(The idea of national competitiveness has gained prominence in the last two decades or so. National competitiveness, as originally understood by the economists, only meant exchange rate engineering to enhance exports. The concept has evolved and expanded in scope with the passage of time. However, consensus does not exist with regard to its definition and determinants. Three international reports i.e. Global Competitiveness Report of WEF, the World Competitiveness Year Book of IMD, and Doing Business of the World Bank are now well recognized reports which rank countries on the ladder of international competitiveness every year. These reports may not be perfect assessments but they provide a fair idea of a country’s international competitiveness. Out of these reports, the Global Competitiveness Report of WEF and Doing Business of the World Bank evaluate Pakistan’s national competitiveness every year. An analysis of Pakistan’s rankings determined by these reports indicates that Pakistan remains stuck in a low equilibrium of national competitiveness. The main reasons underlying the low national competitiveness of Pakistan include political instability, an inadequately educated workforce, corruption, hurdles in access to finance, poor linkages between the academia and industry, crumbling infrastructure, regulatory and administrative bottlenecks, and low social development. Based on analysis through the lens of these international reports, the paper concludes that Pakistan needs to reprioritize public spending by making increasing investment in the social sector, particularly in education, healthcare, and skill development. Author)
National competitiveness has lately become an obsession with governments. The idea of competitiveness is no longer restricted to firms and industries. This remains a hot topic for mass media, economic policy debates, and reports of governments. Analysis with regard to competitiveness has shifted from firms and industries to locations and countries. The rankings issued by the World Economic Forum (WEF), Institute of Management Development (IMD), and Doing Business of the World Bank are taken seriously by the countries ranked by the reports. Rise and fall of a country on these rankings sometimes evokes debates in political circles. But what competitiveness exactly is at the national level remains a contentious issue as definitions of national competitiveness are abound in literature. Some critics of the idea of national competitiveness even say that the very idea of competitiveness in terms of an entire economy is absurd and elusive. Like love or democracy, national competitiveness has got several meanings and perspectives.
Notwithstanding the fascination of policy makers and the press with the idea of national competitiveness, professional economists tend to be skeptical about the very concept as well as its application. Their argument is that international trade is not a zero-sum game for nations. Paul Krugman, the most prominent opponent of the idea of national competitiveness calls it a ‘dangerous obsession’ as its application to public policies may result in distortions and inefficiencies. “ The idea that a country’s economic fortunes are largely determined by its success on world markets is hypothesis not necessarily a truth; and as a practical empirical matter that hypothesis is flatly wrong – – – obsession with competitiveness is not only wrong but dangerous, skewing domestic policies and threatening the international economic system. Thinking in terms of competitiveness leads directly and indirectly to bad polices on a wide range of issues, domestic and foreign, whether it be in healthcare or trade.”
According to economists, trade is not about ‘absolute advantage’ and not even about ‘competitive advantage’. Trade is about comparative advantage, which means the advantage of producing one good against another in an economy. The standard model of trade based on comparative advantage, developed back in 1817 by Ricardo, is premised on the assumption that a nation even if it is efficient in producing all goods, will gain from trade with other nations. The critics of the idea of national competitiveness argue that when nations are treated as companies, then the underlying assumption is that they compete with similar products in the same markets. This is necessarily not the case. Nations are not like big corporations competing in the global market for increasing their share of the pie. USA and Japan are not competitors in the international market as Coca Cola and Pepsi are. International trade is not a zero-sum game.
Elucidating national competitiveness
National competitiveness has been a subject of varied definitions and explanations. Some authors have argued that national competitiveness just means the ability of a country to sell in the international market. The ‘ability to sell’ proposition treats countries like corporations which compete for market shares based on price. We may call it a mercantilist view of competitiveness. Some take competitiveness as the ability of the country to earn. The supporters of this view look at productivity through the results of an economy and argue that a high degree of competitiveness leads to higher GDP or income and consequently to a high level of living. Others have analyzed competitiveness from the perspectives of ‘ability to adjust’ through innovation and flexibility and ‘ability to attract’ (FDI and economic activities).
|Box 1: Defining National Competitiveness
Analysis of various definitions of the term ‘national competitiveness’ shows that competitiveness can be interpreted through both narrow as well as broader concepts. Competitiveness in its narrow concept means the ability of a country to compete in the international market based on cost conditions through exchange rate engineering. A broader concept of competitiveness lays emphasis on the institutional and systemic circumstances of an economy such as legal, governmental, public policy and other factors related to the business environment of a country. The scope of the notion of national competitiveness is expanding. New studies no more discuss it in the narrow concept of cost and exchange rate. Cutting nominal wages and engineering depreciation in currency are the policies that increase competitiveness only in the short-term. Impact of such policies may even sometimes be counter-productive in the form of increase in unemployment and inflation.
Competitiveness should essentially be linked to the welfare of the people. While emphasizing this relationship, Michael Porter says, “When you start to look at location, I argue, and believe very strongly that the true metric of competitiveness is the productivity of the resources utilized in that location. Take for example a company making shoes in Massachusetts that is gaining market share, but it is paying its workers only 50 cents an hour wages. The low wage makes it competitive in selling shoes, but is not boosting the prosperity of Massachusetts which would like to have high wages”. The emerging consensus is that competitiveness is the ability of a country or location to create welfare and a competitive analysis should contain an output evaluation (competitiveness achieved) i.e. welfare assessment, and a process evaluation (investigating the ability) i.e. an analysis of strategies, strengths, weaknesses, production, technology functions etc.
