Ease of doing business? – Newspaper

PAKISTAN has ensured a great leap in its classification in the latest indicators of Ease of doing business published by the World Bank. This is commendable and welcome, and is the culmination of a diligent and concerted effort made by the government's leading agency, the Investment Board, in conjunction with a wide range of federal and provincial agencies, in the past. two or three years (The initiation of these reforms is prior to this government and this fact must be recognized with all my heart). However, despite all the exaltation in this regard, it is important to recognize which are the EoDB indicators and which are not.

Read: Pakistan jumps 28 positions in the ranking of ease of doing business of the World Bank

The indicators suffer from significant and well recognized deficiencies.

First, the EoDB indicators punctuate de jure measures (that is, what has been announced) but not the de facto position on the ground, which in most cases differs significantly.

Second, the Ease of doing business indicators capture a part of the overall investment climate in the country, and most of the time, they do not measure or qualify the most important limitations and bottlenecks that companies face. In fact, by assigning equal weights to all the different indicators obtained by the EoDB, it "cuts" or minimizes the importance of the most important restrictions that companies may face in a particular jurisdiction.

As a corollary, the World Bank's EoDB seems to be significantly biased towards capturing the ease of doing business for new businesses or new businesses rather than for the owners.

The disconnection with the broader investment climate or economic performance is manifested, for example, in the difference between the current range of 108 in Pakistan and the rank of 168 in Bangladesh. Despite being 60 notches lower in the EoDB, Bangladesh attracted an internal FDI equivalent to 1.1 percent of GDP in 2018 compared to 0.8pc for Pakistan.

Another issue concerns the methodological inconsistency of the World Bank's Doing Business framework that makes a comparison of a country's progress between years difficult, if not impossible. This issue stood out quite embarrassingly for the World Bank when Chile's ranking fell massively between 2006 and 2010. On both occasions, the fall coincided with the coming to power of the socialist Michelle Bachelet.

It is important to put the EoDB indicators in perspective.

In early 2018, the respected World Bank chief economist, Paul Romer, suggested that questionable methodological changes had been made within the framework of Doing Business that coincided with the assumption of power by the leftist government in Chile. These changes resulted in a sharp fall in the classification of Chile instead of an underlying deterioration of its commercial climate.

Finally, the most powerful criticism of the global frameworks of "best practices" driven by IFIs, such as EoDB, is that they promote imitation that "often combines form and function, leading to a situation in which" it seems "substitute for" does ", that is, governments seem capable of imitating, but in reality they are no longer capable" (from Building State Capability: Evidence, Analysis, Action).

The elaboration of the points here and the review of some examples of how both domestic and foreign investors have been treated, not only in the distant past, but as recently as the 2019-2020 finance bill, will provide a wider context.

Among the most important parameters that investors are looking for is the certainty and continuity of policies. This problem has affected Pakistan since the 1990s and where the country's history is poor, however, policy coherence is not reflected in the EoDB. A long list of atrocious examples abounds.

Beginning with the Westinghouse case of the 1990s, where a court of first instance in Pakistan blocked the US company so that it did not fulfill a contractual obligation with its local supplier, until the victimization of PML-N of the Hub Power administration and the IPPs under the 1994 energy policy in Nawaz The second Sharif government, to waive sovereign commitments in the case of the Engro investment of $ 1.1 billion in its new fertilizer plant, as well as for the investment of Al-Tuwairqi Steel Mills of nearly $ 300 million, the list of adverse interventions by the executive and the judiciary are spreading over the past three decades is depressingly long.

This list includes other unfortunate episodes, such as the scrap of the purchase of Pakistan Steel Mills by a consortium led by foreign investors, or the torpedoing of the PIA restructuring by the Supreme Court for weak reasons. More recently, massive fines have been imposed on Pakistan in the cases of Reko Diq and Karkey because the country has breached its sovereign commitments, again due to misplaced activism by the courts.

Another area of ​​great importance that has kept investment at bay is the country's fiscal regime. This includes not only the complicated tax code and the multiplicity of taxes (especially after the 18th Amendment), but also the tax treatment, that is, the way the law is applied (or chosen not to apply). The lack of taxation in large sectors of the economy and the unequal treatment of taxes between different industries, between companies within the same industry and between formal and informal sectors of the economy, create challenging conditions for formal businesses that are not properly captured. in the ease of doing business indicators.

The tax treatment recently offered by FBR to investors in three Special Economic Zones highlights the fact that the problem is not one that has been sent to the distant past, but is a continuous one, which extends to the period covered by the last report. of Doing Business.

Perverse investment incentives are amplified by widespread underbilling and contraband that harm genuine and documented companies. The regulatory burden is an additional element that companies in the formal sector have to deal with, which increases "arbitration" with undocumented companies in the informal sector.

In summary, although early success as an advance in the classification of Ease of doing business is welcome and the exaltation of the government is justified, it is important to recognize that there are much deeper and more significant reforms that must be implemented to achieve lasting improvement in the climate of investment of the country.

The writer is a former member of the economic advisory council of the prime minister and runs a macroeconomic consultancy based in Islamabad.

Published on Dawn, November 8, 2019