PAKISTAN has secured a big jump in its ranking in the latest Ease of Doing Business indicators released by the World Bank. This is both commendable as well as welcome, and is the culmination of diligent and concerted effort having been put in by the government’s lead agency, the Board of Investment, in conjunction with a wide swathe of federal as well as provincial agencies, over the past two to three years. (The initiation of these reforms predates this government and this fact should be large-heartedly acknowledged.) However for all the exultation in this regard, it is important to recognise what the EoDB indicators are — and what they are not.
The indicators suffer from significant, and well-recognised, shortcomings.
First and foremost, the EoDB indicators score de jure measures (ie what has been announced) but not the de facto position on the ground, which in most cases differs significantly.
Secondly, the Ease of Doing Business indicators capture one part of the overall investment climate in the country — and more often than not, do not measure or score the more significant constraints and bottlenecks businesses face. In fact, by assigning equal weights to all the different indicators the EoDB scores, it ‘trims’ or minimises the importance of the more significant constraints that businesses may face in a particular jurisdiction.
As a corollary, the World Bank’s EoDB appears to be significantly biased towards capturing the ease of doing business for start-ups or new companies rather than for incumbents.
The disconnect with the wider investment climate or economic performance shows up, for example, in the difference between Pakistan’s current rank of 108 and Bangladesh’s rank of 168. Despite being 60 notches lower on the EoDB, Bangladesh attracted inward FDI equal to 1.1 per cent of GDP in 2018 compared to 0.8pc for Pakistan.
Another issue pertains to 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 came to the fore rather embarrassingly for the World Bank when Chile’s ranking dropped 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 place the EoDB indicators in perspective.
In early 2018, the World Bank’s respected chief economist Paul Romer suggested that questionable methodological changes had been made to the Doing Business framework that coincided with the assumption of power of the left-leaning government in Chile. These changes resulted in the sharp fall in Chile’s rankings rather than any underlying deterioration of its business climate.
Finally, the most powerful critique of global ‘best practice’ frameworks pushed by IFIs, such as EoDB, is that they promote mimicry that ‘often conflates form and function, leading to a situation where ‘looks like’ substitutes for ‘does’; ie governments look capable after the mimicry but are not actually more capable” (from Building State Capability: Evidence, Analysis, Action).
Elaborating the points here and reviewing some examples of how both domestic as well as foreign investors have been dealt with, not just in the distant past but as recently as the 2019-20 Finance Bill, will provide greater context.
Amongst the most important parameters investors look for is policy certainty and continuity. This issue has dogged Pakistan since the 1990s and where the country’s track record is poor — yet policy consistency is not captured in the EoDB. A long list of egregious examples abound.
Starting with the Westinghouse case of the 1990s, where a Pakistani lower court blocked the US company from enforcing a contractual obligation on its local supplier, to the PML-N’s victimisation of the management of Hub Power and the IPPs under the 1994 power policy in Nawaz Sharif’s second government, to reneging of sovereign commitments in the case of Engro’s $1.1 billion investment in its new fertiliser plant, as well as for Al-Tuwairqi Steel Mills nearly $300 million investment, the list of adverse interventions by the executive as well as judiciary spreading over the past three decades is depressingly long.
This list includes other sorry episodes such as scrapping the purchase of Pakistan Steel Mills by a foreign investor-led consortium, or the torpedoing of PIA’s restructuring by the Supreme Court on flimsy grounds. More recently, massive fines have been imposed on Pakistan in the Reko Diq and Karkey cases due to the country reneging on its sovereign commitments, again due to misplaced activism by the courts.
Another area of paramount significance which has kept investment at bay is the country’s tax regime. This includes not just the complicated tax code and the multiplicity of taxes (especially after the 18th Amendment), but the tax treatment ie the way the law is applied (or chosen not to be applied). The lack of tax enforcement on large swathes of the economy, and uneven tax treatment between different industries, between firms within the same industry, and between the formal and informal sectors of the economy, all create challenging conditions for formal businesses that are not adequately captured in the Ease of Doing Business indicators.
The tax treatment meted out recently by FBR to investors in three Special Economic Zones highlights the fact that the problem is not one consigned to the distant past but is a continuing one — extending into the time period covered by the latest Doing Business report.
The perverse incentives for investment are amplified by pervasive under-invoicing and smuggling that hurt genuine, documented businesses. The regulatory burden is an additional element that formal-sector businesses have to contend with, which increases the “arbitrage” with undocumented firms in the informal sector.
In short, while an early success such as an advancement in the Ease of Doing Business ranking is welcome and the government’s exultation is justified, it is important to recognise that there are far deeper and more meaningful reforms that need to be implemented to bring about a lasting improvement in the country’s investment climate.
The writer is a former member of the prime minister’s economic advisory council, and heads a macro-economic consultancy based in Islamabad.
Published in Dawn, November 8th, 2019