Determinants of national competitiveness
The debate on national competitiveness has oscillated around market share, costs and productivity. Initially competitiveness was considered a zero-sum game, meaning that a country could improve its competitiveness at the expense of another country. Welfare of the people was not necessarily a part of the debate. As the scope of the definition has increased and the fog surrounding the concept is becoming clear, the list of determinants of national competitiveness has also expanded. Competitiveness of a country, in broader terms, means more income, more growth, and economic development comparatively at a faster pace. Economic growth is a complex process that is driven by economic, political, historical, and socio-cultural factors. Economic development is shaped mainly by biophysical and geophysical characteristics of the economies. The geography school of thought thus emphasizes that growth, development and competitiveness is to come from geographical advantages. Some have argued that geography does not matter much and institutions are the real engines of competitiveness and prosperity.
Innovation is considered as one of the main determinants of competitiveness but innovation cannot occur in isolation. Institutions are needed to support the process of innovation. “Improvements follow from science and from entrepreneurs such as Thomas Edison, who applied science to create profitable businesses. This process of innovation is made possible by economic institutions that encourage private property, uphold contracts, create a level playing field, and encourage and allow the entry of new businesses that can bring new technologies to life. It should therefore be no surprise that it was U.S society, not Mexico or Peru, that produced Thomas Edison, and that it was South Korea, and not North Korea that today produces technologically innovative companies such as Samsung and Hyundai.” Highlighting the importance of innovation for competitiveness and growth, Paul Romer points out that the ability to keep discovering new and better processes is of vital importance for growth. Merely education of existing knowledge does not spur economic growth. Romer writes, while talking of a hypothetical situation of the Middle Ages, “A farmer who educated his children and workers at the leading educational institutions of the day would not have been able to increase his output per acre by very much. It is not the dissemination of old information but steady arrival of new bits of software that makes education even more valuable and provides new opportunities for growth”.
Cultural norms and values are also cited as a source of competitiveness or lack of it. Further, norms and values do not change that fast and their rigidness varies according to cultural attitudes. Cultures having deep religious values are comparatively less receptive to and slower in adopting new value systems. Professor David Landes, while talking of culture in the context of Middle East, says that the culture having the following characteristics is hardly conducive for economic development and peace (i) does not produce an informed and capable workforce; (ii) continues to mistrust or reject new techniques and ideas; and (iii) does not respect such knowledge if its members are able to get it either by study abroad or by good fortune at home.
Culture also determines attitudes towards work. What work ethics you have is generally determined by the national and organizational culture. Mukesh Eshwaran et al have shown in the case of rural areas of India that women may not participate in market work due to family status concerns in a culture that stigmatizes market work by married women.
Connected to the culture is the idea of trust and social capital which has gained much prominence in the literature in the last couple of years. High trust societies have a competitive advantage over low trust societies. The line of argument is that the low trust societies require formal rules and regulations and consume resources in terms of time and money. “This legal apparatus, serving as a substitute for trust, entails what economists call “transaction costs”. Widespread distrust in a society, in other words, imposes a kind of tax on all forms of economic activity, a tax that high-trust societies do not have to pay.” Social capital trust and social cohesion are thus the sources of competitiveness. Education and skills of the people, entrepreneurship, creativity, innovation, economic and technological infrastructure, business and work environment all are cited as determinants of national competiveness.
Colonial origins have a deep imprint on development outcomes. Abhijit Banerjee et al have shown that in case of India areas in which proprietary rights in land were historically given to landlords have significantly lower agricultural investments and productivity in the post-independence period compared to the areas where such rights were given to the cultivators. The areas where proprietary rights were with landlords have significantly lower investments in education and health.
According to Michael Porter, productivity is the main determinant of competitiveness. While defining foundational competitiveness i.e. expected level of output per working-age individual (not output per current worker), Porter says that there are three broad and interrelated drivers of competitiveness namely: social infrastructure and political institutions (basic health and education, quality of political institutions, and the rule of law), monetary and fiscal policy (fiscal sustainability, level of debt, and inflation), and the microeconomic environment. So the concept of foundational competitiveness is an improvement of the earlier concept and goes beyond the expected level of productivity per employed worker as prosperity by including the ability to mobilize high share of the available workforce.
Creativity and knowledge have also been emphasized in the literature as the sources of competitiveness. “Creativity has become the driving force of economic growth. The ability to compete and prosper in the global economy goes beyond trade in goods and services and flows of capital and investment. Instead, it increasingly depends on the ability of nations to attract, retain and develop creative people.”
Measuring national competitiveness
There are several approaches to measure competitiveness. The main difference lies in the selection of variables and application of methodology. New indices of competitiveness are being developed. However, three indices have so far gained prominence at the global level and they are the Global Competitiveness Report of the World Economic Forum, the World Competitiveness Year Book of the Institute for Management Development (IMD), and Business Competitiveness- Ease of Doing Business of the World Bank.
