Lessons from the business index
Ray Dalio reminds the macroeconomic policy managers of three principles for keeping economic growth alive in a country. “First, don’t have debt rise faster than incomes; second, don’t let incomes rise faster than productivity — because you will eventually become uncompetitive; and third, do all that you can to raise your productivity — because in the long run that’s what matters most.” When one talks about increasing productivity, there are certain efficiency-related improvements in the production process which the private sector has to undertake themselves. But there are also certain productivity-enhancing governance reforms which the State has to undertake, in particular the reform of economic (regulatory and management) institutions.
Setting up and sustaining a business requires undertaking formal registration with Securities and Exchange Commission of Pakistan, Federal Board of Revenue and provincial revenue authorities (depending upon which province the business operates). Second, they will need to apply for utilities e.g. electricity, gas, and communication networks. Third, they have to seek permission to operate from the sectoral inspectors e.g. the food department in case of restaurants, drug regulatory authority in case of pharmaceuticals etc. Last but not the least, if they need to acquire land or undertake construction, they will require necessary permits from the local land registry office or municipal department. All of this remains very complex and at times opaque in Pakistan.
The World Bank’s Ease of Doing Business Index 2018 now ranks Pakistan 147th among 190 economies. The same index for 2017 ranked Pakistan at 144th. The key factors responsible for this downward slide were the deteriorating rank in compliance with taxes and getting credit for business.
In the case of the former, we understand that now with multiple tax authorities working across all provinces of Pakistan, business tax payers are expected to file monthly and annual returns with multiple tax bodies at federal and provincial levels. There are over 45 taxes which Pakistani business tax payers need to comply with every year. These taxpayers also receive audit notices from multiple tax authorities in turn increasing the overall compliance costs.
The World Bank’s Ease of Doing Business Index 2018 now ranks Pakistan 147th among 190 economies. The same index for 2017 ranked Pakistan at 144th. The key factors responsible for this downward slide were the deteriorating rank in compliance with taxes and getting credit for business
Obtaining credit still remains cumbersome, particularly for the small and medium enterprises (SMEs). A recent report of the State Bank of Pakistan explains that only a few business groups enjoy easy access to credit in Pakistan. There are also no serious public policy reform efforts either to increase the credit worthiness of businesses in general. In recent consultations, convened by Sustainable Development Policy Institute, Pakistani SME exporters have revealed how difficult it is to access the Export Finance Scheme and Long Term Financing Facility.
While the government continues to boost about future prospects in real estate and construction sectors, according to the doing business ranking exercise it still takes 15 different administrative processes and over 250 days to get the permit before starting the construction.
The governance of trade in Pakistan also remains an area requiring a lot of effort from the relevant authorities. In terms of trading across border, the country was ranked at a dismal 171 out of 190, making Pakistan’s trade regime one of the least open for exports and imports of merchandise. The costs of both border- and documentary-compliance remain higher than competitor economies.
Businesses also require efficient dispute resolution and contract enforcement mechanisms. Unfortunately Pakistan was again ranked low in terms of enforcing contracts (156 out of 190). Such slow progress on legal reforms for businesses generally keep the foreign and new local investors away from Pakistani markets.
So, what could be a good starting point for Pakistan to work on productivity-enhancing governance reforms?
First, improve the governance of utilities in particularly electricity and gas companies. For Pakistani SMEs, apart from access to energy, a bigger concern is the rising cost of electricity and gas, in turn making them uncompetitive.
Second, improve the currently intrusive direct and indirect tax regime. All tax authorities need to be reminded that apart from justified revenue collection another objective for this existence is to create a level playing field for all sectors of the economy and all segments with in the private sector. Tax authorities can do this through the practice of prudent redistribution policies.
Third, reduce the burden of regulations faced by agriculture, industrial manufacturing and services sectors. Effective one-window operations should not be limited to just enterprise registration and tax matters; these should also be made effective for compliance with building, environmental, worker safety and consumer right regulations as well.
Fourth, the government will need to share costs of improvements in human capital and product sophistication (through adoption of new technology). Unfortunately the Export Development Fund and several other such measures have not delivered the envisaged objective, due to which Pakistan’s available labour, particularly in the manufacturing sector has seen weakening quality. Given the reduced pace of competition policy reforms, desired enterprise-level learning and market development of non-traditional products has also not come about.
There are no short cuts to improving the doing business ranking. The political leadership at the federal level will need to be more proactive in its liaison with the provincial governments and move towards a consensus-driven Charter of Economy if Pakistan wants to attract investors from the region and abroad.
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The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.