THE STATE OF DOMESTIC COMMERCE IN PAKISTAN STUDY 1 COMPETITIVENESS

THE STATE OF DOMESTIC COMMERCE IN PAKISTAN

STUDY 1

COMPETITIVENESS

For

The Ministry of Commerce Government of Pakistan

November 2007

By

Innovative Development Strategies (IDS) Pvt. Ltd. House No. 2, Street 44, F-8/1, Islamabad

Table of Contents List of Abbreviations ............................................................................................................... i Acknowledgments ................................................................................................................ iv Executive Summary ........................................................................................................... 3 Section 1: Review of Literature ..................................................................................... 6 1.1. Industrial Competitiveness: The Challenge for Pakistan ............................................ 6 1.2. Pakistan’s International Competitiveness – Issues .................................................... 7 1.3. Studies on Social and Environmental Compliance and SPS/TBT Requirements ....... 8 1.4. Trade Policy: Macro and Meso Focus........................................................................ 9 1.5. Pakistan: Growth and Export Competitiveness .......................................................... 9 1.6. Global Competitiveness Report ............................................................................... 10 1.6.1 Global Competitiveness Index ................................................................................. 10 Section 2: Indicators of Competitiveness .................................................................. 12 2.1 Financial and Economic Indicators .......................................................................... 12

2.1.1 Real Effective Exchange Rate...................................................................... 13 2.1.2 Inflation ........................................................................................................ 13 2.1.3 Gross Capital Formation .............................................................................. 13 2.1.4 National Interest Rates................................................................................. 13 2.1.5 Consumption ................................................................................................ 14 2.1.6 Wages and Productivity ............................................................................... 14

2.2 Quality of Governance Indicators ............................................................................. 14 2.2.1 Corruption Perceptions Index (CPI) ............................................................. 14 2.2.2 Efficiency of Legal Framework ..................................................................... 15 2.2.3 Favoritism in Decisions of Government Officials .......................................... 15 2.2.4 Voice and Accountability .............................................................................. 16 2.2.5 Rule of Law .................................................................................................. 16

2.3 Indicators for Regulation .......................................................................................... 16 2.3.1 Regulatory Quality ....................................................................................... 17 2.3.2 Burden of Government Regulation ............................................................... 17 2.3.3 Clarity and Stability of Environmental Regulations ....................................... 17

2.4 Public Service Provision Indicators .......................................................................... 17 2.4.1 Transmission and Distribution (T&D) Losses (% of output) .......................... 17 2.4.2 Percent of Population Covered by Mobile Telephony ................................... 18 2.4.3 Percent of Paved Roads .............................................................................. 18 2.4.4 Public Expenditure on Education (% of Total Government Expenditure) ...... 18 2.4.5 Overall Infrastructure Quality ....................................................................... 18

2.5 Business Environment ............................................................................................. 19 2.5.1 Business Environment Indicators ................................................................. 19 2.5.2 Property Rights ............................................................................................ 19 2.5.3 Business Costs of Corruption ....................................................................... 20

2.6 Human Resource and Technology .......................................................................... 20 2.6.1 Research and Development Expenditure as % of GDP ............................... 20 2.6.2 Internet Users per 1000 People ................................................................... 20 2.6.3 Information and Communication Technology Expenditure (% of GDP) ........ 21 2.6.4 High Technology Exports (% of Manufactured Exports) ............................... 21 2.6.5 Technological Readiness ............................................................................. 21

2.6.6 Quality of Scientific Research Institutions .................................................... 21 2.6.7 Quality of Competition in the ISP Sector ...................................................... 22

Section 3: Benchmarking Pakistan’s Performance ................................................... 23 3.1 Financial and Economic Indicators .......................................................................... 23 3.2 Quality of Governance Indicators ............................................................................. 25 3.3 Indicators for Regulation .......................................................................................... 26 3.4 Public Service Provision Indicators .......................................................................... 27 3.5 Business Environment ............................................................................................. 28 3.6 Human Resource and Technology .......................................................................... 29 Section 4: Conclusion ................................................................................................. 31 4.1 Policy Recommendations ........................................................................................ 31

List of Tables Table 3.1: Financial and Economic Indicators ............................................................... 23 Table 3.2: Quality of Governance Indicators ................................................................. 25 Table 3.3: Indicators for Regulation .............................................................................. 26 Table 3.4: Indicators for Public Service Provision ......................................................... 27 Table 3.5: Costs of Doing Business .............................................................................. 28 Table 3.6: Indicators for Human Resource and Technology ......................................... 29

Innovative Development Strategies (Pvt) i

List of Abbreviations

ABAD Association of Builders and Developers

ADB Asian Development Bank

ADBI Asian Development Bank Institute

APCA All Pakistan Contractors Association

ATT Afghan Trade Transit

BAF Bank AlFalah

BCI Business Competitiveness Index

BOR Board of Revenue

CAA Civil Aviation Authority

CBM Cubic meter

CBR Central Board of Revenue

CDA Capital Development Authority

CIB Credit information bureau

CMR Contract for the International Carriage of Goods by Road

CPI Corruption Perceptions Index

CPIA Country Policy and Institutional Assessment

DFID Department for International Development

DHA Defense Housing authority

EDF Export Development Fund

EIU Economist Intelligence Unit

EOS Executive Opinion Survey

EPB Export Promotion Bureau

ESCAP Economic and Social Development in Asia and the Pacific

FBS Federal Bureau of Statistics

FCL Full Container Load

FDI Foreign Direct Investment

FIAS Foreign Investment Advisory Service

Ft Foot

FY Fiscal Year

GCI Global Competitiveness Index

GCR Global Competitiveness Report

GD Goods Declaration

GDP Gross Domestic Product

GoP Government of Pakistan

GOR Government Officials Residences

GRT Gross Register Tonnage

GST General Sales Tax

HBFC Housing Building Finance Corporation

HBL Habib Bank Limited

HDR Human Development Report

HFIs Housing Finance Institutions

IFC International Finance Corporation

IFS International Financial Statistics

IMF International Monetary Fund

ISAL Informal Subdivision of Agricultural Land

ISO International Standards Organization

IT Information Technology

ITU International Telecommunications Union

http://en.wikipedia.org/wiki/Gross_Register_Tonnage

Survey Report on Domestic Commerce

Innovative Development Strategies (Pvt) ii

KBCA Karachi Building Control Authority

KDA Karachi Development Authority

KESC Karachi Electric Supply Corporation

KM(s) Kilometer(s)

KPT Karachi Port Trust

KSE Karachi Stock Exchange

LCL Less Than Container Load

LOA Length Overall

MCB Muslim Commercial Bank

MENA Middle East and North Africa

MOC Ministry of Commerce

MOD Ministry of Defense

MTDF Medium Term Development Framework

NBP National Bank of Pakistan

NCS National Conservation Strategy

NER Net Primary School Enrollment Rate

NHA National Highway Authority

NIE Newly industrialized economy

NIT National Institute of Transport

NLC National Logistics Cell

NTN National Tax Number

NTRC National Transportation Research Center

NTTFC National Trade and Transport Facilitation Committee

NWFP North West Frontier Province

PASSCO Pakistan Agricultural Storage and Services Corporation

PEC Pakistan Engineering Council

PHDEB Pakistan Horticulture Development and Export Board

PIAC Pakistan International Airlines Corporation

PIDE Pakistan Institute Of Development Economists

PIHS Pakistan Integrated Household Survey

PKR Pakistani Rupee

PQA Port Qasim Authority

PR Pakistan Railways

PREF Pakistan Real Estate Federation

PSDP Public Sector Development Program

R&D Research and Development

REER Real Effective Exchange Rate

REITs Real Estate Investment Trusts

RICS Royal Institute of Chartered Surveyors

SAI Social Accountability International

SBP State Bank of Pakistan

SKAA Sindh Katchi Abadis Authority

SME Small and Medium Enterprises

SPS Sanitary and Phytosanitary

SRO Statutory Regulation Order

Std Standard

TEP Total Factor Productivity

TEU Twenty-Foot Equivalent Units

TI Transparency International

TOR Terms of Reference


Innovative Development Strategies (Pvt) iii

TSDI Transport Sector Development Initiative

TTFP Trade and Transportation Facilitation Program

UK United Kingdom

UNDP United Nations Development Program

US United States

USA United States of America

USC Utility Stores Corporation

USD United States Dollars

WAPDA Water and Power Development Authority

WDI World Development Indicators

WEF World Economic Forum

WGI Worldwide Governance Indicators

WTO World Trade Organization

Innovative Development Strategies (Pvt) iv

Acknowledgment

The IDS team owes a debt of gratitude to the officers of the Ministry of Commerce for their

guidance, assistance and feedback during the course of this study. Our special thanks go out,

in particular, to Syed Asif Ali Shah, Secretary; Mr. Naseem Qureshi and Mr. Ashraf Khan,

Additional Secretaries; Mr. Abrar Hussian, Joint Secretary; Syed Irtiqa Zaidi, Consultant and

Mr. Qaseem Subhani, Section Officer, for sparing their precious time and efforts for the

study.

We feel a deep sense of gratitude for the Minister for Commerce. Mr. Humayun Akhtar

Khan, who took out considerable time from his busy schedule to guide us. It was his sincere

and deep conviction which enabled us to conduct and compile this detailed and

comprehensive study on Domestic Commerce of our country. His apt guidance and keen

analytical oversight were extremely helpful in finalizing the study and formulating the policy

recommendations.

This study has benefited from comments received from the following:

1. State Bank of Pakistan, Karachi

2. Federal Board of Revenue, Government of Pakistan, Islamabad

3. Planning and Development Division, Government of Pakistan, Islamabad.

4. Trade Development Authority, Government of Pakistan, Karachi.

5. (Management Consultants) Establishment Division, Government of Pakistan,

Islamabad.

6. Finance Division, Government of Pakistan, Islamabad.

7. Pakistan Institute of Development Economics, Islamabad.

8. NTTFC, Karachi.

9. FPCCI, Karachi.

10. Planning and Development Board, Government of Punjab, Lahore.

11. Planning and Development Board, Government of NWFP, Peshawar.

12. Planning and Development Board, Government of Sindh, Karachi

13. Planning and Development Board, Government of Balochistan, Quetta.

14. Investment and Commerce Department, Government of Punjab, Lahore.

15. Law, Justice and H.R. Division, Government of Pakistan, Islamabad.

16. National Tariff Commission, Government of Pakistan, Islamabad.

17. Statistics Division, Government of Pakistan, Islamabad.

1

COMPETITIVENESS*

by

SAFIYA AFTAB

* The indices presented in this report were validated in focus group discussion with key stakeholders

held in the major cities of Pakistan and formed the basis of the questionnaires used in the five surveys of Domestic Commerce, namely, Retail Trade, Wholesale Trade, Storage, Transport and Real Estate. These results are presented separately in the respective reports and in the Basic Statistics of the

Sample Survey Data.

Innovative Development Strategies (Pvt) 3

Executive Summary 1. A country’s competitiveness can be defined as the “ability of an economy to compete

and grow in the global trading system and pass on the benefits to the domestic consumer.”

