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Friday, 25 October 2019

Not so Easy Business

By: Muhammad Ali Jan

Pakistan is part of the top 10 economies that improved the most in 2018/19. Source: World Bank's Doing Business 2020 report


Pakistan has jumped 28 places in the World Bank’s (WB) global ‘Ease of Business’ rankings to become one of the world’s top 10 performers for 2019. Naturally, the government is ecstatic and the Prime Minister has tweeted a message congratulating everyone involved in achieving this feat. At a time when the Pakistan Tehreek-e-Insaf (PTI) is finding precious little to celebrate – either on the economic or political front – their jubilation is completely understandable. It is also true that for a government increasingly obsessed with its international image, as well as one extremely popular with overseas Pakistanis, these rankings are meaningful, just like they are meaningful for a section of global investors. However, it is also important to read these rankings with a great degree of caution, and key stakeholders as well as the public at large should be aware of their limitations as well as the errors of commission and omission inherent within them. Indeed, presenting these – or any other global cross-country ranking – as some kind of objective indicator for improved economic governance is not only wrong, it is also dangerously misleading.

Without getting into a detailed critique, I will simply highlight three main reasons why Pakistan’s 28 place jump – from 136 to 108 – may mean very little for actual business development and growth in the country. To begin with, what does the WB’s ‘Ease of Business’ report measure? Briefly put, what it attempts to asses and compare are administrative hurdles across a few areas of business regulation, such as registering property, getting electricity, paying taxes, getting taxes etc. In total, there are 11 main dimensions that are combined to make up this ranking. To be more precise, it tries to assess and compare the legally required time and costs of regulatory compliance for these aspects of private enterprise across the globe. It gathers information on these variables through four sources: the laws and regulations in the books, 'experts' (mostly lawyers, consultants and accountants) supposedly well acquainted with local business practices, certain government officials and the WB staff itself.

The first problem is that, by the Bank’s own admission, this is far from a comprehensive measure of the business environment since it does not cover, for example, aspects like security, macroeconomic stability, corruption, labour skills of the population, the underlying strength of institutions, the infrastructure or the financial system,- all of which impact how easy it is to set up a business. Given the lack of any coherent plan from the government for increasing investment that involves sub-regional businesses as well as the general environment of crushing stagflation, it is doubtful that these reforms on their own can lead to a spurt of new business development.

In addition, underlying these rankings is a certain laissez faire ideological bias so that simply a permissive environment is deemed enough to spur growth and for the fruits of this growth to be widespread. To give one example, while the government has made the payment of tax much simpler by introducing online payment modules, the timing, manner and rate of taxes themselves are considered by observers to be a reason why cash has disappeared from the market and the economy has slowed down. Yet, the ease of business ranking would register the reform on paper as a positive while its effects will not be counted.

This brings us to a much more fundamental problem with the ranking: that its source of information involves tax lawyers, accountants, government officials but not entrepreneurs themselves. This is because the report is mainly about how rules and regulations exist on paper and not how they are experienced by actual actors (i.e. firms) on the ground. A much more reliable measure of actual experience are the WB’s 'Enterprise Surveys' which cover aspects such as access to finance, corruption, infrastructure, crime, and competition by interviewing a large random sample of managers and business owners themselves across a range of enterprise types in different parts of the country. What these reports show is that for economies like Pakistan, where close to 70% of all livelihoods are earned in the Informal economy, the disjuncture between laws on paper and actual experience can be monstrous. In fact, scholars who have compared the two surveys have found almost ‘zero correlation’ between improvement in the ranking in terms of laws and actual experience on the ground.

A final limitation of the report is that, even if one were to accept that the formal laws and regulations are important, they cover them for only two main cities, namely Karachi (where the Sindh government was as involved in these reforms as the federal government) and Lahore. Therefore, in addition to the limitation of only looking at laws on paper and not actual experience on the ground, ignoring the vast informal economy, restricting surveys to legal and government experts and covering a few aspects of regulation with a somewhat simplistic idea that less regulation is necessarily better, the report also suffers from a lack of coverage, which for a country as large and varied as Pakistan, is extremely misleading.

This is not to say that the report is entirely devoid of substance or that any other government would not have flaunted a report like this. It is also true that the global 'development industry' continues churn out such reports, even when the rankings contradict one another; to give an example, even as Pakistan has jumped many points on this index, it has dropped three positions from 107 to 110 on the global competitiveness rankings. In fact, the one key lesson of the current economic morass in the country is this: policy makers must dispense with the ‘one-size fits all’ approach to development, particularly that borrowed heavily from the Bank’s neoliberal ‘good governance’ agenda with its laundry list of reforms.

Instead, countries must rely on their own resources (of course, not in an autarkic sense) to chart a home-grown plan for reform, economic growth, decent employment and poverty reduction. Of course, that would require reaching across the aisle - both economically and politically - to people one may not always agree with or like but who are critical stakeholders if any stable and prosperous political economy arrangement is ever to evolve.

The writer is a Research Associate with the School of Global and Area Studies, University of Oxford. He can be reached at muhammad.jan@area.ox.ac.uk.


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