Earlier this week, this newspaper highlighted how the dis-ease of doing business is getting worse in Pakistan (See BR Research columns dated November 10, 2015). In that column we highlighted some of the reasons why Pakistan is still ranked so poor despite all the hue and cry over the subject in the last many years.
About two years ago, in January 2014 to be specific, the Chairman Board of Investment Miftah Ismail said the government will improve the country's ranking within two years. The last we heard some committees were also formed to help speed up that process. Yet, two years on and the rankings have only worsened.
Commenting on these state of affairs, one economic observer aptly said that the ease of doing business rankings is like an exam that comes with a cheat paper. That is to so say that the overall rankings are already broken down into very specific components that are needed to improve the rankings. Today's Brief Recording section attempts to highlight those specific components, in terms of where does Pakistan stand vis-à-vis a host of other economies, and which specific areas do we need to work on.
However, it is pertinent to highlight at this point that is not the rankings per se that we must chase. Rankings are competitive, and yes in theory being ranked 110 is better than being ranked 130 and worse than being ranked 80. And to that end, perceptions matter.
But in practise, and ceteris paribus, no investor says well "Oh! We should invest in country X because it is ranked 80 as against country Y, which is ranked 100" - not especially if the difference in rating points or the country X and Y's distance from best performance is nearly about the same. Ergo, what matters the most is that regulations in Pakistan are closest to the best performance.
Specifically, it is the distance from best performance or 'distance to frontier' (DTF) score as the World Bank calls it, which matters the most. The DTF shows the distance of each economy to the "frontier," which represents the best performance observed on each of the indicators across all economies in the Doing Business (DB) sample since 2005.
According to World Bank's definition, an economy's distance to frontier is reflected on a scale from 0 to 100, where 0 represents the lowest performance and 100 represents the frontier. For example, a score of 75 in DB 2015 means an economy was 25 percentage points away from the frontier constructed from the best performances across all economies and across time. A score of 80 in DB 2016 would indicate the economy is improving. Using a real example, the US, which is ranked 7th best in the ease of business, has a distance to frontier score of 87, whereas South Sudan, which is ranked 187th, has a distance to frontier score of 35.
The itemised takeaways from the series of graphs in today's Brief Recording clearly shows that nothing short of wide ranging reforms are needed to turn the dynamic around and make Pakistan a country where business is easy to conduct. From expanding credit coverage and strengthening of legal rights to quality of land administration and significant improvements in judicial system - all require serious and continuous efforts by the government. And these cannot be done with the kind of quick fix shortcut economics mindset that this government has. There are no or little low hanging fruits here!
-- Figure 1 reasserts our view that it is the distance from frontier that matters. For instance, starting a business in Pakistan is ranked 122nd in the world, which would be a matter of concern if we limit our analysis to ranking alone. But in terms of distance from best performance, starting a business is one of the best things going for Pakistan and that there is relatively less room for improvement in that measure as compared to other indicators. Likewise, we are ranked 25th in the world in terms of protecting minority investors. But relatively, there is more room for improvement in protection of minority investors than in starting a business.
-- Figure 2 tells us that the total number of procedures and the number of days required to register a firm could be improved, although its impact on overall ranking will be relatively small. In any case, the SECP should take note of these areas.
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Figure 2: Starting a business
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Economy Rank DTF Procedures Time Cost Paid-in
(number) (days) (% of income min. capital
per capita) (% of income
per capita)
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Pakistan 122 80.94 10 19 9.4 0
India 155 73.59 12.9 29 13.5 0
Bangladesh 117 81.72 9 19.5 13.9 0
Singapore 10 96.49 3 2.5 0.6 0
Vietnam 119 81.25 10 20 4.9 0
Turkey 94 85.18 8 7.5 16.6 11
Central African Republic 189 31.36 10 22 204 540.1
United Arab Emirates 60 89.98 6 8 6.2 0
New Zealand 1 99.96 1 0.5 0.3 0
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-- Figure 3 shows that the total number of procedures and number of days required to build a warehouse are two areas where the authorities need to work on; there is little room for improvement in other sub indicators.
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Figure 3: Dealing with construction permits
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Economy Rank DTF Procedures Time Cost (% of Building
(number) (days) warehouse quality control
value) index (0-15)
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Pakistan 61 72.62 10 250.4 3.2 13.7
India 183 32.47 33.6 191.5 26 11
Bangladesh 118 65.27 13.4 269 1.7 11
Singapore 1 92.97 10 26 0.3 14
Vietnam 12 82.21 10 166 0.8 14
Turkey 98 67.82 18 103 3.6 9.5
Morocco 29 77.65 13 91 3.7 12
Afghanistan 185 22.94 11 353 76.6 1.5
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-- Figure 4 is a story that most Pakistanis are already aware of; so really there is no eureka moment here.
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Figure 4: Getting electricity
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Economy Rank DTF Procedures Time Cost (% of Reliability of
(number) (days) income supply and
per capita) transparency of
tariff index (0-8)
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Pakistan 157 45.47 5 178.3 1226 0
India 70 74.56 5 90.1 442 5.5
Bangladesh 189 15.31 9 428.9 3141 0
Singapore 6 94.34 4 31 26 8
Vietnam 108 63.34 6 59 1323 3
Turkey 36 82.84 4 63 600 6
Korea, Rep. 1 99.88 3 18 40 8
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-- Figure 5 shows that the two areas where Pakistan needs solid improvement is lower cost of registration as well as the quality of land administration index. Both these indicators are as bad as that of Bangladesh, which is ranked 185th on this particular sub-index.