2. The report begins with a review of 6 key studies that the Government and multilateral

development institutions have undertaken on competitiveness over the last three to four years,

focusing on work that has some relevance to the TORs. The first report “Industrial

competitiveness: The Challenge for Pakistan” was carried out by Asian Development Bank

(ADB) in October 2004. The study examines the international competitiveness of Pakistan by

benchmarking various indicators of national capability and performance against competitors

and by highlighting key lessons from the experience of East Asian economies. The second

publication was a short paper “Pakistan’s International Competitiveness – Issues” again

commissioned by ADB. It highlighted the key issues that Pakistan needs to address in order

to achieve international competitiveness. The study mapped the range of factors affecting

competitiveness, and provided an overview of the issues faced by Pakistani firms in this

regard.

3. The study “Study on Social and Environmental Compliance Issues” commissioned by

the Ministry of Commerce, to evaluate if Pakistani exports met international social and

environmental standards found that large exporters were more aware of the need to comply

with standards as compared to Small Medium Enterprises (SMEs) who have little or no idea

about requirements for social and environmental standards. Another study on sanitary and

phytosanitary (SPS) regulations in developed countries was commissioned by the Ministry of

Commerce to assess whether Pakistani exporters of agricultural products were ready to

comply with possible future restrictions, found that agricultural exports from Pakistan are

strongly vulnerable to the imposition of such standards.

4. The fourth study “Trade policy: Innovative Proposals for Pakistan’s Trade Policy

2004-05” was funded by the United Nations Development Program (UNDP) and formulated

policy recommendations to be incorporated in the trade policy for FY2005. The study

recommended better marketing and research on potential export markets, improving export-

facilitation processes (including sales tax refund systems) and initiating a system of regular

dialogue between exporters and public agencies such as the Export Promotion Bureau (EPB).

5. The study “Pakistan: Growth and Export Competitiveness” by the World Bank

formulated recommendations to accelerate the country’s GDP growth. The study identified

some areas that required action including strengthening the macro framework, addressing

issues in the power sector, ensuring that small and medium enterprises (SMEs) have access to

finance, human resource development and the institution of systems to ensure adherence to

international health and safety standards.

6. The final report reviewed was ‘The Global Competitiveness Report’ (GCR) by the

World Economic Forum (WEF). The GCR aims to measure the ability of the world’s

economies to achieve sustained economic growth and collects information on factors that

encourage business and commercial activity and compiles its key findings into the Global

Competitiveness Index. The Growth Competitiveness Index is composed of three pillars, the

quality of the macroeconomic environment, the state of the country’s public institutions, and

the country’s technological readiness. Pakistan ranked 83rd

out of a total of 117 countries on

the Growth Competitiveness Index in 2005.

7. The study required the development and quantification of indicators in 6 categories as

follows:

Financial and economic

Quality of governance

Regulatory



Public service provision

Business environment

Human resource and technology

8. As a first step, measurable indicators were identified for each of the categories along

with their data sources. Along with ensuring that the indicators were relevant, there was a

need to get data from internationally recognized publications which release data on a regular

basis, and include indicators from a variety of countries.

9. The financial and economic indicators act as the indicators of the business

environment and reflect if the government is working to increase the productivity of factors

of production by employing essentially the right pricing techniques. The indicators chosen in

this category were: real effective exchange rate, rate of inflation, gross capital formation,

interest rates and consumption.

10. The quality of governance is defined as the quality of public institutions, the provision

of a safe and predictable environment to do business, and the facilitation of transparent

business dealing. The indicators chosen in this category were: corruption perceptions index,

efficiency of legal framework, transparency of government policymaking, voice and

accountability and rule of law.

11. Effective regulation is the key to the provision of an enabling environment for

business. The indicators chosen for this category were: regulatory quality, burden of central

government regulation and clarity and stability of environmental regulations.

12. The public service provision indicators measure how reliable and cost effective the

provision of public services is. The indicators chosen in this category were: transmission and

distribution of losses, percent of population covered by mobile telephony, percent of paved

roads, public expenditure on education and overall infrastructure quality.

13. For the purpose of this study business environment covers primarily policies that

ensure market competition and create a level playing field for business, as well as policies

that ease red-tapism and make regulatory procedures simple. The following indicators are

chosen in this category: business environment indicators, property rights and business costs

of irregular payments.

14. The indicators chosen for the human resource and technology indicators were:

research and development expenditure as a percent of GDP, internet users per 1000 people,

information and communication technology expenditure (% of GDP), high technology

exports (% of manufactured exports), technological readiness, quality of scientific research

institutions and quality of competition in the ISP sector.

15. Pakistan’s performance was than benchmarked with respect to each of the indicators

detailed in the previous section, and with reference to a set of five countries. The countries

chosen were the United States (US), United Kingdom (UK), China, Malaysia and India.

16. With the financial and economic indicators Pakistan’s REER fares well compared to

the other countries while its rate of inflation is the highest. Pakistan does not fare well with

interest rate, its discount rate being the highest. Pakistan’s rate of final consumption (as a

percent of GDP), at just over 82 percent, compares with developed countries – only four

percentage points less than that of the UK, and signifies a lack of business confidence and a

culture of immediate consumption as opposed to investment aimed at ensuring higher

consumption rates in the future.

17. Pakistan does not compare well in the quality of governance category. In our group of

six countries, Pakistan is ranked as the most corrupt according to the CPI. With regard to

efficiency of the legal framework, a GCR indicator, where a higher score represents a more

efficient legal system, Pakistan falls to the bottom of the table. Pakistan is almost at the

bottom of our list, ranked only one point above China, with the favoritism in government

Competitiveness


decisions indicator. Pakistan has the second lowest score on voice and accountability. With

regard to the rule of law Pakistan is again second from the bottom in our listing.

18. In the regulatory category Pakistan shows mixed results. It ranks above India, and

close to the UK on burden of government regulation. With regard to the last indicator on

environmental regulations, Pakistan does not do too well, ranking just above China and

significantly lower than the rest.

19. T&D losses as a percent of output are the first indicator chosen for public service

provision. Pakistan fares better than India on this count, but both the South Asian countries

compare extremely unfavorably to the rest of the group. With regard to percent of population

covered by mobile telephony, Pakistan has good coverage relative to India but ranks the

lowest in the provision of paved roads. In income Pakistan fares better than India, but does

not fare well with regard to the public expenditure on education indicator. In the

infrastructure quality category Pakistan ranks at the bottom, tied with India and China, and

significantly below Malaysia and the two developed countries.

20. In the business environment category Pakistan compares very favorably to India with

regard to costs of doing business and property registration and obtaining licenses. With

employment rigidity Pakistan compares favorably to India, but not to all the other countries

in the group. With regard to contract enforcement, the data is not so favorable for Pakistan,

with the number of procedures for contract enforcement being the highest for the countries in

our group, at 46. Pakistan ranks at the bottom with regard to the disclosure index which

measures transparency in stock market dealings and financial systems. Pakistan does not fare

very well with the next two indicators: property rights and business costs of corruption.

21. The final set of indicators in which Pakistan’s performance is benchmarked are

indicators which measure human resource development and technological development.

Pakistan comes out at the bottom on the table on the first indicator: R&D expenditure as a

percent of GDP. With regard to internet users per 1000 people, once again Pakistan falls to

the bottom on the table by a considerable margin. Pakistan does very well in information and

communication technology expenditure as a percent of GDP category but does not fare well

with high technology exports as a percent of total manufactured exports. With regard to both

technological readiness and the quality of scientific research institutions, Pakistan is at the

bottom of the table ranking significantly below India. Pakistan does better with respect to

quality of competition for ISPs performing better than China.

22. The benchmarking exercise reveals that Pakistan is doing badly in some areas, but

surprisingly well in others. On economic indicators, the evidence is mixed. On quality of

governance and regulation, Pakistan does not do well. For public service provision, the

evidence is again mixed. The government seems to be doing well on some counts (the

growth in telecommunications access, the road network), but badly in others (losses in

electricity supply) and particularly badly in human resource development, where its

performance is extremely poor even in relation to India, a country with a similar level of per-

capita income which also has a severe resource constraints when it comes to expenditure on

social services. Pakistan does well in the business environment category. Overall, the

benchmarking exercise reveals significant flaws in systems of governance, in human resource

development and in technology diffusion, all key factors in the determination of long-term

competitiveness.


Section 1

Review of Literature 1. As the world economy continues to liberalize with restrictions in the movement of

capital and goods breaking down, trade barriers reducing (in some cases to be replaced by

non-trade barriers), and the domestic economy showing encouraging growth (GDP growth

rate has averaged 6.85 percent over the last four years1), Pakistan’s international

competitiveness has become the focus of greater study and debate. The Government and

multilateral development institutions have undertaken key studies on the investment climate,

and the cost of doing business in Pakistan, and analyzed the implications of this information

for the growth, or otherwise, of the external sector. This section reviews some of the key

studies carried out over the last three to four years, focusing on work that has some relevance

to the TORs.

1.1. Industrial Competitiveness: The Challenge for Pakistan 2. In 2003/04, the Asian Development Bank (ADB) commissioned five studies on the

growth prospects of the external sector in Pakistan, two of which dealt specifically with

competitiveness issues. The first of the series, carried out in collaboration with the Asian

Development Bank Institute (ADBI), entitled Industrial Competitiveness: The Challenge for

Pakistan, focused on benchmarking the situation of the industrial sector in the country in

relation to competitor economies, and identifying lessons learnt particularly from East Asia, a

region that is acknowledged to have made significant strides in this regard.2

3. The study defines competitiveness as “the ability to compete with firms at the

international frontier of best practice” and emphasizes that “it is firms that compete, not

nations.”3 However, governments have a role to play in promoting knowledge and

technology transfer, making sure that financial markets work and that the physical

infrastructure needs of firms are taken care of. Governments need to ensure that firms are

able to access technology, organize themselves following principles of international best

practice, and can link themselves to global value chains.

4. The study emphasizes that high technology activities are growing faster globally, both

in terms of manufacturing output and international trade; but that technology has to be

upgraded at all levels to maintain industrial competitiveness. In an apparent paradox, the

study also points out that it is more difficult for developing countries to advance up the value

chain in low technology export markets, like that for textiles, because of the relatively more

1 Government of Pakistan. 2006. Pakistan Economic Survey. Economic Advisor’s Wing. Finance Division.

Growth rates recorded at constant factor prices. 2 Asian Development Bank Pakistan Resident Mission/Asian Development Bank Institute. 2004. Industrial

Competitiveness: The Challenge for Pakistan. October. 3 Ibid. Page i.

Competitiveness


stringent design and branding requirements in the sector, than in high technology exports like

electronics, which do not have similar requirements.

5. Pakistan boasts a relatively open trade regime when compared with other South Asian

countries, but the country’s investment climate has not been conducive to private sector

investment, and the cost of doing business remains relatively high, with infrastructure issues

(and the cost of power in particular) being the most notable bottlenecks. An analysis of

export dynamics shows that the country may face problems in maintaining export growth

rates in the medium term due to weak product positioning. For example, world trade in

cotton fabrics and textile yarn, two of Pakistan’s major exports, have been relatively stagnant

in recent years. On the other hand, Pakistan has lost market share in the world trade of

medical instruments, which is a dynamic sector.

