May 2, 2011

Luring foreign investment

These are testing times for Pakistan that call for radical measures to be adopted to address the present problems.

By Wasif Majeed

An element of political certainty coupled with improvement, albeit marginal, in the law and order situation has provided a pedestal to the government, federal and provincial, to woo foreign investors to invest in Pakistan. Invitations by the governments to delegations from various countries and visits by some of these delegations to Pakistan lend credence to this view. To this effect, the government seems to enlighten the possible foreign investors of the available infrastructure and abundance of human resource in Pakistan, which, if utilised, will help them to make good fortune from their investments. The government in the past has also used tax holidays/breaks or other fiscal incentives as a tool to lure investment in Pakistan.

All such efforts by the government seem to converge primarily on one point -- assuring foreign investors of the decent returns they can make on their investments by utilising the available infrastructure and availing fiscal benefits. However, I have noticed that little preference is given by the government in raising the confidence of potential foreign investors about the safety of their investment in general and in the legal system to enforce rights arising out of their investment in particular. We should understand that the availability of infrastructure and fiscal incentives are important factors that a foreign investor takes into account prior to making a decision of making investment in a particular country, but these are not the only factors.

A foreign investor has various other factors in his list of considerations before making a decision of going ahead with investment in a particular country, for instance, whether the government has the power to expropriate his investment and if so, the remedies available to him in such a case or whether there is an effective legal system to enforce contractual rights in that country? To have an objective assessment of such factors, the international business community has developed various tools -- one being the Doing Business project.

The Doing Business project was initiated by the World Bank in the year 2003 with the aim to providing the international business community, in the form of a yearly report, the objective measures of business regulations and their enforcement across world economies. The report considers regulations affecting various areas of the life of a business and ranks the world economies on the basis of its findings on such regulations.

The 2011 report ranks world economies on the basis of their regulations affecting areas of life of a business, which are: starting a business, dealing with construction permits, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and closing a business. Pakistan ranks 83rd among 183 world economies in the Ease of Doing Business Ranking Index. It is not surprising to note that in the 2011 ranking, Pakistan has slipped eight positions to secure 83rd position from the earlier 75th position it held in the 2010 ranking. This correlates with a 22 percent drop in foreign direct investment (FDI) in Pakistan during the first 10 months of the current year.

During the crunch times, government spending on the development of the infrastructure facilities and its ability to offer fiscal benefits to foreign investors may be limited, however, it may not require enormous funds to improve the world-wide perception of Pakistan as an ‘investor-friendly country’. As a starting point, the government should take initiatives for improvement in the regulations identified in the Doing Business Report.

In this respect, we can at least follow the examples of countries like Colombia, Rwanda, and Sierra Leone, which have formed regulatory reform committees at the national level that report directly to the president. These committees use the Doing Business indicators as an input to reform their overall business environment. Other countries including India, Egypt, Malaysia, Saudi Arabia, etc, have formed such committees at the inter-ministerial level. Even a fractional improvement brought about by the recommendations of these committees would be significant, besides showing a resolve of the respective governments to improve their overall business environment.

The creation of an Economic Advisory Council, headed by Dr Hafeez Pasha, is a welcome development in Pakistan. Comprising of eminent economists of Pakistan, including the former finance minister, Mr. Shaukat Tareen, the former industries minister Jehangir Khan Tarin, former State Bank governor Salim Raza and others, the working of the Council appears to be restricted to making recommendations to the government aimed at increasing revenue collection.

Such a framework can also be created for the purpose of recommending measures aimed at improving regulations which affect the doing of business in Pakistan. I can optimistically confirm that the government will not have a problem in identifying volunteers that are ready to offer their services pro bono. As a first step, even the scope of Economic Advisory Council can be expanded until a body is formed to ponder over issues affecting businesses and to make its recommendations accordingly. We must remember that these are testing times for Pakistan that call for radical measures to be adopted to address the present problems.

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