Impediments to FDI

Doing business, any kind of business in Pakistan is known to be a tough proposition. The World Bank's 2018 ranking on Doing Business Index (DBI) records Pakistan's overall position almost at the bottom on the list - at 147th.
The World Bank ranks economies on their ease of doing business, from 1-190. A high ease of doing business ranking means the regulatory environment is more conducive to the starting and operation of a local firm. The rankings are determined by sorting the aggregate distance to frontier scores on 10 topics, each consisting of several indicators, giving equal weight to each topic.
For Pakistan, it is as follows: 1. starting a business (142), 2. dealing with construction permits (141), 3. getting electricity (167), 4. registering property (170), 5. getting credit (105), 6. protecting minority interest (20), 7. paying taxes (172), 8. trading across borders (171), 9. enforcing contracts (156) and 10. resolving solvency (82).
The second element after the lack of ease of doing business that discourages Foreign Direct Investment (FDI) from coming to Pakistan pertains to the lack of level playing field in the country. On the one hand our private sector with exceptions proving the rule don't pay their legitimate taxes and pilfer with impunity all kinds of utilities, including water, electricity, gas, etc., and on the other you are asked for bribes, kickbacks and commission by every government official you come across in the process of setting up a business. One well-known real estate tycoon once confessed openly that he puts 'wheels' (bribery) on the files that he wants to be moved up or down the decision-making chain.
We also lack enough skilled workers. We don't even have certified plumbers, or trained electricians, trained bell-boys, and even trained gardeners, what to talk of skilled handymen. We don't even produce enough engineers and IT hard- and software experts.
The incoming sponsors of the FDI also face the menace of what is called the black economy which has reached almost the size of the white economy. According to one report, the cost advantage the informal businesses enjoy by sidestepping taxes and regulatory obligations, allows them to undercut prices of more productive competitors and thus continue in business, despite low productivity.
The biggest source of black economy is the exemption allowed to incomes from agriculture. Today, most big businesses own huge land-holdings in barren regions. On books they show the profits earned from their other businesses as income from agriculture and declare losses from the former. Most of the professionals like doctors, engineers, lawyers, high-end educational institutions, hospitals, etc., share their taxes in three ways keeping a large part of the amount in their own private lockers, distributing the remaining balance between the tax collector (bribe) and the treasury (under-declaration).
And also why would any investor in his right mind decide to invest his millions in a country that plays its home series in the UAE, because no cricket-playing country wants to send its team to terrorism-prone Pakistan? This is happening since 2009 when the visiting Sri Lankan Cricket team was attacked by terrorists in Lahore in broad day light. The continued refusal of cricket playing countries to send their teams to Pakistan even after a decade since the violent incident occurred makes the claims of successes of the on-going military campaign against terrorism sound more like just that - claims.
Another impediment to the smooth inflow of FDI is the guarantor of FDI - the IMF itself. We go to the Fund because we have explored and exhausted all other avenues to raise the required resources to fund our financing gaps. The Fund in order to ensure that it would get back its loan imposes a lot of austerity conditions on the borrower assuring it at the same time that in the long run its economy would start growing at an accelerated rate.
'In the long run we are all dead,' so said John Maynard Keynes (1883-1946). But since World War II, the fundamentalists of the so-called 'Washington Consensus' have been coming up with their own self-serving definitions of the term 'long run' so as to sell 'austerity' to the poor countries of the developing World as the panacea for all their economic ills. But the austerity formula has proved, in the long run, to be a stagnation trap for countries that went to the Fund seeking a loan.
There is a lot of economic sense in investing the limited resources we mobilise through various means, including costly borrowing in public-sector projects aimed at expanding the much-needed physical infrastructure, like irrigation systems, power plants, roads, bridges, housing schemes, motorways and metro buses, etc. Such projects generate all kinds of jobs and most of these are highly labour intensive. Also, such projects do give a fillip to the manufacturing sector as demand for building material, such as cement, electrical fittings, plastic materials, etc., goes up. More jobs would mean more money in the hands of more people belonging to all classes: upper, middle and lower. More money in the hands of more people would mean steep escalation in the demand for all kinds of essential and non-essential consumer goods, necessitating expansion in production capacities of the goods in demand leading to significant growth in the real economy.
If one were to follow this economic path single-mindedly, totally ignoring the needs of the social infrastructure like health, education, potable water, good governance etc., one cannot rule out the possibility that the pace of economic growth will slow down considerably in due course of time because an illiterate and physically unfit manpower, with only limited access to even clean drinking water would hardly be able to accomplish all that the front-loading of investment in accelerated expansion of physical infrastructure requires. It would need a great deal of balancing in the allocation of limited resources to physical and social infrastructure so as to make the two develop in a way that the opportunity cost is not too high. The notion of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently. But IMF conditionalities ignore this aspect of balancing while prescribing what is called 'one size fits all' formula.
Meanwhile, the concept of free market economy introduced in the late 1970s by Reagan-Thatcher combine entailing deregulation, privatization and drastically cutting down public spending has only ended up in expanding the gap between the haves and have-nots. This gap needs to be shortened as quickly and as drastically as possible.
To a great extent, this task - the task of shortening and that too drastically the stark inequality - is performed by genuine regulatory authorities.
In Pakistan, we have the following regulatory bodies: the State Bank of Pakistan, the Securities and Exchange Commission of Pakistan, the Competition Commission of Pakistan, the Pakistan Electronic Media Regulatory Authority, the National Electric Power Regulatory Authority, the Oil and Gas Regulatory Authority, the Drug Regulatory Authority, the Civil Aviation Authority, the Pakistan Nuclear Regulatory Authority, the Pakistan Standards and Quality Control Authority, the Public Procurement Regulatory Authority, the Private Education Regulatory Authority, the Pakistan Medical and Dental Council, the Pakistan Engineering Council, the Pakistan Nursing Council, the Pakistan Tibb Council, the Pakistan Veterinary Medical Council and the Pakistan Environmental Protection Agency.
But all these regulatory bodies function directly under the government and those who man these bodies are also hired and fired by the government, which makes a mockery of the very concept of market regulation. It is, therefore, necessary to liberate these bodies from government control and turn them into autonomous statutory bodies. Delegation of authority away from the government would prevent these bodies from becoming partisan entities and would also make them more accountable.
Meanwhile, all attempts to document the economy over the last at least 40 years have been foiled by the personnel of the Federal Board of Revenue with the connivance of the ruling elite, political as well as the military. In this digital age, there is no reason why there should be any physical contact between the taxpayer and the tax collector. But no government seems willing even to take a look at this aspect of governance.