liquidity in the stock market reduces the incentive for shareholders to monitor managers, leading to weaker corporate governance that impedes optimum resource allocation and slows productivity enhancement.
This is where the regulator (SECP) takes up the mettle, making corporate governance increasingly more robust. SECP's Code of Corporate Governance, crafted along the OECD model with help from the IFC, touches most of the buttons. The SECP Act, its latest amendment ripe for Presidential assent, pretty much captures the spirit of Sarbanes-Oxley Act in the US, where Enron and WorldCom were played out, that legislated more stringent governance oversight. But how relevant is our Code to our situation? Does it go far enough or does it go too far?
The sheen of our booming stock exchange, the fifth best performing index in the world, is not without blemish. It lacks depth and is not immune to shocks. Only a fraction of companies are listed - indeed we have fewer listed companies today than three years ago, and there is no sign of a corporate beeline to the PSX, despite the current euphoria. Only one fourth of the scrips are actively traded. Only a handful offer sufficient 'floating stock'. There is insufficient evidence that we have been cauterized against the interruptions of 2002 and 2008.
The organised sector - MNCs, banks, bigger corporates - can happily live with the Code. They have no difficulty attracting competent independent directors. They are quite used to 'significant policies' and actually making them work. The working relationship between the Board and the Management is generally quite seamless. It is the 'family owned' companies, that get listed basically to raise funds, who find little use for the Code. They go through the form - find a family friend or two to act as independents, set up the required committees, even put on their website the code of conduct and whistle blower policy - but they basically want it to be business as before, rubber stamped by a compliant Board that is there only to meet statutory requirements.
Most of them share the view of Conrad Black, the celebrated Publisher who ended up in jail largely because of a hostile Audit Committee: "the proclaimers and enforcers of contemporary corporate governance are most often people who have never faced the complexities of actually running a business but want to make up more and more rules on how to do it".
The Seth has been running his business successfully, shenanigans and all included, and just can't understand why there should be succession planning, or that he no longer has unquestioned authority to give company funds to his favourite charity, or why it is problematic now to find the cash to grease the palms that he has been so good at. He turns to working around the Code. And the SECP is quite indulgent, either because it wishes to give the 'family-owned' greater incubation time, or fears a tighter control will discourage the others from getting listed.
PSX has done well. MSCI has confirmed it by welcoming it back to its Emerging Markets Index that represents 10% of world's market capitalization. But it is too small and flimsy to be a predictor of economic growth; and corporate governance is work in progress. Meanwhile, to the bottom of the pyramid it does look like a casino that distances the top of the pyramid further.
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