Doing business in Pakistan

KARACHI: “The difference between Pakistan and India is that you can get things done faster in Pakistan,” said an Australian businessman at a gathering of Australian and Pakistani entrepreneurs in Karachi.

Given the fact that it was the launch of the Pakistan-Australian Business Forum, one might expect such kind of words about the country from a visitor, but the World Bank has empirical evidence to suggest that his statement is true. For the last seven years, the World Bank has issued a report called Doing Business, which measures the ease with which private enterprises can conduct business around the world. It measures such metrics as the amount of time it takes to register a business, how many procedures does it take, how many official signatures and how much would it cost. It does so for dozens of other relatively simple interactions between government and businesses in any given country.

It then ranks each country by how easy it is to do business there. While the subjects covered by the report seem like inane minutiae about government paperwork, they reflect a practical application of the globally dominant ideology about the role of government in an economy: the Washington Consensus. This broad term refers to the idea that the primary role of the state is to ensure the functioning of a free and fair private market place. While the idea has come under attack since the beginning of the current global recession, it remains the driving force behind most of the  global institutions.

According to the Doing Business report, for the last seven years, Pakistan has been an easier place to do business than Brazil, Russia, India and China – collectively referred to as the BRICs and commonly thought of as the most important emerging markets in the world. For the 2010 report, released in September 2009, Pakistan was ranked higher than any other South Asian nation, the first time that has happened since rankings were published in 2005.

This relative ease of doing business is being used by the government of Pakistan in marketing Pakistan as an investment destination. That is probably a smart call, considering the fact that the World Bank’s report is one of the key references used by foreign investors when making a decision as to where to invest. But perhaps the government would do well to focus on how the rankings are compiled, and how surprisingly easy it is to climb up the ladder.

One shot to the top

Pakistan had lagged behind Maldives in the rankings as the second-best place to do business in South Asia for the past four years. Yet in 2010, Pakistan leapfrogged past them to become the easiest place to do business in the region. So what changed? According to this year’s report, just one thing: the government of Pakistan made it possible to electronically register for the sales tax, which meant that the requirement for issuing a declaration of compliance on stamp paper was removed.

This single act reduced the amount of time it takes to start a business by four days (to 20 days) and reduced the cost by 50%. It was that simple. Just one act means that Pakistan can now call itself the best place to do business in South Asia. But perhaps more critically, this action by the government was remarkably easy. It is not as complex as building a national highway network or educating the entire population. All it required was an executive order removing the requirement for a little bit of paperwork that saves ordinary business and entrepreneurs a lot of hassle. It also signals to foreign investors that the government is serious about welcoming them.

Where we do well

There are 10 separate categories on which each country is judged. The report issues a ranking for each country in each category as well as an overall ranking for every country. Pakistan’s overall ranking is 85 out of 183 countries, meaning that the country lies in the middle of the pack. Of the 10 categories, the country does best in the category of “Protecting investors,” coming in at number 27. This is largely due to the fact that it is relatively easy for investors to sue management in the event of a suspected act of fraud. Indeed, the strength of Pakistan’s investor protections place the country higher than the average for the OECD, a group of 30 mostly rich countries. There is no other category in which Pakistan makes it into the top 50.

More work needed... a lot more

While the country has some strengths it also has a lot of weaknesses. Perhaps unsurprisingly, Pakistan gets one of its worst rankings when it comes to the ease of paying taxes. The country also does remarkably poor in the ease of enforcing contracts. But while the current rankings are depressingly low, unlike other global rankings, Pakistan’s problems in the Doing Business report are remarkably easy to fix.

In most cases, all they require is the removal of redundant procedures, which shortens both the time and cost associated with the interaction between government and businesses. The point that this report illustrates more than anything else is that attracting foreign investors does not require a country to lay our massive incentive schemes. Sometimes it can be as simple as just removing a little bit of red tape. In the case of Pakistan, it would probably not hurt to remove a lot of red tape.

And then there is Singapore

The one country that has taken the World Bank’s rankings more seriously than anyone is Singapore. In the words of a Pakistani entrepreneur who has business interests there, “Singapore assaulted that list like its life depended on being number one.” The government of Singapore looked at the reports methodology and systematically set out to become the easiest place to do business in the world for every single category. Singapore has been ranked number one for the past four years in a row. Singapore’s efforts have also borne fruit. The country has seen a 24% increase in foreign direct investment since it reached the top spot in the rankings.

Published in the Express Tribune, May 24th, 2010.