(a) The Global competitiveness Report
The Global Competitive Index is based on three broad assumptions. First, the determinants of competitiveness are complex. Competitiveness is composed of twelve pillars and each pillar has a different weight based on the stage of development of an economy (Table 1).
Table-1: Stages of development
stage 1 to stage 2
stage 2 to stage 3
|GDP per capita (US$)thresholds||<2,000||2,000-2,999||3,000-8,999||9,000-17,000||>17,000|
|Weight for basic requirements||60%||40-60%||40%||20-40%||20%|
|Weight for efficiency enhances||35%||35-50%||50%||50%||50%|
|Weight for innovation and sophistication factors||5%||5-10%||10%||10-30%||30%|
Source: Global Competitiveness Report 2014-15
Second, economic development is a dynamic process of successive improvement. It evolves in stages. The first stage is ‘factor-driven’ where institutions, infrastructure, macroeconomic environment and health and primary education play vital roles. In this stage countries generally take advantage of cheap labour and unprocessed natural resources. In the second stage, called the ‘efficiency-driven stage’, efficient production becomes the main source of competitiveness. In the ‘innovation-driven stage’, economies can no longer compete on price or even quality so they have to continuously innovate to push the production possibilities frontier outwards. Developed countries like USA are in this stage and low innovation is being cited as one of the biggest reasons for the current decline of its economic growth. The third assumption of the GCR is that as economies develop their transition from stage to stage is smooth.
While all 12 pillars apply to every country ranked by the report, the relative importance of each depends on a country’s stage of development. In order to take the stage of development into account, while assigning weights to different variables, the pillars are divided into three sub- indices, each critical to one particular stage of development. The ‘basic requirements’ sub index consists of those pillars which are most critical for countries in the factor-driven stage, while the “efficiency- enhancers’ do the same for the efficiency-driven stage. The ‘innovation and sophistication factors’ sub index includes all pillars which are critical for the countries bracketed in the innovation-driven stage (Figure-1).
|GLOBAL COMPETITIVENESS INDEX|
|Pillar 1. Institutions
Pillar 2. Infrastructure
Pillar 3. Macroeconomic environment
Pillar 4. Health and primary education
Pillar 11. Business sophistication
Pillar 2. Innovation
|Innovation and sophistication factors
|Pillar 5. Higher Education and training
Pillar 6. Goods market efficiency
Pillar 7. Labor market efficiency
Pillar 8. Financial market development
Pillar 9. Technological readiness
Pillar 10. Market size
Source: Global Competitiveness Report 2014-15
The Global competitiveness index (GCI) is a highly comprehensive index for measuring national competitiveness and captures both microeconomic and macroeconomic foundations of national competitiveness. It uses a complex formula to weigh dozens of factors, from the extent of impact of malaria to internet use in schools. “For all of its complexity, however, the WEF’s definition sounds rather like the definition of total factor productivity or TFP, a term economists have used for decades to refer to aspects of growth not explained by changes in labour and capital”. There are other criticisms against the WEF’s competitiveness index. It is argued that GCI promotes ‘IMF-style reforms’ and advocates the principles of ‘Washington Consensus’ despite the point that the results of such reforms have not been that promising in the developing countries. Such reforms are not the answer to the development needs of economies with severe structural backwardness, inefficient industries, missing markets, low skill levels, and deficient institutions.
Pursuant to the principles of the ‘Washington consensus’, the report assigns higher values to freer trade, stronger intellectual property protection and more liberal capital accounts across the countries. “The free market bias, with an implied rejection of failures inherent in market structures, is also found in indices dealing with government spending as a share of GDP, private as well as indirect taxes, union power, and pension benefits. All these are assigned negative relations to competitiveness. The ability of firms to hire and fire workers freely, by contrast, is regarded as uniformly positive for competitiveness: this gives Russia one of the highest scores and Sweden, Germany, and Italy, respectively among the lowest… At the general level, the WEF index has two problems. The first is its underlying assumption that markets are efficient and that policy intervention, where necessary, must be market friendly. This removes from consideration a large, important set of issues, particularly in developing countries, where market failures call for selective responses. The second is that its broad definition of competitiveness diverts it from its legitimate focus on direct competition between countries taking it into areas where competitiveness analysis is both unwarranted and has little analytical advantage. While its attempt to analyse growth differently from economics is promising, its methodology and procedures fails to live up to this promise.”
Another concern with regard to the WEF index is the subjectivity of weights assigned to various criteria. Uniform application of WEF indices to all countries may incorrectly penalize some while benefitting others. Another drawback identified is the addition assumption i.e. adding of parameters to reach a global score, which is not always true in real-world conditions and may result in bias in the ranking of nations.
(b) World Competitiveness Year Book
The World Competitiveness Year Book published every year by the Institute of Management Development (IMD) divides the variables used for computing the national competitiveness into four groups. Each group has five factors. (Figure-2) These factors are further divided into more than 340 indicators. IMD gives equal weightage to twenty factors in the computation of scores and rankings of the economies. Professor Arturo Bris, Director of IMD World Competitiveness Centre says, “There is no single nation in the world that has succeeded in a sustainable way without preserving the prosperity of its people. Competitiveness refers to such objective: it determines how countries, regions and companies manage their competencies to achieve long-term growth, generate jobs and increase welfare. Competitiveness is therefore a way towards progress that does not result in winners and losers: when two countries compete, both are better off”.
