Need for investment

Investment occupies pivotal position in the economic growth (GDP) equation [GDP = consumption + investment + government expenditure + (exports-imports)]. Keeping other variables constant in this equation, increase or decrease in the level of investment affects economic growth in the same direction and hence socioeconomic development.
Investment increases the real value of the economy. With increasing level of investment, output of goods and services increases. With additional economic growth, many job opportunities are created and gap between employed and unemployed labour force gets reduced. More jobs tend to increase purchasing power of the people, as a result consumption expenditure increases and thus overall welfare of the society gets enhanced.
Investment comes from domestic sources and foreign capital inflows. For the developing countries, the domestic sources -skilled labour, capital, technology and managerial skills- are limited. Therefore, Foreign Direct Investment (FDI) inflows are crucial for boosting production capacity and economic growth.
Pakistan is a developing country with low Human Development Index (HDI). Investment activity is limited. Public productive expenditures are extremely low as compared to non-productive expenditures. It is because domestic revenues -tax and non-tax- are not sufficient to meet the requirements for desired level of investment. Therefore, attracting right kind of FDI is essential in order to raise the level of overall investment in the country.
FDI has many advantages. It is a source of capital for capital-starved countries. It brings new technology. Foreign investors also provide requisite trainings to the local work force. Thus FDI adds innovations in the methods of production, marketing, distributions, etc and helps to achieve efficiency in resource utilisation. In the presence of foreign investors, the local investors have to work hard and compete efficiently in order to stay in the market.
Pakistan was successful in attracting sufficient FDI inflows during the period 2002-03 to 2006-07. However, FDI started to decline from 2007-08. On average, FDI contracted by 28 percent during 2007-08 to 2011-12 as against the average growth of 29 percent during 2002-03 to 2006-07.
Why foreign investment is drying up in the country? According to the State Bank of Pakistan (SBP), excessive red tape, complicated and less transparent tax procedures, excessive regulatory bodies, labour laws, high costs and slow settlements of disputes and time consuming entry and exit of business firms. Among others, important factors responsible for significant reduction in FDI over the years are discussed as under:
Poor internal security situation: Poor internal security situation is a major impediment in attracting foreign investors to invest in the country. Why foreign investors will put their money in the country if they are sure that their existence will not be guaranteed there and their skilled labour or professional workers will put to death. A number of incidents happened in the past provide strength to the argument that poor law and order situation remains a serious issue in the country. The government has to come up with stringent measures to improve internal security situation in order to restore the confidence of the investors.
Economic and political risks: Though the country offers market size, one of the determinants of foreign investment, however, policy and political instability risks are higher. Frequent policy changes hardly give confidence to the investors to make decisions for investment. In the recent political turmoil in and around capital city, the road was almost blocked with containers and such a month-long political turmoil shatters the confidence of big firms to continue their operations. Secondly, it stops new investors to invest. Failure to manage the visit of the Chinese president in the mid of sit-ins provides better illustration that political crisis dissuades the investment opportunities.
Excessive tax burden: According to investor surveys, tax administration amongst the top constraints to businesses in the country. Furthermore, Pakistan ranks 21st in the world in terms of number of payments required to be made by large firms, according to World Bank data. The Federal Board of Revenue (FBR) has taken a number of steps such as self-assessment, online registration, e-filing, e-payment, etc to facilitate taxpayers in order to broaden the tax base. However, the number of effective taxpayers remains a fraction of the total population. Low taxpayers' compliance indicates poor tax culture in the country. Promoting tax culture is important to broaden the tax base, which is imperative to reduce tax burden. Equal tax treatment of taxpayers by reducing exemptions is also important to make tax system transparent, neutral, equitable and efficient.
Inadequate energy supply: Adequate supply of energy is required for operating machinery to the fullest capacity and also to utilise labour efficiently. Situation of energy supply in the country is not satisfactory. Frequent power shortages have resulted in shutting down of hundreds of industrial units leading to production and job losses. Even some investors have shifted their capital to other countries. Hundreds of thousands of workforce have lost their jobs. Others are employed at low wages on the pretext that industry is not working at full capacity due to energy crisis. Thus energy crisis has caused significant losses to the economy over the last many years. The policy makers need to focus on this particular area. By constructing dams, energy supply can be enhanced on the one hand and damages due to floods caused by excessive rains can be minimised on the other. Likewise, controlling electricity losses is required to recover cost of supplying electricity, which can be further invested in new energy-related projects.
Unskilled labour: Availability of cheap labour is an important factor that influences the decision of international investors. Labour is abundant is Pakistan. As jobs are not sufficient to meet the requirements of labour force, workers are available at low wages. Nevertheless, labour is not adequately skilled. At first place, a large segment of the work force is not well educated. Secondly, these workers are not adequately trained. So to attract the foreign investment, the policy makers ensure quality education to the youth. As majority of poor masses can send their children to public schools rather than costly private schools, the policymakers should come up with robust policy to implement curriculum in public schools at par with that ensued in private schools. Thirdly, highly educated and well trained school staff should be ensured in public schools as is working in private school system.
(The views expressed in this article are not necessarily those of the newspaper)