6. The study concludes that Pakistan has much to learn from first-tier newly

industrialized economies (NIEs) like Taiwan and South Korea, particularly with regard to

fostering public-private partnerships in skill and technology development. The study

emphasizes the need to develop a strategic vision for the industrial sector, and suggests that

the government concentrate on investing in human resource development to support a

competitive industry, and improve the investment climate (seeing to infrastructure

development as well as ensuring a stable macroeconomic and political environment). It

concludes by saying that critical competitiveness issues need to be addressed at the firm

level, with the government playing the role of a facilitator, implementing policies that will

promote competitiveness, whether these take the form of fiscal incentives, policies to

encourage foreign investment or access to finance, particularly to support high risk initiatives.

7. As the title suggests, the study was focused on industrial competitiveness, with strong

emphasis on the need for technological innovation in industry. Thus, the analysis centered

largely on the need for firms to attain a level of technological sophistication that would

enable them to compete in the world economy. This technology-centric view of

competitiveness has been criticized on the grounds that it ignores, or at least does not

sufficiently analyze, other factors, for example labor productivity, that may have significant

impacts on competitiveness.

1.2. Pakistan’s International Competitiveness – Issues 8. The publication of the study on industrial competitiveness was followed by research

that was more general in scope. The second of the series of studies by ADB consisted of a

short paper highlighting key issues for Pakistan with regard to achieving international

competitiveness.4 The study postulates that “competitiveness gaps” are apparent in

Pakistan’s tradable goods sector, with relatively low labor productivity (stemming partly

from the generally indifferent quality of education); low technology diffusion (stemming

from the dormancy in the non-military research and development sector); and physical

infrastructure constraints, primarily the high cost of energy, which have had significant

implications for the cost of doing business.

9. Pakistan has competitive strengths in areas like textiles and clothing, but its exports

tend to be concentrated in the low value-added segment of the value chain, which typically

has low barriers to entry and is, therefore, vulnerable to decline. Some industries geared

towards meeting domestic demand, such as footwear, are facing strong competition from

imports, while others, such as automobiles, are thriving behind protective barriers.

10. The study appreciates that the stability of the macroeconomic environment in recent

years will serve to improve the investment climate, but delineates a number of policy

4 Sherani, Sakib. 2004. Pakistan’s International Competitiveness – Issues. ADB Pakistan Resident Mission.

Unpublished.



recommendations to further encourage competitiveness. It suggests the preparation of a

competitiveness strategy and the institution of a public office, as well as a business council

with prime responsibility for identifying barriers to achieving competitiveness and

developing appropriate policy recommendations. This model, which has been followed in

varying forms by a number of East Asian economies, has been found to be successful in that

it fosters private-public partnership, which is key to building an enabling environment.

11. The study goes on to make recommendations regarding improving the general

business climate, including infrastructure bottlenecks (an exercise which would require

substantial increases in the Public Sector Development Program (PSDP)); and ensuring that

red-tapism is kept to a minimum. Other key recommendations include the need to build

technological capability in the country by attracting more foreign direct investment (FDI),

linking technological capacity in the non-civilian field to manufacturing, invigorating

research and development (R&D) in production processes, and promoting interaction

between researchers and end users of technology. The study also emphasizes skill

development and the need to ensure that policies promote, or at least do not discriminate

against, innovative producers and exporters who are moving out of production and export of

non-traditional categories.

12. The study was useful in terms of mapping the range of factors affecting

competitiveness, and providing an overview of the issues faced by Pakistani firms in this

regard. It also provided a useful analysis of the possible nature of government intervention to

promote competitiveness. However, the study was fairly general in nature and does not

facilitate an in-depth analysis of factors that have a bearing on competitiveness. Its utility lay

primarily in identifying areas for further research and analysis.

1.3. Studies on Social and Environmental Compliance and SPS/TBT Requirements

13. In terms of more specific research, the Ministry of Commerce, in 2004, commissioned

a study to assess whether Pakistan’s exports met, or would be able to meet, international

social and environmental standards.5 Compliance with such standards is crucial to

sustainability of export growth. In the absence of World Trade Organization (WTO)

agreements on social and environmental standards, international buyers, who operate in a

private capacity out of the developed countries, have, in most cases, adopted standards

developed by organizations such as the International Standards Organization (ISO) or Social

Accountability International (SAI).

14. The study found that awareness of the need to comply with standards is high amongst

large exporters who deal with major buyers in the developed world, and who have the

resources to meet the costs of compliance, but SMEs have little or no idea about requirements

for social and environmental standards and are unlikely to find international markets for their

products. The study was not very well researched, as it was originally conceived as a

secondary literature or “desk-based” research, but in the course of the research, it became

clear that relevant literature was not forthcoming. Although the study employed focus-group

discussion techniques and involved interviews with experts at organizations responsible for

implementation and enforcement of standards, it only succeeded in providing fairly general

conclusions. This was true also because environmental and social standards can vary

significantly from country to country and an in-depth analysis would have to be fairly market

specific.

5 Akbar, M. 2004. Study on Social and Environmental Compliance Issues. Study for the Ministry of

Commerce, supported by the Asian Development Bank, Pakistan Resident Mission.

Competitiveness


15. This issue of variation in standards and the need for market-specific information came

up again in a study on sanitary and phytosanitary (SPS) regulations in developed countries,

again commissioned by the Ministry of Commerce to assess whether Pakistani exporters of

agricultural products were ready to comply with possible future restrictions.6 The study

found that agricultural exports from Pakistan are strongly vulnerable to the imposition of

such standards, and that a lack of awareness amongst agricultural exporters, and inadequate

testing facilities at the domestic level, are compounding the problem.

1.4. Trade Policy: Macro and Meso Focus 16. The UNDP also funded a report on trade policy in response to a request from the

Ministry of Commerce, which focused on formulating policy recommendations to be

incorporated in the trade policy for FY2005.7 The report contends that the East Asian

economies and China were able to effect quantum leaps in exports as they were chosen as

outsourcing locations by major global buyers. Pakistan’s investment climate, however, is not

conducive to long-run investment by foreign investors, and, in the long run, the country needs

to improve its law and order conditions considerably, and invest in skill development to

attract foreign investment.

17. The study also makes a series of recommendations to boost exports in the short and

medium term, including better marketing and research on potential export markets,

improving export-facilitation processes (including sales tax refund systems) and initiating a

system of regular dialogue between exporters and public agencies such as the Export

Promotion Bureau (EPB). However, the work was very narrowly focused on issues to be

covered in the trade policy for one year.

1.5. Pakistan: Growth and Export Competitiveness 18. More recently, the World Bank’s comprehensive study on growth and

competitiveness in Pakistan focuses on recommendations to accelerate the country’s GDP

growth, and emphasizes the need to address structural constraints hampering export

competitiveness.8 The study contends that the removal of textile and clothing quotas in

January 2005 has served to intensify competition amongst exporters, and the phasing out of

safeguards against China’s exports by 2007 will further exacerbate the situation.

19. The study first analyzes sources of growth and finds that total factor productivity

(TFP), or the efficiency with which resources are used in production, “explains over 20

percent of the long-term GDP growth rate,” with the rest being explained by capital

accumulation and the growth in the labor force.9 TFP, in turn, has been strong in periods

when the investment climate is positive in both micro terms (less time spent on negotiating

government procedures, regular power supplies to manufacturers), and macro terms

(implementation of investor-friendly trade and financial sector policies, political stability,

etc.). Structural reforms also have a key impact on growth, explaining about 80 percent of

6 Akbar, M. 2004. Study on Sanitary and Phytosanitary (SPS) Requirements and Technical Barriers to

Trade (TBT). Study for the Ministry of Commerce, supported by the Asian Development Bank, Pakistan Resident Mission.

7 Thoburn, John. 2004. Trade Policy: Innovative Proposals for Pakistan’s Trade Policy 2004-2005, (Macro and Meso Focus). Report prepared for the Ministry of Commerce, Government of Pakistan, supported by the United Nations Development Program.

8 World Bank. 2006. Pakistan: Growth and Export Competitiveness. PREM. South Asia Region. Study No. 35499-PAK.

9 Ibid. Page ii, para 7.



the increase in real per capita GDP growth, as evidenced by the cross-country analysis

(involving 78 countries) effected in the study.

20. The study contends that Pakistan has made considerable progress in trade

liberalization and simplification of government procedures, but lacks in the areas of

education and skill development, public infrastructure provision and financial depth. In

addition, if the country is to achieve its growth potential of 7 to 8 percent annual GDP

growth, the rate of investment has to rise from the current level of approximately 17 percent

of GDP to 21-23 percent. If factor productivity remains at current levels, the investment

requirement will be as high as 29 percent of GDP. Agriculture is a mainstay of future

growth, but if growth in the sector is to be sustained, there is a need to diversify into related

fields such as livestock and horticulture.

21. The study goes on to conduct a value-chain analysis of five products and finds that

impediments to competitiveness in these areas include the poor quality of economic

governance (particularly deficiencies in business regulation and contract enforcement), lack

of skilled labor, issues in supply and pricing of power, logistics and trade facilitation, and the

inability to meet safety and health standards with reference to the export of food items.

22. The study also emphasizes the need to maintain macroeconomic stability, particularly

with regard to controlling the fiscal deficit and inflation, maintaining a positive real interest

rate to encourage saving and discourage unproductive investment, and pursuing an

appropriate exchange rate policy. The study also makes some very specific recommendations

regarding further deregulation, including the need to simplify the duty drawback and sales tax

rebate schemes, reforms in regulation and contract enforcement, and the urgent need for

reform of the power sector, both in terms of ensuring reliable power supply and putting in

place an appropriate pricing structure. Issues of further liberalization of the trade regime (in

terms of removing existing concessions and exemptions, lowering tariffs on key items like

edible oil), improvement of transport logistics and other procedures to facilitate trade and

competitiveness.

23. The study identifies some priority areas for immediate action, including strengthening

the macro framework, addressing issues in the power sector, ensuring that small and medium

enterprises (SMEs) have access to finance, human resource development and the institution

of systems to ensure adherence to international health and safety standards.

1.6. Global Competitiveness Report 24. By far the most comprehensive and widely-cited work on competitiveness, in general,

is the World Economic Forum’s Global Competitiveness Report, published annually. The

Forum has developed an Executive Opinion Survey (EOS), and targets business executives in

each country as respondents, to get information on a range of factors that contribute towards

creating an “enabling environment” for business and commercial activity. The data gleaned

from the EOS are then consolidated into a country profile.

