Investing in Pakistan – roadblocks that spring up

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Real estate is the most lucrative, risk-averse and popular investment opportunity in Pakistan amongst retail and large investors. Everyone wants to invest small or large savings in real estate instead of starting or expanding a business. What will be the implications of this behaviour on employment opportunities for a huge size of existing and upcoming young labour force?

If we compare Pakistan’s investment-to-GDP ratio with other developing countries making headlines, it becomes evident that they all maintained a ratio twice as much as Pakistan’s current level. Lower level of investment and a large young population emphasise the urgency to take steps for increased investment and economic growth to provide jobs to youth, deliver services and improve quality of life.

The hidden deficit in Pakistan’s policies

While the government’s constraints may not allow immediate measures that bolster public investment, the key is to mobilise private sector investment and that requires an enabling business-friendly environment.

However, current obstacles are not allowing investment in new ventures or expansion of existing businesses.

For example, see Pakistan’s Ease of Doing Business ranking of 138 (by the World Bank Group’s Doing Business Report 2016) out of 189 economies of the world. It was around 70 in 2007.

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Country’s formal commercial dispute resolution system is one of the worst in the world ie “Enforcing Contracts” rank is 151. How can someone think about starting a business if such a state of affairs persists?

Pakistan’s ranking in “Paying Taxes” is 171. We always hear debates on tax mobilisation and enhancing the tax-to-GDP ratio but rarely report how we treat taxpayers and this, indeed is evident from the “Paying Taxes” ranking.

The country ranks 157 in “Construction Permits” and 133 in “Registering Property”. There has been a sharp continuous slippage in rankings of almost all indicators during the last eight years. Resultantly, people continue to invest in real estate speculation and informal businesses or rely on rent seeking through statutory regime orders and subsidies.

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The regulatory issues

Another dimension of constraints faced by investors is the archaic and complex regulatory framework. Regulations pertain to different tiers of the government, influencing business activity. Poor regulatory quality and arbitrary enforcement of regulations hurt small businesses disproportionately. Most of the sectoral regulatory agencies are under the federal government. However, it is struggling with the institutional structure instead of designing business friendly regulations.

A number of regulations are being administered by provincial and local governments particularly in the areas of labour, environment, quality, price controls and safety inspections among others. These create real hurdles for businesses through unpredictable and non-transparent inspections and arm twisting tactics for rent seeking.

Multiple public sector regulatory agencies continue to deter local and foreign investors. Dr Ishrat Husain highlighted in an article that there are 40 public sector organisations that a business has to deal with. This indeed, accentuates the problem of excessive, ineffective and unnecessary regulatory oversight and control.

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No effort is being undertaken in Pakistan to simplify or upgrade business and regulatory legal framework at provincial and local levels. Another outcome is the ever escalating property prices due to speculative and non-productive investments. This has also made cost of doing business very high in terms of acquiring premises for a factory or office.

It is interesting to note the response of the public sector in Pakistan when pushed to enhance private sector development. Most favoured option is to establish a government organisation headed by a civil servant for providing trainings, capacity building, technological, marketing or other such business solution services to the private sector without realising that private sector has surpassed public sector in terms of exposure and knowledge.

A cogent message that needs to be conveyed to policymakers is that in order to allow business to thrive and attract investment, they need an enabling environment. Irrelevant trainings, useless feasibility reports and so-called technology up-gradation support are mostly futile efforts. A basic question that needs to be addressed here is: how can a public servant train or guide a business organisation?

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Furthermore, there is a need to address regulatory bottlenecks and other complexities of the public-private interface.

The writer is a Doctoral Student in Public Policy at the University of Delaware and formerly served as Governance Specialist at the Ministry of Finance

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