Source: IMD Yearbook 2014
The main difference between the WEF and the IMD indices lies in the classification of countries and, as a consequence, assigning of weights to various indicators. The IMD applies exactly the same calculations to each country in order to establish their competitiveness scores and ranks. The WEF distinguishes between three kinds of economies and classifies countries according to their stages of development. IMD World Competitiveness Yearbook 2014 ranks 60 economies but the ranking does not include Pakistan, so delving into it in detail is not warranted as it would not be required while analyzing Pakistan’s national competitiveness.
(c) Doing Business Report
This brings us to the third global report related to competitiveness and that is the Doing Business Report of the World Bank. The World Bank releases the Doing Business Report every year always with a new title. The first Doing Business report was released in 2003. It covered 133 economies and comprised of 5 indicator sets. Doing Business 2015 ranks 189 economies against 10 set of indicators ( called topics by the report) i.e. starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency. So, national competitiveness is a function of these ten factors (Figure-3).
|Dealing with Construction Permits|
|Closing a Business|
|Starting a Business|
Source: Based on Doing Business Report, 2015
Doing Business provides a comprehensive snapshot of each country’s business environment through the lens of regulations in the above-mentioned areas. “Its greatest strength is its transparency and adherence to clearly stated criteria. Doing Business takes the same set of hypothetical questions to189 economies and collects answers to these. Thus, for instance, when checking on an economy’s efficacy in ‘enforcing contracts’, it measures the time, cost and procedures involved in resolving a hypothetical commercial lawsuit between two domestic firms through a local court. The dispute involves the breach of a sales contract worth twice the size of the income per capita of the economy or $5000, whichever is greater. This meticulous insistence on using the same standard everywhere gives Doing Business a remarkable comparability across economies.”
Doing Business is, however, not free from criticism. It is, perhaps, the most controversial report of the World Bank where politics and ideology seem to be at play. China has been attempting since long to water down the report. India has also expressed serious reservations from time to time. Labour unions, international aid agencies and many developing countries are staunch critics of Doing Business. Its critics say the Doing Business is premised on the assumption that deregulation and neoliberal policies are the recipe for development. Doing Business advocates, ‘Regulation is bad and deregulation is good.’ By advocating neoliberal economic policies, it has become a handmaiden of the corporate world. Even the indicators, which promote regulation, do it for the corporate world and not for the citizens. Take the example of ‘getting credit’. On the face of it, it seems as if this indicator would be measuring the degree of easiness of getting credit for setting up a business. This is, however, not the case. Getting credit in the context of Doing Business means how easy is it for the moneylenders and the financial institutions to recover debts.
Similarly ‘paying taxes’ indicator measures total number of tax payments and contributions paid during a year, time consumed to comply with these tax payments, and tax rates. Perhaps nobody will deny the point that simple tax payment procedures are desirable for reducing the cost of doing business. But the issue of tax rates is not that simple. Every country has its own peculiar socio-economic environment, preferences and political ideology. Tax decisions should ideally be taken according to the preferences of its people. By rewarding low tax rates, Doing Business seem to promote tax havens for the tax evading businesses.
Employing workers is another indicator of Doing Business, which has attracted a lot of criticism from labour unions. This indicator measures how flexible labour market contracts are and how easily employers can hire and fire the labourers. Countries having laws of minimum wages or legislation for the enforcement of the rights of the workers are ranked low according to this indicator. This indicator is in direct conflict with the international convents in place for the protection of the rights of the labourers. However, realizing the anomalies, the World Bank suspended referring to this indicator in October 2009. There are other valid criticisms as well like: i) Doing Business measures the official rules and not the actual practice. There is a big divergence what is ‘on the books’ and what really happens in practice; ii) Doing Business does not cover the reality of the small firms as most of them operate in the informal sector; iii) It advocates a one-size-fits all strategy; iv) Doing Business does not take into account some important factors having relevance with a country’s business environment. For example, it does not cover factors like social stability, quality of physical infrastructure, and education levels for the competitiveness of business environment.
It was in this context that the World Bank constituted an independent review panel of experts under the chair of Trevor Manuel, Planning Minister of South Africa. The panel gave its report in June 2013. The panel showed a number of concerns about the report. The panel in particular recommended that the World Bank should retain the report but should do away with the aggregate rankings. The panel observed, “Removing aggregate rankings would defuse many of the criticisms leveled against the report, but would diminish the report’s influence on policy and public discussion in the short run. In the long term, however, doing so may improve focus on underlying substantive issues and enhances the report’s value.”