1.6.1 Global Competitiveness Index 25. The 2004/05 Global Competitiveness Report introduced a new measure of

competitiveness. This measure, the Global Competitiveness Index (GCI), unifies two

indices, the Growth Competitiveness Index (which refers to the aggregate or macro

determinants of competitiveness) and the Business Competitiveness Index or BCI (which

essentially captures the firm-level or micro determinants). The Index is based on three

principles as follows:

Competitiveness


Productivity is complex (the World Economic Forum identifies 12 pillars of

competitiveness, including institutions, infrastructure, macro stability, security, human

capital, efficiency in the markets for labor, goods and in financial markets, technological

readiness, market size, business sophistication and innovation)

Development is a dynamic process that evolves in stages, and competitiveness means

different things at different stages of development. For an economy at the basic or factor-

driven stage, competitiveness may lie in keeping factor prices low. For more developed

economies, competitiveness is founded on efficiency, while at the highest level, it is

defined by innovation.

Economies move from one stage to the other in a smooth fashion and, thus, some

countries can be considered to be in transition from one stage to the next at any given

time. The GCI methodology defines the characteristics of economies at each level of

development and in transition.

26. Pakistan is defined as a stage-1 country in GCI terms (with an income of less than

$2000, with primary exports constituting more than 70 percent of total exports), and ranked

91st out of a total of 125 countries on the 2006-07 GCI. In terms of basic requirements, the

country was ranked 93rd

(where basic requirements measure macro stability, infrastructure,

security and human capital development). In terms of efficiency enhancers, the country was

ranked 91st (where efficiency enhancers include goods, labor and financial market efficiency,

technological readiness and openness and market size). In terms of innovation, the country

was ranked at 60 (with a ranking of 66 for the sub-factor of “business sophistication.”)

27. Pakistan’s country profile on the Report includes an assessment of the most

problematic factors in doing business. According to this measure, corruption topped the list

as the most problematic factor in doing business (with approximately 13 percent of

respondents citing it as the most difficult factor). This was followed by government

instability (about 12 percent of respondents cited this as a major factor), policy instability,

red-tapism and infrastructure issues. To a lesser extent, tax regulations, access to finance and

poor human capital were also cited as issues impeding competitiveness. Interestingly, crime

and inflation did not figure as important factors (only 4 percent of respondents cited these as

factors), and nor did labor regulations. However, government instability, which was not cited

as a major issue two years ago, has now assumed importance.

28. The reports cited above constitute the key knowledge base on competitiveness, with

particular reference to Pakistan, over the past two to three years. In terms of benchmarking

Pakistan’s performance, the report on Industrial Competitiveness, which was commissioned

by the ADB, entailed a benchmarking exercise mainly comparing Pakistan’s export

performance (for manufactured exports) in relation to other countries. The report also carried

out a benchmarking exercise specifically for textile and clothing exports, and also scored

exports in this commodity group by level of sophistication. Other than this, the Global

Competitiveness Report provides a wealth of data for benchmarking, given the range of

indicators that it assesses for a number of countries.


Section 2

Indicators of Competitiveness 29. The concept of competitiveness has gone far beyond exchange rate competitiveness

and encompasses a range of factors that help determine productivity. Some of the

determining factors for competitiveness can be economic in nature (having to do mainly with

the macroeconomic environment), while others are more amorphous and refer to systems of

governance (the functioning of the judicial system, regulatory requirements, etc.) or to

infrastructure and human resource availability. For our purposes, we classify

competitiveness indicators into the following broad categories:

Financial and economic

Quality of governance

Regulatory

Public service provision

Business environment

Human resource and technology

30. In order to benchmark Pakistan’s competitiveness, we have to identify measurable

indicators in each of these categories, identify data sources for these indicators and identify

sources that provide information on Pakistan and other countries at similar stages of

development, in addition to developed countries. The indicators should also be published, or

should be made available at pre-determined times to enable a comparison of Pakistan’s

position over time, relative to other countries. With these considerations in mind, the

following indicators are selected to benchmark Pakistan’s competitiveness and track changes

in the country’s relative position over time.

2.1 Financial and Economic Indicators 31. In addition to acting as indicators of the business environment, financial and

economic indicators of competitiveness should reflect whether or not the government is

working to increase the productivity of factors of production by employing essentially the

right pricing techniques. Thus, of the wealth of macroeconomic indicators that are recorded

for Pakistan, we pick ones that have an impact on productivity and describe the business

environment in the country, particularly as it affects domestic commerce. The indicators

chosen, and the explanation for their selection are given as follows.

Competitiveness


2.1.1 Real Effective Exchange Rate10 32. The real effective exchange rate (REER) can be defined as a “nominal effective

exchange rate index adjusted for relative movements in national price or cost indicators of the

home country, selected countries, and the euro area.”11

The nominal effective exchange rate

index is the ratio of the average exchange rate of a currency for a particular period and a

weighted average of exchange rates of selected currencies. The REER is considered a prime

measure of competitiveness as it captures the effects of changes in foreign and domestic price

levels, in addition to the nominal exchange rate. Thus, it accounts for the fact that a country’s

exports may become more competitive, even if nominal exchange rates remain unchanged, if

the general price level in its trading partners is increasing at a higher rate than the rate of

increase of the price level within the country itself. Thus, the REER incorporates a measure

of inflation differentials, which are key to establishing competitiveness.

33. The REER is a complicated index to calculate, and the most widely-cited estimates of

REER are from the International Monetary Fund’s annual publication, the International

Financial Statistics (IFS). The IFS publishes REERs for most of its member countries,

including Pakistan, on an annual basis, and is, therefore a suitable source for compilation of

the REERs.

2.1.2 Inflation 34. The rate of inflation is a measure of competitiveness in the same way as the real

exchange rate, in that it benchmarks the competitiveness of a country’s products compared

with other economies. A high rate of inflation has a negative impact on competitiveness as it

implies a high cost of raw materials and services, and may lead to goods being priced out of

the market. Estimates of inflation are available from a number of sources, but for the sake of

maintaining comparability, we use the estimates in the World Bank’s World Development

Indicators, which reports the average annual rate of growth of the Consumer Price Index over

a period of four years from 2000 to 2004.

2.1.3 Gross Capital Formation 35. Gross capital formation, or investment, is key to competitiveness in that it is an

indicator of business confidence in the economy. The IFS reports gross capital formation as a

percent of GDP for almost all the member countries of the IMF. Gross capital formation is

reported as an amalgam of two measures: gross fixed capital formation and changes in

inventories. The former is the “total value of a producer’s acquisitions, less disposals, of

fixed assets during the accounting period,” while the latter involves changes in existing

stocks of outputs.12

2.1.4 National Interest Rates 36. Interest rates, once again, are important indicators of business activity. In general,

lower interest rates, particularly lending rates, are associated with high levels of investment.

The IFS reports six categories of interest rates for its member countries, including central

bank discount rates, money market rates and lending and deposit rates. Of these, lending

rates are the most relevant to benchmark competitiveness, but these are not reported for

10 Source: International Monetary Fund. International Financial Statistics. Published annually. 11 International Monetary Fund. 2005. Introduction. International Financial Statistics. 12 International Monetary Fund. 2005. International Financial Statistics, Yearbook. Page xxi.



Pakistan. Data on lending rates for Pakistan are not given in the World Development

Indicators (WDI) published by the World Bank either. Since we are constrained to use

international publications that provide data for a range of countries, using similar

methodology for each economy, we cannot use lending rates as indicators, and we benchmark

Pakistan’s performance on the basis of central bank discount rates (which are reported for

Pakistan in the IFS), or the rate at which the central bank lends government securities to

commercial banks.

2.1.5 Consumption 37. Consumption is not only a good indicator of the business environment, but also the

prime indicator for the strength of domestic commerce. However, the indicator is interpreted

differently depending on the level of development of the economy. The IFS reports figures

for final consumption expenditure as a percentage of GDP, for the member countries of the

IMF. Final consumption is calculated as the sum of government and private consumption,

and is obtained from the national accounts of the member countries. Final consumption is,

therefore, the fifth indicator we use to benchmark Pakistan’s standing with regard to financial

and economic indicators.

2.1.6 Wages and Productivity 38. Wages constitute a significant portion of manufacturing costs, and some neo-classical

economists have proffered the view that countries at the lower end of the productivity

spectrum will compete primarily by lowering wage rates. Wages are, however, closely

linked to productivity, which is a more robust indicator of competitiveness, and there is little

evidence that low wages are synonymous with high productivity, where productivity is

defined as output value per unit of labor cost. Although data on wages is difficult to obtain,

and in Pakistan’s case, the data is outdated, it was considered necessary to include some

measures of wages and productivity in our analysis. Accordingly, we look at data on labor

cost per worker in manufacturing, and value added per worker in manufacturing – both

indicators reported in the WDI.

2.2 Quality of Governance Indicators 39. Governance is a very broad concept and embraces essentially all aspects of public-

sector regulation and administration. To distinguish this category from the subsequent

categories of Regulation and Public Service Provision, we define the quality of governance

very carefully. For the purposes of this study, therefore, we define quality of governance as

the quality of public institutions, the provision of a safe and predictable environment to do

business, and the facilitation of transparent business dealing. The quality of governance is a

broad concept, but, for the sake of consistency, we again restrict ourselves to five indicators

in this category, relying mainly on international multi-country rankings, so that Pakistan’s

progress can be effectively benchmarked. For the sake of diversity, and to avoid bias as

much as possible, we attempt to pick up indicators from more than one publication. The

following indicators are considered under this heading.

2.2.1 Corruption Perceptions Index (CPI) 40. The Corruption Perceptions Index, which has been published by Transparency

International (TI) since 1995, has become the most widely-cited index on corruption, where

Competitiveness


corruption is defined by TI as “the abuse of public office for private gain.” The CPI is

published annually, and ranks over 150 countries on the basis of perceived corruption. The

perceptions are recorded, based on key information from designated “experts” who do

business in the country concerned. Until recently, these experts were chosen almost entirely

from developed countries, but the pool of experts has recently been expanded to include

individuals from emerging market economies who are conducting business in countries other

than their own. Like other indices that are based on opinion polls, the CPI is essentially a

subjective measure, and has been criticized on these grounds. Transparency International has

recently added new indices, including the Bribe Payers Index (which estimates the propensity

of companies from 30 leading exporting nations to pay bribes in other countries) and the

Global Corruption Barometer (which estimates attitudes towards corruption and experience

with corrupt practices in 69 countries including Pakistan). For our purposes, we benchmark

Pakistan’s performance with other countries based on its ranking in the CPI.

41. The Global Competitiveness Report (GCR) lists a number of indicators relating to

public institutions, some of which are particularly relevant to track progress in achieving

competitiveness. The indicators from the Report that are used to benchmark Pakistan are as

follows.

2.2.2 Efficiency of Legal Framework 42. This indicator, which is obtained from information from the Executive Opinion

Survey (EOS) of the GCR, is based on the following question: “The legal framework in your

country for private businesses to settle disputes and challenge the legality of government

actions and/or regulations is …. .” Respondents are expected to rate the legal framework in

the country under question on a scale of 1 to 7, where 1 is “inefficient and subject to

manipulation” and 7 is “efficient and follows a clear, neutral process”. The GCR reports

indices for 104 countries on this indicator. Given that the existence of efficient, transparent

dispute-resolution mechanisms is key to creating an enabling environment for private

business, the efficiency of the legal framework can be considered a key indicator of

competitiveness.

