Ease of Doing Business Index (EDBI) measures different aspects of business regulation, including commencing business activity, obtaining construction permits, getting electricity connections, registering property, accessing finances, protecting investors, paying taxes, trading across borders, enforcing contracts, resolving solvency and regulating labour market, which are of utmost importance for the entrepreneurship as well as for enhancing business activity in any jurisdiction.
As better EDBI ranking stimulates business activity, which, in turn, accelerates economic growth, many research studies have found positive relationship between ease of doing business indicators and economic growth. For example, the relationship between better regulations and economic growth is empirically found to be consistently significant. Fairly robust body of evidence exists for the significant and reasonably large positive impact of regulatory reforms on economic growth. These ease of doing business indicators, e.g. such as registering property and trading across borders, are found to have significant positive impact on economic growth.
This is ample proof of the fact that countries wishing to boost economic growth can reform and improve business environment by utilizing EDBI data of the World Bank.
Improving EDBI ranking of a country is, therefore, inevitable to boost investment and business activity that is essential for getting a better place on the Human Development Index (HDI) on which Pakistan was at 150th place – out of 189 countries – in 2018, the lowest among the South Asian nations except Afghanistan which was at 168th place. Other South Asian countries on the list were ranked as: Sri Lanka (76th) – the star performer of the region – Maldives (101st), India (130th), Bhutan (134th), Bangladesh (136th) and Nepal (149th). Pakistan falls in the bottom quartile of countries in terms of human capital index (HCI) launched by the WB and it could be an important factor contributing to the country’s low GDP per capita ($1,541). Poor HCI also evidences low level of investment in human resource development. For example, education spending is less than even a mere 2.5% of GDP. On the other side, it may not be possible to accelerate economic growth and boost per capita income without raising HCI and HDI. Empirically, the impact of human capital development on economic growth rate is positive and significant and that human resource is the source that is crucial to economic growth.
Read More: PAKISTAN’S TRADE PROSPECTS IN 2018
Starting a business requires 12 kinds of procedures that consume about 18 days to complete, and for registering a property, about 155 days are required. Furthermore, Pakistan’s standing on the ease of doing business index was at 172 on the indicator of paying taxes – it was at 156 in 2017. This was due to tax rates, which surged to 33.8% of total profits due to imposition of super tax on large companies despite that the overall corporate tax rate reduced to 30%. As per section 4B read with Division IIA of Part I of the First Schedule to the Income Tax Ordinance 2001 (ITO), every banking company is liable to pay super tax at the rate of 4% of its income irrespective of quantum of income while all other persons have to pay super tax at the rate of 3% of their income subject to having income of PKR 500 million or more. Due to multiplicity of taxes, corporate and non-corporate taxable persons made 47 tax payments every year which consumed 312 hours. With narrow tax base, cost of doing business is considerably higher for the registered businesses as the tax authorities rely heavily on the existing, extremely narrow tax base to meet its additional revenue requirements for achieving the assigned tax targets. The higher cost of doing business renders registered persons uncompetitive.
Similarly, Pakistan’s ranking was 105th on the indicator of getting credit for doing business–the country ranked 82nd in 2017. In view of the growing needs of the government for financing to balance the budgets, little capital is left for the businesses to launch and expand. With debt-to-GDP ratio of 70%, fiscal deficit of 6.8% and record high current account deficit of $18 billion in 2017/18, the government needs loans of $12 billion for fiscal consolidation and to meet its obligations regarding debt servicing charges of Rs6.7 trillion during 2018/19.
The WB found about six kinds of procedures that an applicant has to complete for getting an electricity connection. Pakistan’s position was at 167th on the index of getting electricity. There are 15 types of procedures that require 252 days for an investor to get a construction permit. Similarly, on the index of trading across the border, Pakistan remained at 171, among the bottom 20 economies. For fulfilling border compliance, an exporter needs 75 hours and the cost of documentary compliance is $257. The cost of border compliance is $457. In the case of imports, the cost of documentary compliance is $735 and border compliance is $936.6. On the index of enforcing contracts, the country was ranked at 156 and on the index of resolving insolvency at 82.
What is Human Development Index?
Definition: The Human Development Index (HDI) is a statistical tool used to measure a country’s overall achievement in its social and economic dimensions. The social and economic dimensions of a country are based on the health of people, their level of education attainment and their standard of living.
Description: Pakistani economist Mahbub ul Haq created HDI in 1990 which was further used to measure the country’s development by the United Nations Development Program (UNDP). Calculation of the index combines four major indicators: life expectancy for health, expected years of schooling, mean of years of schooling for education and Gross National Income per capita for standard of living.
Every year UNDP ranks countries based on the HDI report released in their annual report. HDI is one of the best tools to keep track of the level of development of a country, as it combines all major social and economic indicators that are responsible for economic development.