The Doing Business Report has not adopted the recommendation about doing away with the aggregate rankings. It has, however, started benchmarking the countries side by side the aggregate rankings in terms of distance to frontier (DTF). For example, according to Doing Business 2015, the distance to frontier of China, Pakistan, India, Bangladesh, Malaysia, and Indonesia respectively is 62.58, 56.64, 53.97, 46.84, 78.83, and 59.15. Similarly, the report has benchmarked the countries with regard to ten indicators (topics) which are the basis of overall aggregate ranking. Doing Business 2015 says, “The distance to frontier score benchmarks economies with respect to measure of regulatory best practice—showing the gap between each economy’s performance and the best performance on each indicator. This measure captures more information than the simple rankings previously used as the basis for the ease of doing business ranking because it shows not only how economies are ordered on their performance on the indicators but also how apart they are.”
Rankings of the Doing Business Report are neither sacrosanct nor authoritative. They are at best suggestive in nature as observed by the review panel. According to Professor Daron Acemoglu et al, “The debate about Doing Business is conceptually similar to debates about other economic indicators. For example, the report of the commission on the measurement of economic performance and social progress, chaired by Joseph Stiglitz, recently assessed GDP, by now ubiquitous measure of production of an economy.GDP also has issues with data quality. GDP as a measure also has certain biases. It does not measure quality of life—- But GDP is not wrong as such, but wrongly used.”
The Doing Business report is just like a cholesterol test for the firms and businesses as a cholesterol test does not tell us everything about the state of our health but its abnormal range does signal that something is seriously wrong and we should change our behaviours and habits in ways that improve not only cholesterol rating but our overall health. Doing Business rankings may not be perfect and most of the criticisms are valid. But we cannot ignore the fact that the Doing Business Report sheds light on important institutional features that play a vital role in the economic growth and development of a country and it certainly gives an approximate measure of the national competitiveness of a country just like WEF and IMD reports.
Pakistan’s national competitiveness through the lens of Global Reports
The Global competitiveness report 2014-15 ranks a total 144 countries out of which Pakistan’s ranking is 129. Thus Pakistan is among the worst performers in terms of competitiveness. Pakistan has persistently scored low on GCI since a decade or so. Pakistan was ranked 94 out of 117 countries ranked by the World Competitiveness report 2005-06. It was 91 (out of 125) in 2006-07 and 92 (out of 131) in 2007-08. The number of countries ranked by the WEF report varies each year, so year-to- year analysis about the rise and fall of a country on the rankings may not convey meaningful results. In order to have a guesstimate of Pakistan’s rise or decline on the GCI, let us assume the number of total countries ranked was 144 (as per GCR 2014-15) and this number is constant since 2008-09. Simple back of the envelope calculation show that Pakistan’s rankings have continuously gone down on the GCI rankings since 2008-09 as is evident from the following table.
Table-2: Rankings of Pakistan on GCI (2008 to 2014)
(out of 144)
|Increase / decrease|
Source: WEF reports 2008-09 to 2014-15; hypothetical rankings based on calculations by the author
How does Pakistan fare against 12 pillars of the report since 2008-09? In order to have an idea about Pakistan’s rise or fall in terms of these pillars, we can compare the rankings of 2012-13 and 2014-15 as in both years the number of countries ranked was 144. Out of the 12 pillars, Pakistan has gone down in 9. There is a slight improvement in three pillars i.e. macroeconomic stability (from 139 to 137), financial market sophistication (from 73 to 72), and technological readiness (from 118 to 114).
Table-3: Pakistan’s rankings (2008 to 2014)
|12 pillars of GCI|
|Health and Primary Education||116||113||123||121||117||128||129|
|Higher Education and Training||123||118||123||122||124||129||127|
|Goods Market Efficiency||100||83||91||93||97||103||100|
|Labor Market Efficiency||121||124||131||136||130||138||132|
|Financial Market Sophistication||71||64||73||70||73||67||72|
Source: WEF’s Global Competitiveness Reports 2008-09 to 2014-15
Competitiveness is a relative concept. India and Bangladesh are Pakistan’s competitors in South Asia while Malaysia, Indonesia, and China are some other major countries with whom Pakistan would be competing in the international market. How does Pakistan stand in terms of the 12 pillars of the GCI compared to its comparators? Pakistan is the worst scorer against the pillars of macroeconomic stability, health and primary education, higher education and training, goods market efficiency and labour market efficiency. It is the second worst scorer after Bangladesh against the indicators of ‘institutions’ and ‘infrastructure’. The following table gives an idea of Pakistan’s positioning against its comparators.
Table-4: Where does Pakistan stand among its comparators?
|Institutions||Infrastructure||Macroeconomics||Health and primary education||Higher education and training||Goods market efficiency||Labor market efficiency||Financial market development||Technological readiness||Market size||Business Sophistication||Innovation|
Source: The Global Competiveness report 2014-15
The above analysis, based on WEF’s reports, makes three points clear. First, Pakistan is among the worst performers on the global competitiveness index. Second, Pakistan is persistently on the decline in terms of overall GCI ranking and most of the constituent pillars of the index. Third, Pakistan also lags behind its comparators against most of the indicators.
Let us now examine Pakistan’s national competitiveness in terms the Doing Business Report of the World Bank. Pakistan stands at 128 out of a total of 189 countries ranked by Doing Business, 2015. Table 5 gives a detailed profile of Pakistan against 10 indicators of the Doing Business Report that shows that Pakistan’s position against a majority of the indicators is not that promising.