2.2.3 Favoritism in Decisions of Government Officials 43. This indicator from the GCR is defined in the form of the following question: “When

deciding upon policies and contracts, government officials….” Respondents rate government

policymaking on a scale of 1 to 7, with 1 being “usually favor well connected firms and

individuals” and 7 being “are neutral”. The literature on competitiveness, in general, and on

Pakistan, in particular, shows that a lack of transparency in decision making, adds

considerably to the costs of doing business, as managers try to perfect ways to skirt the

system. Favoritism in decisions also discourages some firms, who may be otherwise

competent and competitive from bidding for contracts, if they do not have the requisite

contacts in the government. This is therefore an important indicator of competitiveness.

44. Issues of governance have recently assumed prominence as multi-lateral development

agencies have started to focus on improving governance as a means to achieve development

outcomes. From amongst the development agencies, the World Bank has taken the lead on

developing, compiling and publishing a set of governance indicators, under the aegis of the

Worldwide Governance Indicators (WGI) project, which commenced in 1995, under the



leadership of Daniel Kauffman.13

The WGI project initially reported estimates for

governance indicators once in two years, but has, from 2005, commenced reporting on

indicators annually.14

The data on the WGI indicators are obtained from a variety of sources,

including assessments prepared by international donors, surveys of firms and individuals

within the country, and assessments of commercial risk-rating agencies. With regard to

quality of governance, we pick two indicators from amongst the WGI indicators as follows.

2.2.4 Voice and Accountability 45. The Voice and Accountability Indicator of the WGI is constructed primarily from

survey data from a variety of sources. Some of the data sources used include the

Bertelsmann Transformation Index, prepared by the Bertelsmann Foundation, which surveys

119 developing countries on political participation and institutional stability among other

indicators; Columbia University’s State Capacity Survey, which compiles data from 108

developing countries and contains questions on the perception of the legitimacy of state

institutions; data from the Economist Intelligence Unit (EIU); and from surveys conducted by

think tanks such as the Heritage Foundation. The Voice and Accountability Index is a

conglomerate of information, but it broadly refers to the extent of the participation of citizens

in the political process, the independence of the media, and transparency of governance, in

general. As such, it is an appropriate indicator for quality of governance.

2.2.5 Rule of Law 46. The last indicator, which we consider in the list under Quality of Governance, is also

from the WGI project, and is the indicator for the Rule of Law. As is the case with the other

indicators developed by Kauffman’s team, this indicator too is based on a merging of data

obtained from a variety of surveys, and it attempts to quantify the extent to which citizens

have confidence in the systems of justice in the country. The indicator includes responses to

survey questions on the state of contract enforcement, and the likelihood of encountering

violence in the society. Data sources for the indicator include the Economist Intelligence

Unit (which surveys contract enforcement and the incidence of violent crime); information

from the US State Department and Amnesty International (who track human rights abuses

and law enforcement); and the Global Risk Service carried out by Global Insight.

2.3 Indicators for Regulation 47. Effective regulation is key to the provision of an enabling environment for business.

Indicators for effective regulation are generally easier to identify than for quality of

governance. For example, regulation is a relatively well-defined and transparent activity.

This also means that we can define fewer indicators for the quality of regulation. We use just

three indicators for this category.

13 For the latest report of the WGI project, see Kauffman, Daniel, Aart Kraay and Massimo Mastruzzi. 2006.

Governance Matters V. Aggregate and Individual Governance Indicators for 1996-2005. The World Bank. September.

14 The WGI governance indicators are constructed in six broad areas: namely, Voice and Accountability (or the extent to which citizens participate in the country’s political process, freedom of the media, etc.); Political Stability and Absence of Violence; Government Effectiveness (which measures the quality of the public service); Regulatory Quality; Rule of Law and Control of Corruption.

Competitiveness


2.3.1 Regulatory Quality

48. Kauffman’s governance indices, as detailed in the WGI project, include the

Regulatory Quality indicator, which is defined as “the ability of the government to formulate

and implement sound policies and regulations that permit and promote private sector

development.”15

Data sources used in the development of this indicator included country

assessments from the Asian Development Bank (which assesses the trade policy and the

competitive environment among other indicators); the Bertlesmann Transformation Index

(which looks at price stability); and the World Bank’s Country Policy and Institutional

Assessment (CPIA), which, like the ADB, assesses the trade policy, competitiveness, and the

state of factor and product markets. The indicator for regulatory quality is a compendium of

these and other assessments.

2.3.2 Burden of Government Regulation 49. The GCR reports on this indicator, which is tabulated from the Executive Opinion

Survey that is based on the question: “Complying with administrative requirements (permits,

regulations, reporting) issued by the central government is burdensome.” Respondents rate

the burden of regulations on a scale of 1 to 7, where 1 means “extremely burdensome” and 7

means “not burdensome”. The indicator is fairly general, but gives an overview of the

regulatory environment in the country and how it impacts business.

2.3.3 Clarity and Stability of Environmental Regulations 50. The GCR reports on this important indicator, which is tabulated from a question in its

Executive Opinion Survey. The question is: “Environmental regulations in your country are

…. .” Respondents rank environmental regulations in the country on a scale of 1 to 7, with 1

coded as “confusing and enforced erratically” and 7 coded as “stable and enforced

consistently and fairly.” This is an important indicator, as environmental regulations are, in

many cases, fairly new, but often have high penalties associated with them, and can,

therefore, be used to intimidate businessmen if needed.

2.4 Public Service Provision Indicators 51. The provision of quality public service is the key task of all levels of government,

particularly local government. In the context of competitiveness, the reliable and cost

effective provision of public utilities, such as electricity and gas, is particularly important to

help businesses maintain a competitive edge. The World Development Indicators (WDI),

published by the World Bank, is an excellent source of information on provision of public

utilities. Some indicators that can be used from this source to benchmark Pakistan’s

performance under this category are as follows.

2.4.1 Transmission and Distribution (T&D) Losses (% of output) 52. In general, a growing economy should have a relatively high per capita consumption

of electricity, and relatively low transmission and distribution losses. If T&D losses are

inordinately high, the electricity provision utility can safely be assumed to operate at less than

optimal levels of efficiency. Competitiveness is affected in the long run if T&D losses are

15 Kauffman, Daniel, Aart Kraay and Massimo Mastruzzi. 2006. Governance Matters V. Aggregate and

Individual Governance Indicators for 1996-2005. The World Bank. September. Page 4.



high, as the government has to take measures to restructure electricity provision, or may even

have to resort to rationing of electricity supplies (the infamous load-shedding that has taken

place in Pakistan in the past). Given that high T&D losses represent inefficiencies in

provision of electricity, an appropriate indicator of public service provision is given by the

percentage of the output that is lost.

2.4.2 Percent of Population Covered by Mobile Telephony 53. The WDI also carries information on a number of indicators on telecommunications,

including fixed mainlines per 1000 people and population covered by mobile telephony. Of

these two, the latter was considered more relevant for competitiveness, given that mainline

connections are becoming increasingly irrelevant as mobile telephone services grow in

coverage and compete to provide ever lower rates. While the growth of mobile phone

networks is not public service provision per se, it is indicative of the government providing

facilities to promote the growth of telecommunications networks, and, as such, can be

considered as a relevant indicator in this category.

2.4.3 Percent of Paved Roads 54. The provision of good facilities for efficient transportation is key to promoting an

enabling environment for business, and the government has an important role to play in

maintaining transport facilities. As such, this indicator, reported in the WDI, is very

appropriate as an indicator of quality of public service provision. At the highest level, freight

transport requires the provision of well-maintained highways and motorways for speedy and

safe transportation. However, the percent of paved roads is a good proxy indicator.

2.4.4 Public Expenditure on Education (% of Total Government Expenditure) 55. Public expenditure on education is indicative of the government’s commitment to

providing essential services, as well as the government’s commitment to raise the level of

human development. The UNDP’s Human Development Report (HDR) publishes this

indicator for a range of countries, which makes comparison across the board easy. This is

also one of the few education indicators for which data for Pakistan is available in the HDR.

A more interesting indicator, for purposes of comparing competitiveness, would have been

expenditure on education at the tertiary level, which is an indicator of how seriously the

government is promoting knowledge creation in the economy. While expenditure on

primary education, or education in general, is, expenditure on tertiary education is more

indicative of a commitment to direct production systems in the country towards the higher

end of the value chain – an exercise that is key to achieving competitiveness. However,

although the HDR publishes data for expenditure on tertiary education, there is no data

available in this category for Pakistan, so we cannot use it. We will therefore go with a more

general indicator on public expenditure on education as a percent of total public expenditure.

2.4.5 Overall Infrastructure Quality 56. The GCR reports on this indicator, which is a response to the question, “General

infrastructure in your country is …. .” Respondents rate the quality of general infrastructure

available to them on a scale of 1 to 7, with 1 being “poorly developed and inefficient” and 7

being “among the best in the world”. While this indicator is fairly general, it gives a good

Competitiveness


overall picture of the perceptions of the business community regarding the services available

to them. This is the last indicator that we track in the category of public service provision.

2.5 Business Environment 57. The business environment is a very general category. A number of factors come

together to constitute an enabling environment for business development. These can range

from provision of infrastructure, to effective law enforcement, to fiscal incentives that

encourage business development. For this category, we define business environment to cover

primarily policies that ensure market competition and create a level playing field for business,

as well as policies that ease red-tapism and make regulatory procedures, simple. The

following indicators are chosen in this category.

2.5.1 Business Environment Indicators 58. Perhaps the most comprehensive set of indicators on the business environment are

recorded by the World Bank and are reported both in the WDI, and in the World Bank’s other

flagship publication on private sector activity, Doing Business. As reported in WDI, there

are seven categories under which indicators are grouped, which are listed below.

Starting a business

o Number of procedures

o Time required in days

o Cost % of per capita income

Registering property



Dealing with licenses

o Number of procedures to build a warehouse


Hiring and firing workers

o Rigidity of employment index (which benchmarks ease of replacing workers if

needed)

Enforcing contracts



Protecting investors

o Disclosure index (which benchmarks transparency in the financial systems and stock

markets)

Closing a business

o Time to resolve insolvency in years

59. The indicators in this category are largely self explanatory and since all of them are

relevant to competitiveness, they are reported upon in this study.

60. In order to diversify our analysis, we also report on some indicators of the business

environment reported on in the GCR. These are listed below.

2.5.2 Property Rights 61. While the business environment indicators listed above cover all the operational costs

of doing business, the business environment is also defined by the effectiveness of contract



enforcement procedures. The GCR carries a listing of this indicator, based on the question:

“Property rights, including those over financial assets are …. .” (rated on a scale of 1 to 7,

with 1 being “poorly defined and not protected by law” and 7 being “clearly defined and

protected by law”.

