According to just-released 2008 edition on the ‘ease of doing business’, the fifth in a series of annual reports investigating the regulations that enhance or contain business activity, by International Finance Corporation, an arm of the World Bank, Pakistan is ranked 76 among 178 economies of the world and India sits at 120th position. In the context of South Asia, only Maldives is ahead of Pakistan, ranked at 60, but India lags behind other five nations ––Bangladesh(107), Sri Lanka (101), Nepal (111) and Bhutan (119). India held 134th ranking last year and has, thus, moved up by 14 steps and Pakistan has retreated by two steps.
However, Pakistan fares better in business start-up. Those starting a new business have to go through 11 procedures and spend 24 days in Pakistan compared to 13 procedures and 33 days in case of India. And it costs 14 per cent GNI of income per capita in Pakistan while in India it is 74.6 per cent. Pakistan ranks 59 overall in starting a business while Australia is the top-ranked economy.
Land and construction account for between half and three quarters of the wealth in any country. Thus securing rights to property strengthens incentives to invest and facilitate trade. It takes six procedures in both Pakistan and India but requires 50 days in the former and 62 days in the latter to register a property, the cost of getting registered being 5.3 per cent of the property value in Pakistan and 10.3 per cent in India.
The collateral and bankruptcy laws in most South Asian countries do not effectively protect the legal rights of borrowers and lenders. The region’s average is 3.8 in the 0-10 index, the lowest in the world. But in respect of protection of investors, which is crucial to entrepreneurship and investment, it fares relatively well. Pakistan is slightly ahead of India on 0-10 scale by scoring 6.3 compared to six by India.
Regarding number of tax payments in a year, Hong Kong holds an ideal position in the world. There is only one income tax and one fuel tax to be paid by a medium-sized enterprise. Pakistan ranks 146 overall in this respect and is placed slightly better than India. There are 47 tax payments in a year in Pakistan and 560 days are involved, compared to 60 and 271 days in India. And these taxes constitute 40.7 per cent of the companies’ profits in Pakistan, but 70.6 per cent in India.
In South Asia, doing construction work is a difficult proposition. Complying with building regulations is so costly that many builders would prefer to opt out or pay bribes to pass inspections or simply build illegally. To deal with licences requires 12 procedures, 223 days and costs 869.5 GNI per capita in Pakistan. In India, it requires 20 procedures, 224 days and costs 519.4 per cent GNI per capita.
The pace of reforms has been slow in South Asia. In 2005-06, India took five reforms and Pakistan two and in 2007 both countries another two reforms each to reduce the time, cost, and hassle for businesses to comply with legal and administrative requirements. India took over top position in reforms from Pakistan which held it two years ago.
A country must decide which reforms to tackle first. Four steps to successful reforms are: administrative reforms that need legislative changes, cutting unnecessary procedures and introducing standard application forms. Pakistan, according to the report, did all these things in reforming its trade administration. Apart from implementing risk management techniques, Pakistan also introduced a new customs clearance process that allows importers to file cargo declarations before goods arrive at the port. Hence, trade is easier in Pakistan as customs clearance at container terminal takes only four hours compared to ten days in 2004.
In Pakistan and India, cities vary in their performance on the ease of doing business. Hyderabad in India and Karachi in Pakistan outperform the rest of the cities. If each state were to adopt the country’s best practices, India would rank 79th in the world instead of current ranking of 120th. This means, for example, adopting Jaipur’s regulations on starting a business, Bhubaneshwar’s rules on licensing, contract enforcement and taxes, Hyderabad’s property regulations and Chennai ’s trade practices.
The same is true for Pakistan. If each Pakistani region adopted Lahore ’s regulations on starting a business, Peshawar’s regulations on dealing with licences, employing workers and contract enforcement and Karachi ’s regulations on bankruptcy, taxes and property, Pakistan’s ranking would jump from 76th to 52nd.
The IFC methodology has, however, its limitations. It only studies regulations affecting ten stages of a business’s life but does not take into account the important areas such as a country’s proximity to large markets, quality of infrastructural services, underlying strength of institutions and transparency of government procurement. Then abnormal law and order situation vitiates the business environment. So mere improvement in regulations is not enough to make doing business easier.