Table-5: Pakistan’s profile as per Doing Business
Source: Doing Business 2015
According to Doing Business 2015, Pakistan enjoys a better ranking than India and Bangladesh among South Asia respectively ranked at 142 and 173. As regards to its other comparators i.e. Malaysia, China and Indonesia, Pakistan is far behind. They have respectively been ranked at 18, 90 and 114. Analysis of the rankings of Pakistan and its comparators against 10 indicators of Doing Business shows that Pakistan is the worst as regards to ‘Paying taxes’. Other areas where Pakistan has scored comparatively low are ‘getting electricity’, ‘enforcing contracts’, and ‘getting credit’. Pakistan’s position in terms of ten indicators (topics) of Doing Business vis-à-vis its comparators, is tabulated below.
Table-6: Pakistan vis-à-vis its comparators
|Starting a business||116||158||115||128||155||13|
|Dealing with construction permits||125||184||144||179||153||28|
|Protecting minority investors||21||7||43||132||43||5|
|Trading across borders||108||126||140||98||62||11|
Source: Doing Business 2015
In order to determine the rise or fall of Pakistan’s national competitiveness in terms of Doing Business, a comparison of its rankings against the indicators (topics of Doing Business) is required. According to Doing Business 2014, Pakistan was ranked at 127, so in the overall ranking Pakistan has slipped. A comparison of DB2014 and DB2015 shows a negative change in rankings 7 indicators. Two indicators i.e. trading across borders and resolving insolvency indicate a slight improvement while no change in ranking has been observed with regard to enforcing contracts. The report appreciates the web based computerized system of Pakistan Customs for electronic submission and processing of import and export documents. Doing Business, 2015 notes the introduction of a Web-based system of clearances introduced by Pakistan Customs has made trading across borders easier. Comparison of DB 2014 and 2015, however, shows that national competitiveness of Pakistan has declined (Table-7).
Table-7: Rise and fall of competitiveness (DB 2014 vs. DB 2015)
|Topics||DB 2014 Rank||DB 2015 Rank||Change in Rank
|Starting a Business||109||116||-7|
|Dealing with Construction Permits||121||125||-4|
|Protecting Minority Investors||19||21||-2|
|Trading Across Borders||112||108||4|
|Enforcing Contracts||161||161||No change|
Source: Doing Business 2014 and 2015
Judged against the parameters of Doing Business, the followings points become clear. First, Pakistan is slightly better than its competitors in South Asia but is lagging behind other comparators. Second, its national competitiveness is declining with each passing year, a trend visible in WEF reports as well. Third, overall Pakistan sits almost at the tail end of the countries ranked by Doing Business.
Factors responsible for low national competitiveness
What factors are mainly responsible for Pakistan’s low national competitiveness? The Global Competitiveness Report every year identifies the most problematic factors for low national competitiveness of the countries ranked. The Global Competitiveness report for the year 2014-15, in case of Pakistan, finds that an inadequate supply of infrastructure, corruption, inefficient government bureaucracy, policy instability, access to financing, government instability, inadequately educated workforce, a poor work ethic in national labour force, etc as the most problematic areas for doing business. An overview of the global competitiveness reports of one decade or so shows the problematic areas responsible for the low national productivity of Pakistan are almost the same (Table-8).
Table-8: Factors constraining Pakistan’s national competitiveness
|FactorsIdentified by the report|
|2008||Government instability||Corruption||Inefficient government bureaucracy||Inflation||Inadequate supply of infrastructure||Inadequately educated workforce||Policy instability||Access to financing|
|2009||Government instability||Policy instability||Corruption||Inflation||Access to financing||Inefficient government bureaucracy||Inadequate supply of infrastructure||Crime and theft|
|2010||Corruption||Government instability||Policy instability||Inflation||Inefficient government bureaucracy||Crime and theft||Access to financing||Tax rates|
|2011||Government instability||Corruption||Policy instability||Inadequate supply of infrastructure||Inefficient government bureaucracy||Access to financing||Inflation||Poor work ethic in national labour force|
|2012||Corruption||Policy instability||Access to financing||Inadequate supply of infrastructure||Inefficient government bureaucracy||Inflation||Government instability||Crime and theft|
|2013||Corruption||Policy instability||Access to financing||Inadequate supply of infrastructure||Inefficient government bureaucracy||Inflation||Government instability||Crime and theft|
|2014||Inadequate supply of infrastructure||Corruption||Inefficient government bureaucracy||Policy instability||Access to financing||Government instability||Inadequately educated workforce||Poor work ethic in national labor force|
Source: The Global Competiveness Reports 2008-09 to 2014-15
Political instability in Pakistan is considered by the WEF reports as one of the factors that have constrained Pakistan’s growth and competiveness. The relationship between political instability and economic growth was traced back By Professor Alberto Alesina et al in 1992. They found that in countries and time periods with a high propensity of government collapse, growth is significantly lower than otherwise. Political instability is also connected to policy instability, another area highlighted by the reports. Political instability creates uncertainty with regard to policies and policy makers. Firms and businesses adopt a ‘wait-and-watch’ policy and do not invest. The instability of ‘polity and policy’ has direct impact on productivity as well. Empirical evidence suggests that political instability is harmful to economic growth. One of IMF’s papers titled “How does political instability affect economic growth?” (January, 2011) based on data of 169 countries has concluded that political instability reduces economic growth significantly. In order to address the problem of political instability, its root causes need to be addressed. The root causes of political instability are the social exclusion and fragility of institutions and both are connected. Political stability is not possible without social inclusion. Institutions cannot prosper in a society where the majority is excluded from political and social life. “Social inclusion matters for itself. But it also matters because it is the foundation for shared prosperity and because social exclusion is simply too costly. There are substantial costs—social, political and economic—to not addressing the exclusion of entire groups of people”.