2.5.3 Business Costs of Corruption 62. Once again, this comprehensive indicator is from the GCR and refers to the extent to

which business enterprises have to negotiate their way through government procedures and

issues in the legal system by paying out irregular payments. While the GCR also records the

extent of the burden of irregular payments for specific sectors (like irregular payments in tax

collection, irregular payments in judicial decisions, etc.), this indicator covers the costs of

irregular payments in general, and, as such, is a comprehensive documentation of the extra

costs to business. The indicator is based on the question: “Do other firm’s illegal payments

influence government policies, laws or regulations, impose costs, or otherwise negatively

affect your firm?” The responses are rated on a scale of 1 to 7, with 1 being “they have a

significant negative impact”, and 7 being “no, they have no impact”.

2.6 Human Resource and Technology 63. Human resource and technology development are key to enhancing competitiveness.

Lack of investment in these areas has resulted in situations where a number of developing

countries, including Pakistan, have found themselves firmly entrenched at the lower end of

the value spectrum, producing and exporting goods that do not have growing market shares in

the world market, and whose prices are either falling or stagnant in real terms. Investment in

human resources, and, to a lesser extent, technology, typically has a long gestation period, but

significant payoffs. We use the following indicators to benchmark Pakistan’s progress in this

category.16

2.6.1 Research and Development Expenditure as % of GDP 64. The UNDP’s Human Development Report lists this indicator as part of a section on

Technology Diffusion and Creation. The data collected are primarily for R&D in the public

sector, i.e., research in the public sector universities and research institutes.

2.6.2 Internet Users per 1000 People 65. The WDI carries a list of indicators under the heading of “the information age”, which

ranks countries by prevalence of computing practices, access to media and information

sources, etc. The data on internet users per 1000 people are particularly relevant for our

purposes, as internet usage can be critical for research and development purposes, more so

than access to newspapers or television. Data on this indicator are obtained primarily from

the service accounts of internet providers, so it may actually underestimate the number of

users. Nevertheless, this bias, if it exists, would be present across countries, so the indicator

is still relevant as a basis for comparison.

16 We are somewhat constrained in picking suitable indicators in this category because data for Pakistan are

often not available in a multi-country listing. For example, UNDP’s Human Development Report lists an excellent indicator, tertiary students in science, math and engineering, which would be very relevant to our analysis, but we cannot use it as there are no data for Pakistan in the list. Similarly, data for Pakistan are not available for internet usage (also listed in the HDR).

Competitiveness


2.6.3 Information and Communication Technology Expenditure (% of GDP) 66. The WDI also records data on this indicator, which involves expenditure on computer

software and hardware as well as on computer services (data processing, web hosting etc) and

voice and data communications equipment. Data sources include the World Bank’s own

estimates and data from the World Telecommunications Development Report published by

the International Telecommunications Union (ITU). Ultimately, of course, the data are

obtained primarily from government agencies. Data in categories such as this are somewhat

subjective, and not entirely reliable (given that the Government of Pakistan, for example,

probably does not have a reliable database on total economy expenditure on information

technology), but the indicator is sufficiently robust to carry out a comparison across

countries.

2.6.4 High Technology Exports (% of Manufactured Exports) 67. The WDI also reports on this very important indicator, which tracks the country’s

placement on the value chain in manufactured exports. This is also a particularly robust

indicator in this category, given that export data are generally recorded in detail in most

countries.

68. While the HDR and WDI indicators that we have chosen are based on quantitative

data, the GCR reports some very interesting indicators for technological development, which

are based more on the perception of quality of technology available. The indicators that we

have chosen to track are as follows.

2.6.5 Technological Readiness 69. The indicator for technological readiness is based on a very simple statement: “Your

country’s level of technological readiness is … .” (responses ranked from 1 to 7 with 1 being

“generally lags behind most other countries” and 7 being “is among those of the world

leaders.” It is interesting to note that this question refers to “readiness” rather than current

state of technology and, as such, implies an ability to adapt to new technology. The GCR

also lists indicators such as “Prevalence of Foreign Technology Licensing” and “Firm-level

Technology Absorption”, but this indicator is all-encompassing, and provides an overall view

of the state of technological development in the country.

2.6.6 Quality of Scientific Research Institutions 70. This is a very important indicator in that it provides a cross-check on our earlier

indicators on expenditure on research and development. While expenditure can be relatively

high, it may very well be that funds are being diverted to institutions which are largely

ineffective, and are not fulfilling their mandates. This is particularly true for countries like

Pakistan, where public sector research institutions typically have little to show in terms of

scientific achievement or applicable research. The indicator, as reported in the GCR, is based

on the question: “Scientific research institutions in your country (e.g., university laboratories

and government laboratories) are …” (respondents can rate their responses on a scale of 1 to

7 with 1 being “non-existent” and 7 being “the best in their field.”



2.6.7 Quality of Competition in the ISP Sector 71. This indicator from the GCR enables us to substantiate our earlier indicator on

internet use prevalence. While internet use may be increasing rapidly, the quality of service

is crucial if the internet is to support research and development activity. This indicator is the

response to the question: “Is there sufficient competition among Internet Service Providers in

your country to ensure high quality, infrequent interruptions, and low prices?” Respondents

rate their response on a scale of 1 to 7 with 1 being “no” and 7 being “equal to the best in the

world.”

72. The above set of indicators for different categories are regularly published in reputed

publications, and are readily available for comparison and updating. The use of a multiple of

sources ensures, to some extent, that the extent of bias is kept under control as the indicators

for the most part represent ranking by a variety of sources. The tables reproduced in this

report can therefore be updated annually or bi-annually, and can be used to track progress

over time.

23

Section 3

Benchmarking Pakistan’s Performance

73. We will benchmark Pakistan’s performance with respect to each of the indicators detailed

in the previous section, and with reference to a set of five countries. The countries we have

chosen include the United States (US) and United Kingdom (UK), which would serve as “good

practice” models;17

China and Malaysia, which would serve as models of rapidly developing

economies and thus represent a state of growth that Pakistan would like to attain in the medium

term; and India, a developing country with a social and administrative structure very similar to

that of Pakistan, and a shared history.

3.1 Financial and Economic Indicators 74. The performance of the six countries, including Pakistan, with respect to the financial and

economic indicators we have chosen is give in Table 3.1.

Table 3.1: Financial and Economic Indicators

Indicators Pakistan India China Malaysia UK US

Real Effective Exchange Rate (2004) 91.3 - 94.9 91.9 98.7 88.0

Rate of inflation (measured by the average annual rate of growth of the Consumer Price Index over the period) (2000-04)

4.0 3.9 1.0 1.4 2.3 2.3

Gross capital formation/investment as % of GDP (2003)

16.7 23.0 42.3 21.4 16.6 18.5

National Interest Rate (2004) 7.5 6.0 3.3 - - 3.1

Final consumption expenditure as percent of GDP (2003)

82.7 75.2 55.5 57.7 86.5 86.1

Labor cost per worker in manufacturing in $ per year (1980-84)

1264 1035 472 2519 11,406 19,103

Value added per worker in manufacturing in $ per year

6214 2108 3061 8454 24,716 47,276

Sources: International Monetary Fund, International Financial Statistics, 2005 World Bank, World Development Indicators, 2006

75. Pakistan’s REER compares favorably in our group of comparison. A higher value of

the REER, as it is calculated in the IFS, represents an appreciation of the currency in question

17 We avoid referring to these two countries as best practice models as, on some counts, e.g. with regard to

certain forms of corruption, they do not rank at the top of any of our league tables. Nevertheless, as developed economies, these are good models to emulate as they are representative of varied, and large economies, operating within complex social systems.



against a basket of currencies, given that the exchange rate is also adjusted to reflected

changes in relative price levels. As such, Pakistan’s REER, at 91.3 (compared to a base

where 2000=100) represents a depreciation of the currency, and implies that export prices are

in general, competitive, relative to the base year. Malaysia’s REER is at par with Pakistan,

while China’s remains a little higher. The US REER is the lowest in this group at 88,

indicating a steep depreciation of the currency relative to 2000, while the REER of the UK

indicates a relative stability in currency value. India’s REER is not reported in the IFS, as the

Government of India does not allow the publication of this indicator because of differences

with the IMF on the method of calculation of the index.

76. In general, the REER needs to be interpreted with caution. While a fall in the value of

the index is indicative of an increase in export competitiveness (based on a pricing criterion

alone), a depreciation of the REER will not translate into a favorable trade balance unless

export volumes are growing. The only conclusion we can draw with some confidence in this

regard is that the real exchange rate did not constitute a deterrent to Pakistan’s exports in

2004.

77. For the period in question, Pakistan’s rate of inflation was the highest for the

countries in the group. This data relates to the fiscal year ending in 2004, and inflation has

increased significantly since than. The high inflation rate, relative to other countries, renders

exports relatively uncompetitive, and this is an area to be watched carefully. With regard to

investment, the indicator is best compared with indicators from other developing countries, as

the US and UK would be expected to have lower investment rates relative to GDP, given the

sizable capital stock in developed countries. Pakistan compares unfavorably with India and

Malaysia, with investment constituting just 16 percent of the GDP, compared to 21.4 percent

for Malaysia and 23 percent for India. China’s investment ratio, is of course exceptional, at

over 42 percent.

78. The interest rate, as mentioned earlier, is an indicator of the cost of doing business.

As data on the lending rate is not available, we use the bank rate as a proxy, with the

hypothesis that a lower discount rate would signify greater scope for achieving

competitiveness. Again in the countries in our sample, Pakistan fares badly on this score,

with a discount rate of 7.5 percent – exceeding India’s discount rate over 1 percent and those

of China and the US by a more significant margin. The combination of a high national

interest rate and high inflation can be significantly damaging to business prospects, as

businessmen limit their use of bank finance in the face of high lending rates, and scale down

investment plans accordingly. Although the discount rate for 2004 represents an

improvement over previous years, it would appear that by international standards, business

financing is still too costly in Pakistan.

79. The fifth indicator of the series is final consumption expenditure as a percent of GDP.

This indicator, like REER, again needs to be interpreted with caution. While for developed

economies, a high measure of consumption is indicative of high growth potential in the

economy (as businesses strive to meet the growing demand), in developing economies like

Pakistan, a very high rate of consumption can signify a lack of business confidence and a

culture of immediate consumption as opposed to investment aimed at ensuring higher

consumption rates in the future. In addition, high consumption rates are also typical of low

income economies where resources are just enough to satisfy consumption needs, leaving

little for investment. Pakistan’s rate of final consumption (as a percent of GDP), at just over

82 percent, compares with developed countries – only four percentage points less than that of

the UK. India’s consumption is also high at 75 percent of GDP. China and Malaysia, on the

other hand, have similar consumption rates, near about 56 percent of GDP. Both these East

Asian economies are known for their high savings rates, and the rate of final consumption as

a percent of GDP reflects the tendency towards high household savings rates in these

Competitiveness


countries, as well as the high rates of investment and business confidence. Pakistan, and to a

lesser extent, India, appear in this context as economies where consumption deferral is not the

norm, both because of the relatively low per capita incomes in these countries, as well as the

lack of a culture of saving and investment.