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Figure 5: Registering property
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Economy Rank DTF Procedures Time Cost (% of Quality of the
(number) (days) property land administration
value) index (0-30)
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Pakistan 137 50.31 6 50 7.5 5
India 138 50.29 7 47 7.5 7
Bangladesh 185 27.48 8 244 7 4.5
Singapore 17 85.66 4 4.5 2.9 26.5
Vietnam 58 70.6 5 57.5 0.6 14
Turkey 52 73.01 7 7 4 21.5
Kuwait 68 68.42 8 49 0.5 17.5
New Zealand 1 94.46 2 1 0.1 26
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-- Figure 6 pertains to weakest link in the ease of doing business in Pakistan. However, like many other areas, there is little the Board of Investment can do about it except for acting as a co-ordinating body.
Pakistan's performance remains weak across all sub-indicators most notably for terrible legal rights, which bankers have been talking about for years, and low number of individuals and firms whose borrowing history is recorded by private or public credit organisations. The former lies first in the federal government's domain, and then to be implemented by the courts; whereas the latter has much to do with financial inclusion and we know how "fast" that is growing.
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Figure 6: Getting Credit
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Economy Rank DTF Strength of Depth of credit Credit registry Credit bureau
legal rights information coverage (% coverage (%
index (0-12) index (0-8) of adults) of adults)
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Pakistan 133 30 3 3 6.7 4.8
India 42 65 6 7 0 22
Bangladesh 133 30 6 0 0.9 0
Singapore 19 75 8 7 0 58.6
Vietnam 28 70 7 7 41.5 6.9
Turkey 79 50 3 7 74.9 0
Libya 185 0 0 0 0.5 0
New Zealand 1 100 12 8 0 100
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-- Figure 7 does not show all the sub-indicators for clarity sake. It is heartening to note that Pakistan is faring well in major sub-indicators, including strength of minority investors' index, extent of shareholder governance, shareholder rights, and regulations relating to ownership and control. But there are some areas that need improvement, and are highlighted in the table.
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Figure 7: Protecting minority investors
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Economy Rank DTF Extent of Extent of Extent of Extent of
conflict of interest disclosure director liability corporate
regulation index (0-10 index (0-10) index (0-10) transparency
index (0-10)
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Pakistan 25 66.67 6 6 6 5
India 8 73.33 6.7 7 6 6
Bangladesh 88 53.33 6.3 6 7 5
Singapore 1 83.33 9.3 10 9 7
Vietnam 122 45 3.7 7 3 5
Turkey 20 68.33 6.7 9 5 6
Afghanistan 189 10 1.7 1 1 1
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-- When it comes to paying taxes, the picture is pretty much straightforward. Figure 8 shows how cumbersome is the process of filing tax returns and make payments thereof. While having a low tax rate is important, Turkey's example shows that the number of payments per year and the time spent on paying taxes and filing the returns are far more important.
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Figure 8: Paying taxes
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Economy Rank DTF Payments Time (hours Total tax
(number per year) rate (%
per year) of profit)
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Pakistan 171 44.46 47 594 32.6
India 157 56.14 33 243 60.6
Bangladesh 86 74.42 21 302 31.6
Singapore 5 96.56 6 83.5 18.4
Vietnam 168 45.41 30 770 39.4
Turkey 61 79.44 11 226 40.9
Nigeria 181 32.17 59 907.9 33.3
United Arab Emirates 1 99.44 4 12 15.9
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-- Figure 9 shows how Pakistan fares against its peers in terms of monetary and non-monetary costs of trade. And as is visible across the different indicators Pakistan's performance is extremely poor, especially for a country that is reimagining itself as a regional trading hub.
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Figure 9: Trading across borders
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Economy Rank DTF Time to Cost to Time to Cost to Time to Cost to Time to Cost to
export: Border export: Border export: Documentary export: Documentary import: Border import: Border import: Documentary import: Documentary
compliance (hours) compliance (USD) compliance (hours) compliance (USD) compliance (hours) compliance (USD) compliance (hours) compliance (USD)
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Pakistan 169 38.11 79 426 62 307 141 957 153 786
India 133 56.45 109 413 41 102 287 574 63 145
Bangladesh 172 34.86 100 408 147 225 183 1294 144 370
Singapore 41 89.35 12 335 4 37 35 220 1 37
Vietnam 99 67.15 57 309 83 139 64 268 106 183
Turkey 62 81 8 356 2 87 36 655 11 142
Congo, Dem. Rep. 187 1.26 515 1323 698 2500 588 2089 216 875
Bahrain 85 72.06 24 47 80 211 54 397 84 130
EU countries 1 100 0 0 1 0 0 0 1 0
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-- Figure 10 shows that while the cost of enforcing contracts is not so terribly bad - being a just a few percentage points higher from the best ranked country - but it's the quality of judicial processes and the number of days it takes to resolve a dispute that requires urgent resolution.
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Figure 10: Enforcing contracts
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Economy Rank DTF Time Cost (% Quality of
(days) of claim) judicial processes
index (0-18)
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Pakistan 151 45.35 993.2 23 6
India 178 32.41 1420 39.6 7.5
Bangladesh 188 22.21 1442 66.8 7.5
Singapore 1 84.91 150 25.8 15.5
Vietnam 74 60.22 400 29 6.5
Turkey 36 68.87 580 24.9 13
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