Social cohesion is the prerequisite for a politically stable society. A cohesive society is the one ‘which works towards the well-being of all its members, fights exclusion and marginalization, creates a sense of belonging, promotes trust, and offers its members the opportunity of upward social mobility.’ Social inclusion, social capital, and social mobility are the three pillars of social cohesion. Social inclusion is negatively related to income inequality; social capital is a combination of trust and civic engagement; social mobility reflects the degree to which people can change their position in society. Social cohesion makes competitiveness sustainable. It is an important driver of long-term prosperity and competitiveness. Cohesive societies are politically stable and focus on economic growth and business development. Social cohesion results from policies that allow everybody in society to share its prosperity.
Box 2: For Sustainable Political Stability
Source: The World Bank, 2013
Pakistani society cannot be called a socially cohesive society. Most of Pakistanis seem to have become disillusioned with the economic and political functioning of the state. Uneven distribution of wealth and resources, tribal mode of thinking, nepotism, and greed of the elite and privileged has made the institutionalization of a nationwide concept of citizenship exceedingly difficult rather impossible. We have failed to forge a social contract which is widely understood by the people. This failure is reflected in increased tensions among the ethnic groups, social classes, extended families, and religious factions. “The way people interrelate with one another, the way they perceive national issues and their role in affecting them, and the priority they assign to personal ties and group identification are all parts of the matrix of a society and indicators of its social cohesion. Until Pakistanis can come up with an inner commitment to a cause—which in Pakistan’s history has been fairly rare outside of kinship circles—little can be done or will be done to serve the wider society impartially.”
Inadequate supply of infrastructure
According to WEF report 2014-15, Pakistan has been ranked at 113 out of 144 in terms of infrastructure. Out of the components of infrastructure, it is the worst in terms of quality of electricity supply and ranks at 133. In terms of quality of roads (75) and quality of port infrastructure (59), Pakistan does not fare bad in comparison to its competitors. According to the World Bank, Pakistan’s key infrastructure shortages lie in power, water, irrigation and transport sectors. In order to improve, Pakistan needs to prioritize these areas for investment. Power sector inefficiencies have cost Pakistan dearly in the past couple of years. Growth is estimated to have slowed down at least by 2% per annum, meaning thereby 10% lost growth in the last five years. Logistical bottlenecks increase the cost of production of our goods by about 30%. Increased cost simply means that Pakistan has to face stiff competition from its competitors. Massive resources are needed to improve and expand infrastructure but resources are limited due to limited fiscal space and huge gaps in public sector capacity to build and operate infrastructure.
Access to financing
Access to finance is important for entrepreneurs to start business. Access to financing is now acknowledged as a pathway for economic inclusion and poverty reduction. In the context of Pakistan, the issue of access to finance is significant from several angles. First, a majority of Pakistanis remain outside the ambit of a formal financial system. Only 14 % of Pakistanis use some product or service of a financial institution while in India, Bangladesh, Indonesia, and Malaysia, 48%, 32%, 40%, and 60% of the population respectively have access to formal institutions of finance. Financial exclusion is very high in case of Pakistan. Financial institutions operating in Pakistan limit their services to individuals and enterprises with high and predictable income. The biggest impediments to access of finance are stringent collateral requirements and lack of credit history.
Second, Government is continuously borrowing from the State Bank of Pakistan. Resultantly, inflation and debt are on a rise. Pakistan’s case is that of fiscal dominance. Inflationary consequences of fiscal dominance are serious and inflation is much more variable under fiscal dominance. Besides concerns with regard to rise in inflation, government borrowing from banks to finance its budget deficit is depriving the private sector. Government borrowing may not necessarily be bad. If the amount borrowed is spent on development expenditure like infrastructure, health and education, it brings in private investment while current expenditure such as defence and debt servicing deters private investment.
Inadequately educated workforce
New growth theories do not emphasize accumulation of physical capital only. Human capital is now considered the main engine of growth and competitiveness. Out of the twelve pillars which are considered the bedrock of national competitiveness by the Global competitiveness report, four are directly linked to skills. The pillars directly linked to skills are health and primary education, higher education and training, business sophistication and innovation. The indirect pillars are technological readiness (how a country implements existing technologies to improve its productivity), and labour market efficiency. Due to low level of development of human resources, Pakistan is dependent on low-skills low-technology manufactured exports. The absence of sufficient skilled labour compels for market adjustments which involve acceptance of less efficient methods and lower quality. Several factors are responsible for such a state of affairs. On the top of the list is the low priority given to the public education in Pakistan which is evident from the meager budget allocations. Traditionally Pakistan has not allocated more than two percent of its GDP to education.