80. The last two indicators in our list are not entirely helpful as we were forced to use

very old data, given that the WDI does not report wage rates for Pakistan after 1980-84. As

such, the data is not representative, but it does give us some idea of the relevance of the oft-

cited theory that lower wages promote competitiveness. Pakistan’s labor costs were very

significantly higher than those of China in 1980-84, (this being the period when China had

not yet begun its economic reforms), and were higher than India’s as well. Can this be

blamed for the fact that both India and China consistently experienced very high growth rates

a decade after this data was published, while Pakistan was left behind? It would appear not.

In the early 1980s, the emerging economy that was being closely watched was that of

Malaysia, which was experiencing the beginning of a an export boom in the period under

question and was on the verge of moving into the ranks of middle income economies.

Malaysia’s labor costs at that time were double those of Pakistan, yet it remained highly

competitive than, and for two decades to come.

81. Data collected by the Ministry of Commerce shows that the monthly unskilled wage

rate in Pakistan was Rs. 4000 on an average in 2006, while in India the rate was Rs. 5198 and

in China, it ranged from just above Rs. 7,000 to Rs. 11,000.18

Given the significant growth in

Chinese and Indian exports over the past decade, it would appear that these countries are not

suffering due to the higher labor costs they are now incurring – in fact the higher wages in

these countries are indicative of the higher productivity of labor.

3.2 Quality of Governance Indicators 82. The quality of governance indicators for our country group is given in Table 3.2.

Table 3.2: Quality of Governance Indicators


Transparency International’s Corruption Perceptions Index (CPI) (2006)

2.2 3.3 3.3 5.0 8.6

7.3

Efficiency of Legal Framework (2006)

3.0 5.1 3.4 5.4 6.0 5.1

Favoritism in Decisions of Government Officials (2006)

3.1 3.6 3.0 4.1 4.4 3.5

Voice and Accountability (2005) -1.35 0.35 -1.66 -0.41 1.30 1.19

Rule of Law (2005) -0.81 0.13 -0.47 0.58 1.69 1.59 Sources: Transparency International, Corruption Perceptions Index, 2006 World Economic Forum,

Global Competitiveness Report, 2006-07 World Bank, World Governance Indicators, 2005

83. Transparency International ranks countries on a scale of 1 to 10 on its CPI, with 1

being most corrupt, and 10 least so. In our group of six countries, Pakistan ranks as the most

corrupt, ranking below India (which ties with China in this category) and Malaysia, and

significantly below the US and UK. Pakistan’s score in 2006 represents a minor

improvement over its 2005 score (which was 2.1), but its ranking continues to belie recent

claims of significant improvements in transparency. With regard to efficiency of the legal

framework, a GCR indicator, where a higher score represents a more efficient legal system,

18 Data is from a presentation prepared by the officials of the Ministry on Textile and Clothing Exports in

January 2007. While the presentation does not specify the unit, we are assuming that all wage rates are being expressed in Pakistani rupees.



Pakistan once again falls to the bottom of the table, once again faring worse than India, which

interestingly, has almost the same score as China (which gets relatively low rankings on

account of the centralized nature of the judicial process). With regard to the other GCR

indicator in our list, the favoritism in decisions, Pakistan is once again close to China at the

bottom of our list. The US, interestingly also gets a low score (the spate of recent scandals in

the administration may account for this), while India ranks a little higher. Once again, this is

an area where even developed countries like the US and UK do not get very high scores

(given that the max score is 7), but it is interesting to see that India and Malaysia are ranked

fairly close to these countries.

84. The last two indicators on this list are from the group developed by the World

Governance Indicators of the World Bank. The scale for these two ranges from -2.5 to 2.5,

with a higher score representing a better outcome. As is to be expected, the governance

indicators are strongly biased in favor of democratic systems of governance, which are

recognized as such by the international community. Countries such as China and Malaysia

therefore fare badly on these indices, as does Pakistan. Of the six countries in the sample,

China has the lowest score on voice and accountability, reflecting relatively little space for

dissent. Pakistan has the second lowest score, in spite of the moves towards democratization

in the country after 2002. India’s score remains relatively low for a functioning democracy,

but is nevertheless higher than many developing countries. The US and UK actually fare

worse than one would expect from institutionalized democracies – in case of the US, the

relatively low score on voice and accountability has been attributed to the stronger anti-

terrorism laws that have been enacted post 9/11, which have been criticized by civil rights

activists.

85. With regard to the rule of law, China still comes out at the bottom, and Pakistan is

second from the bottom in our listing. India’s score falls significantly in comparison to its

ranking on voice and accountability, reflecting the administrative issues that the country

faces, but it still fares significantly better than Pakistan. Malaysia scores well on this

indicator, reflecting the perception that in spite of the perceived control on civil liberties, the

country has strong legal systems that serve the public and business interests. Once again,

Pakistan’s ranking is a cause for concern, given the central position that this sort of indicator

would hold in any businessman’s assessment of a country’s investment potential. 3.3 Indicators for Regulation 86. The indicators we have chosen in this category are given in Table 3.3.

Table 3.3: Indicators for Regulation


Regulatory Quality (2005) -0.60 -0.34 -0.28 0.50 1.53 1.47

Burden of Government Regulation (2006)

3.1 2.9 3.4 4.6 3.3 3.6

Clarity and Stability of Environmental Regulations (2006)

3.5 4.0 3.3 4.9 5.7 5.1

Sources: World Economic Forum, Global Competitiveness Report, 2006-07 World Bank, World Governance Indicators, 2005

87. The first indicator in the series, regulatory quality, is one of Kauffman’s indicators

from the WGI, which measures the quality of performance of regulatory agencies. Pakistan’s

performance is this regard is a cause for concern as the country ranks as the bottom on the

list. As regards the two indicators from the GCR, the burden of Government regulation and

clarity of environmental regulations – Pakistan ranks above India, and close to the UK on

burden of government regulation. Only Malaysia has a relatively high score in this group,

Competitiveness


adding credence to the Malaysian government’s claim of facilitating business, rather than

directing it. With regard to the last indicator on environmental regulations, Pakistan does not

do too well, ranking just above China and significantly lower than the rest. Overall,

Pakistan’s performance in this category is not good, and indicates that a review of regulatory

policy and mechanisms of enforcement is desirable.

3.4 Public Service Provision Indicators 88. Table 3.4 gives the detail on indicators in this category.

Table 3.4: Indicators for Public Service Provision


Transmission and Distribution Losses as % of Output (2003)

25.0 27.0 6.0 5.0 8.0 7.0

Percent of Population Covered by Mobile Telephony (2004)

45 41 73 96 99 95

Percent of Paved Roads (2003)

60.0 62.6 79.5 77.9 100.0 58.819

Public Expenditure on Education as a % of Total Expenditure (2002)

7.8 12.7 - 20.3 11.5 17.1

Overall Infrastructure Quality (2006)

3.4 3.3 3.4 5.7 5.8 6.1

Sources: World Bank, World Development Indicators, 2006 UNDP, Human Development Report, 2005 World Economic Forum, Global Competitiveness Report, 2006-07

89. T&D losses as a percent of output is the first of our indicators of public service

provision. Pakistan fares better than India on this count, with losses of about 25 percent

of output (India is at 27 percent); but both the South Asian countries compare extremely

unfavorably to the rest of the group. T&D losses do not go into the double digits in any

of the other countries in our sample, indicating serious issues in the provision of

electricity in Pakistan and India. With regard to percent of population covered by mobile

telephony, Pakistan has good coverage relative to India, and there are indications that this

coverage has grown substantially in the last two years. With regard to provision of paved

roads, Pakistan ranks at the bottom of our table, but relative to its income category, it has

a respectable showing, only two percentage points less than India, the only other country

in this group with a similar level of per capita income.

90. As mentioned in Chapter 2, public expenditure on education may not be the best

indicator of competitiveness, for which a measure of expenditure on tertiary education

may have been more suitable. Nevertheless, in the absence of data on Pakistan on tertiary

education, we use this more basic indicator to indicate the government’s commitment to

human resource development. Once again, this indicator needs to be interpreted with

caution. Developed countries will necessarily spend a smaller proportion of resources on

public education, as their economies are on a different scale of measurement. So while

the US and UK do not appear to devote a large proportion of their public resources to

education, they do not constitute the right frame of reference for Pakistan. It is more

relevant for our purposes to compare Pakistan with India and Malaysia, and in both these

comparisons, Pakistan’s performance is dismal. The expenditure on public education, as

a percent of total expenditure is less than 8 percent in Pakistan, compared to just over 12

percent in India, and over 20 percent in Malaysia. When we keep in mind that this is

19 The World Development Indicators for 2006 carry this figure for percent of paved roads in the US, but it

appears to be an outlier. There is no explanation for this discrepancy. Since it is unlikely that the proportion of paved roads in the US is so low, it is possible that there is an issue of definition here, with regard to what exactly constitutes paving.



primarily expenditure on primary education, the situation is even more alarming with

respect to promoting competitiveness, which really requires substantial investment in

higher education and research.

91. The last indicator in our series is overall infrastructure quality, collated from the

GCR. India, China and Pakistan are clustered at the bottom of the table here -

significantly below Malaysia and the two developed countries. This indicator is more

subjective in nature than the others, being simply a perception of infrastructure

availability, but it is nevertheless telling. Pakistan’s ranking has improved significantly

on this score (being 2.8 two years ago), which is a positive development.

3.5 Business Environment 92. Table 3.5 carries information on the costs of doing business for our comparison set.

Table 3.5: Costs of Doing Business


Starting a business: Number of procedures Time required in days Cost % of per capita income

11 24

18.6

11 71

61.7

13 35 9.3

9

30 19.7

6

18 0.7

5 5

0.5 Registering property: Number of procedures Time required in days

5

49

6

67

3

32

5

144

2

21

4

12 Dealing with licenses: Number of procedures to build a warehouse Time required in days

12

218

20

270

29

367

25

281

19

115

19 70

Hiring and firing workers: Rigidity of employment index (which benchmarks ease of replacing workers if needed)

46

62

24

10

14

3

Enforcing contracts: Number of procedures Time required in days

46

395

40

425

31

292

31

450

14

288

17

250 Protecting investors: Disclosure index (which benchmarks transparency in the financial systems and stock markets)

6

7

10

10

10

7

Closing a business: Time to resolve insolvency in years

2.8

10.0

2.4

2.3

1.0

2.0

Property Rights (2006) 3.7 5.7 4.3 5.8 6.5 5.8

Business Costs of Corruption (2006) 4.0 5.1 4.0 5.2 6.5 5.3 Sources: World Bank, Doing Business 2006 World Economic Forum, Global Competitiveness Report

2004-05

93. The World Bank’s comprehensive reporting on the costs of doing business, the

key indicators of which we report on in this table, is considered the definitive guide on

this subject. We first examine the costs of starting a business. Pakistan compares very

favorably to India on this count, with time required for starting a business being almost

six weeks less than in India, and cost of starting a business (as percent of per capita

income) also being significantly lower, and even comes out better than China. In fact,

on this count, Pakistan’s indicators are closest to those of Malaysia, a country which is

reputed to be business friendly. However, it predictably compares badly with the US and

UK, particularly the former where business procedures are simplest.

