It is a general perception that in low-income countries, labour is cheap; and hence the cost of doing business is low. This, however, is a myth. The World Bank 2011 Economy Rankings – an index that assesses the ease of doing business in respective countries – puts Pakistan in the 105th position, well below the likes of Saudi Arabia (ranked 12), and even Rwanda (ranked 45).
In countries like Pakistan, the total cost of production for a good may be far higher than in many other emerging markets due to multiple external factors. The quality of factors of production remains a major concern for most producers. Human resources suffer severely from a dearth of talent, and consequently demand for productive workers outstrips their supply. On the other hand, those employers who do not incentivise and retain their high-quality employees suffer from excessive transfers and poaching by other competing employers.
Sometimes, persons vital to the business of firms are not paid all of their monetary entitlements: some of their wages are ‘retained’ by employers. Top managers instead receive non-monetary benefits like cars and houses as compensation for withheld wages. The unpaid wage bill of such employees may run into millions of rupees. This deters them from switching over to other competing businesses, as they may have to forego the amount of unpaid (or retained) wages. Head-hunters in such an environment must pay the retained wage bill if they want such skilled workers to switch over to them. This results in higher cost of recruitment for businesses.
This can be described as a ‘hidden cost’ of doing business. The so-called ‘hidden costs’ also include facilitation fees paid to community or state leaders, ‘speed money’ paid to different government departments involved in certifications, bribes to regulators and tax authorities, and payments to extortionists and criminal elements. Payments to extortionists and criminal elements not only include the ‘bhatta’ fee paid by businesses to gangsters and the mafia in cities like Karachi, but also include payments to those service providers who use delaying tactics to extract more money from the businesses that otherwise face tight deadlines for onward delivery of their goods and services. This is a major problem faced by a significant number of businesses in the services sector.
Hidden costs that accrue due to incompetency of the employees (costs associated with operational risks), and blackmailing from service providers are a major hindrance to the development of business in Pakistan. To minimise the occurrence of such costs, many businesses are switching from a manufacturing model to trading-based activity. According to some recent estimates, manufacturing in Pakistan may incur up to five times more hidden costs as compared to trading. If the government does not devise an effective policy to combat rising hidden costs of doing business in Pakistan, a structural shift in the composition of GDP in favour of trading is imminent. This will have a devastating effect on employment and result in a decrease in income levels and an increase in disparities between social strata.
It is imperative that a nationwide drive be initiated for business-ethics literacy. Without inculcating strong ethics in employers, employees, and other service providers, it will be very difficult to reduce the specified unnecessary costs of doing business in Pakistan. The government should, perhaps with the help of the private sector, develop a business ethics qualification, which must certify that the person a business contemplates dealing with is at least aware of the basic requirement of doing business fairly. Also, it will be helpful to found an institute for business ethics, which offers different levels of memberships to individuals and businesses. This, along with training and qualifications in business ethics, should serve as a screening mechanism to solve what is popularly known in economics as the ‘lemons problem’.
The resolution of problems will also attract a number of global business players that are looking for viable business opportunities in Pakistan. There is no doubt that Pakistan boasts of a huge consumer market and international commercial players would be willing to invest in Pakistan – provided a transparent system of doing business is developed, and guidelines are adhered to religiously.
THE WRITER IS AN ECONOMIST AND A PHD FROM CAMBRIDGE UNIVERSITY
Published in The Express Tribune, August 20th, 2012.