Competitiveness


94. Property registration and obtaining licenses are key elements in doing business,

and once again, Pakistan acquits itself well with reference to India, as well as wi th

reference to Malaysia, where the time required to fulfill these procedures is

unaccountably high. Our next indicator measures employment rigidity, with a higher

value showing more rigidity in hiring and firing workers. Here Pakistan compares

favorably to India, but not to all the other countries in the group, where labor strictures

are far less rigid. It is interesting to note that even China, where until recently, security of

employment was assured, has made its employment regulations less rigid to enable

employers to hire and fire more easily. In both India and Pakistan, however, employment

rigidities are strongly entrenched and the turnover of the workforce is low.

95. With regard to contract enforcement, the data is not so favorable for Pakistan, with

the number of procedures for contract enforcement being the highest for the countries in

our group, at 46. This is one of the few categories where Pakistan fares worse than India,

where the number of procedures for contract enforcement is 40. South Asia compares

particularly unfavorably with the US and UK in this regard, where the number of

procedures for contract enforcement are just 17 and 14 respectively. China and Malaysia

rank at the same level on this count. With regard to time required to enforce contracts,

Pakistan does better than India, and surprisingly, better than Malaysia. The next indicator

that we use from amongst the indicators on Doing Business is the disclosure index which

measures transparency in stock market dealings and financial systems. On this count,

Pakistan ranks at the bottom. Interestingly, Malaysia and China, both countries with

fairly controlled financial systems, score very well on this count, and rank with the UK.

India and the US are tied a step above Pakistan. On the last indicator from Doing

Business, which relates to time taken to resolve insolvency, Pakistan again fares

significantly better than India, with an average time of 2.8 years, as opposed to 10 for

India. It also compares quite well with China and Malaysia.

96. The last two indicators in this category are from the GCR, and are based on a

subjective survey. The first relates to the perception of whether property rights are

enforced in the country. On this count, Pakistan comes out at the bottom of the tab le,

doing significantly worse than India. Interestingly, India, Malaysia and the US are

ranked close together on this variable, with only the UK having a higher score. With

regard to the business costs of corruption, Pakistan ties with China at the bottom of the

table, while once again, India, Malaysia and the US are grouped close together. The low

scores that the US gets on both these indicators are symptomatic of recent problems in the

US administration which has repeatedly faced issues of transparency. While India and

Malaysia do not get very high scores, they acquit themselves relatively well for

developing countries.

3.6 Human Resource and Technology 97. The next set of indicators in which Pakistan’s performance is benchmarked are

indicators which measure human resource development and technological development.

Estimates for the chosen indicators are given in Table 3.6.

Table 3.6: Indicators for Human Resource and Technology


Research and Development Expenditure as % of GDP (2002)

0.2

0.8

1.2

0.7

1.9

2.7

Internet Users per 1000 People (2004)

13 32 73 397 628 630

Continued…




Information and Communication Technology Expenditure as a % of GDP (2004)

7.1

3.8

4.4

6.7

6.9

9.0

High Technology Exports as a % of Manufactured Exports (2004)

1

5

30

55

24

32

Technological Readiness (2006) 3.4 5.3 3.6 5.5 5.8 6.1

Quality of Scientific Research Institutions (2006)

3.7 5.3 3.7 5.2 6.0 6.0

Quality of Competition in the ISP Sector (2006)

4.7 5.3 3.8 4.9 6.0 5.5

Sources: UNDP, Human Development Report, 2005 World Bank, World Development Indicators, 2006 World Economic Forum, Global Competitiveness Report, 2006-07

98. Seven indicators were chosen for benchmarking in this category, given the

significance of human resources and technology in promoting competitiveness. The first

indicator we consider is R&D expenditure as a percent of GDP. Pakistan comes out at the

bottom on the table on this indicator, with only 0.2 percent of the GDP devoted to R&D.

India and Malaysia are almost at par with 0.8 and 0.7 percent of GDP dedicated to R&D,

while the US scores exceptionally high with 2.7 percent of GDP going into R&D. With

regard to internet users per 1000 people, once again Pakistan falls to the bottom on the table

by a considerable margin. India, which is the next country from the bottom, has 32 internet

users per 1000 people as compared to Pakistan’s 13. In developed economies, the number is

in the range of 650 people, showing a marked disparity between the developed and

developing countries on this count.

99. With regard to information and communication technology expenditure as a percent

of GDP, Pakistan comes out very well, devoting over 7 percent of resources to ICT

expenditure, including computer networking and provision of hardware and software. This

number is high in comparison to all the other countries in our group, other than the US, and

probably reflects a period of intense activity on this account, where capacity was built up

from a low base.

100. The next indicator is high technology exports as a percent of total manufactured

exports. Pakistan’s performance is particularly dismal on this score, with only 1 percent of

manufactured exports classified as high technology exports. In contrast, 5 percent of Indian

manufactured exports are categorized as high technology exports, and for Malaysia, this

proportion rises to a staggering 55 percent – significantly higher than in the US, UK and

China.

101. The last three indicators on our list are taken from the GCR and are more qualitative

in nature, reflecting the perception of technological readiness in the country (or the country’s

ability to adopt new technology), the quality of scientific research institutions and the quality

of competition amongst internet service providers. With regard to both technological

readiness and the quality of scientific research institutions, Pakistan is at the bottom of the

table ranking significantly below India (which, interestingly, gets a higher score than China

and is close to Malaysia on both counts). Pakistan does better with respect to quality of

competition for ISPs, reflecting the recent upswing in provision of net services, and the

government’s liberalization of registration procedures for ISPs. China, with a more

controlled economy, gets a lower score than Pakistan on this account, while Malaysia does

significantly better than China and Pakistan. Interestingly, India and the US are almost at par

in this grouping.

31

Section 4

Conclusion

102. The benchmarking exercise is interesting in that it reveals a pattern of performance,

with Pakistan clearly doing badly in some areas, but surprisingly well in others. On

economic indicators, the evidence is mixed. There is little evidence of over-valuation of the

exchange rate, which would augur well for competitiveness. However, interest rates are

inordinately high and inflation is high and rising, which can seriously dampen business

activity. On quality of governance, the country’s performance leaves much to be desired – it

consistently ranks near the bottom of the table with respect to the five other countries in our

sample. The same is true for regulation, where once again, Pakistan’s performance is

worrying. For public service provision, the evidence is again mixed. The government seems

to be doing well on some counts (the growth in telecommunications access, the road

network), but badly in others (losses in electricity supply) and particularly badly in human

resource development, where its performance is extremely poor even in relation to India, a

country with a similar level of per-capita income which also has a severe resource constraint

when it comes to expenditure on social services.

103. The business environment is one area where Pakistan appears to be doing better than

expected, although here also the perception of its performance appears to be worse than the

performance actually is! There is a conundrum in evidence here – while in terms of objective

indicators (actual number of days taken in an activity, number of procedures), Pakistan does

not do too badly in comparison with developing countries (and does better than India on

many counts), subjective indicators (from the GCR) show that the business community’s

perception of the costs of doing business in Pakistan are poor. The government needs to take

note of this, and not only work on removing weaknesses in the system, but also publicize and

emphasize areas where progress has been made. Lastly with regard to technology diffusion,

the results are again mixed, with Pakistan doing well on promotion of ICT and ISPs, but

badly on research and development funding, and quality of scientific research.

104. Overall, the benchmarking exercise reveals significant flaws in systems of

governance, in human resource development and in technology diffusion, all key factors in

the determination of long term competitiveness. With regard to simplification of paperwork

and procedures, the government appears to have made progress, but this progress doesn’t

seem to have been adequately recognized. Clearly there is much to do in terms of image

building, investment in human resources and improving the perceptions of the business

community with regard to doing business in the country.

4.1 Policy Recommendations 105. Short Term: In the short term, the Ministry of Commerce can track the state of the

country’s competitiveness primarily by monitoring the state of economic indicators,



including the exchange rate, the rate of inflation and the interest rate. However, economic

indicators constitute a small group in the compendium of indicators of competitiveness, many

of which are qualitative and subjective in nature. The government needs to keep itself abreast

of the business community’s concerns and their reactions to public policy in a variety of

areas. The Ministry of Commerce should therefore consider constituting a series of business-

government roundtables on a regular (possibly quarterly or six-monthly) basis, and enable the

business community to air their concerns and respond to the government’s policy changes.

The roundtable could be constituted by sector or business groupings, or could constitute two

to three days of deliberations, with special sessions for different groups. A report would be

prepared on the deliberations in the roundtable, with a clear account of key issues raised by

all stakeholders, actions agreed upon, and a timetable for taking action. This action plan

would then constitute the starting agenda item for the next roundtable.

106. Medium Term: In the medium term, the Ministry of Commerce will need to press

for long term reform in key areas affecting competitiveness, and will have to lobby for such

reform with other agencies of the Government of Pakistan. Some of the important issues that

have to be resolved include the following:

Differential power and natural gas tariff structure for commercial enterprises, and the

relatively high energy costs in Pakistan in general, which have significant implications for

the costs of production and the costs of doing business. While the government has been

concerned about the restructuring of the power sector and reduction of transmission and

distribution losses for some time, it has not succeeded in bringing about the needed

reforms. The Ministry can play a role in raising the issue of high energy costs as an

important factor affecting competitiveness;

There is an urgent need to reform, and in some cases operationalize, systems of contract

enforcement. The High Courts constituted specialized benches to deal with commercial

disputes some time ago, but these have not realized their full potential due to the shortage

of legal personnel trained in company and business law. This is an area where the

Ministry of Commerce can intervene by organizing training courses in commercial law

for the legal fraternity, liaising with law colleges to include or update relevant courses,

and generally liaising with the Ministry of Law to find ways to operationalize business

courts;

As part of the debate on legal reform in the context of facilitating business and commerce,

the Ministry of Commerce should consider using forums such as the proposed business

roundtable to assess the impacts, if any, of judicial reforms such as recent advances in

propagating alternative dispute resolution (ADR) through amendments in Section 89A of

the Code of Civil Procedure, and the enactment of the Small Claims and Minor Offences

Courts Ordinance in 2002.

107. Long Term: Promoting competitiveness really has to do with reducing the cost of

doing business, and in the longer term, the emphasis should really be on legal and judicial

reform, particularly in relation to contract enforcement and establishment of property rights,

transparency in the functioning of capital markets and perhaps most important, human

resource development at the tertiary level.

108. While the compendium of studies on domestic commerce in general, and this

benchmarking exercise in particular, are useful in highlighting issues, more detailed research

work is required in specific areas including legal and judicial structures that support business

and contract enforcement, property rights and efforts at skill development and the integration

of technology in commodity producing sectors. These are areas that the Ministry may

consider for further research and analysis.

Date post:	13-Jul-2015
Category:	Economy & Finance
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THE STATE OF DOMESTIC COMMERCE IN PAKISTAN STUDY 1 COMPETITIVENESS

Economy & Finance