Higher levels of education and better healthcare are required for a better workforce, for increasing total factor productivity and for pushing the country’s production function outwards. Several South Asian countries like Malaysia, Singapore, South Korea and Thailand achieved considerably higher growth rates compared to Pakistan mainly due to the reason that the quality of human capital in these countries was better compared to Pakistan. The second factor is the relevance and quality of education. According to a cross-national study, no association between the increases in human capital due to rising educational attainment of the labour force and the rate of growth of output per worker has been observed. The plausible reasons include low quality. In our case, technical and vocational education has not been given importance. Indoctrination/false ideology inculcation and rote learning have remained the hallmarks of the educational system.
For example, in rural areas where agriculture is the mainstay, education related to agriculture is barely touched upon in the school curricula rather emphasis is on subjects like Islamiyat, Arabic, geography, etc. From the perspective of competitiveness, it may not be useful for a rural Pakistani to know how to find out the location of Montenegro. For him, it is more important to know the methods and processes to increase per acre agricultural yield. Third, a skilled workforce does not come solely from schools. Structural transformations in the economy also matter. If the process of structural transformation in the economy is comparatively faster, the labour workforce will get more opportunities to upgrade its skills. Pakistan’s degree of structural transformation has been slower compared to other countries in South Asia and this factor explains the low skills of our labour. The fourth factor responsible for inadequate skills is a skill mismatch due to a disconnect between the academia, research institutions and the industry. “Pakistan has emphasized research-oriented universities. But academia-industry linkages for R&D, innovation and commercialization have historically been underdeveloped. Universities tend to focus on traditional education using traditional teaching methods which may overvalue the importance of rote memorization and mastery of content over development of problem-solving skills. Agricultural and engineering universities need substantial up-gradation and stronger linkages with the industries they serve as well as with international organizations and centres of excellence.”
It is now well-recognized that corruption is harmful for economic growth, development and competitiveness. Corruption impedes foreign and domestic investment. It increases what economists call ‘transaction costs’. It raises uncertainty for the firms and businesses. It sands the wheels of economic growth. The validity of the literature which sprang up in the context of the ‘Asian Paradox’ i.e. miraculous growth of most East Asian countries despite the prevalence of corruption, stands discredited in the light of new research. There are a number of channels through which negative effects of corruption are transmitted to the economy.
Corruption misallocates talent and resources, and distorts technology choices. People, being rational human beings, join the fields of employment possessing maximum potential for rent seeking. For example, graduates from universities prefer to become clerks rather than agriculturists, and business entrepreneurs. Corruption is also responsible for sectoral misallocation. Huge deals in arms by the developing countries are pertinent examples. If the incentive for commissions would not have been there, there is every possibility that the funds would have been funneled to other sectors like physical infrastructure development, directly related to economic growth and development.
Corruption also distorts technology choices. For example, the health sector presents a glaring example of distortion in technology choices in developing countries. Big hospital infrastructures and sophisticated medical equipments are generally preferred to rural health clinics specializing in preventive care (primary health) even in the poorest countries.
Corruption hampers ability of the state to raise taxes and encourages informal businesses. The reasons are obvious. Due to corruption in the tax machinery and complex procedures/system of tax collection upon which corruption thrives, businesses avoid registeration for tax purposes. A direct correlation between corruption and the informal sector of economy is easy to understand. In countries where corruption levels are high, informal sectors of economy are also huge. Again Pakistan is a pertinent example. According to various estimates, the informal sector of the economy constitutes 50-60% of our total GDP.
Further, corruption impacts decisions to start businesses because information on bribes is needed to start and run the business in a corruption-ridden setup. Thus potential entrants to business face uncertainty as to what bribes to pay and when to pay. In this way, corruption acts as a barrier to entry of new firms into business. Additionally, it acts as a heavy drain on existing businesses as well. What happens is that whenever there is an upward increase in tax revenue targets, it is the existing tax paying businesses upon which the hammer falls as governments are unable to tax the businesses operating in the informal sector. It eventually harms economic growth. We can also say that a low tax base has a direct link with corruption. Moreover, the impact of corruption is differential and discriminatory. Corruption is regressive for small businesses. One of the potential reasons for the less developed SME sector in Pakistan can be traced to corruption.
Corruption should not be viewed merely as an administrative problem. The corruption issue has got economic dimensions as well and requires economic insight for its solution. Economic reforms aimed at simplifying cumbersome laws and procedures, doing away with inefficient regulations, and re-designing an incentive system for civil service can go a long way in reducing the levels of corruption.
Pakistan is currently stuck in a low equilibrium of economic growth mainly due to low competitiveness. Infrastructure is crumbling and the power crisis is growing. Investment is low. Political instability, poor human capital, increasing regional disparities (rural-urban divide), institutional decay, macroeconomic imbalances, low tax base, slow speed of structural transformation, regulatory and administrative barriers, corruption, narrow fiscal space, increasing social polarization, terrorism, and limited diversification of economy are some of the daunting challenges for the national competitiveness of Pakistan. Besides taking care of such problematic factors, Pakistan needs to capitalize on its strengths to break out of the low equilibrium of growth and competitiveness. A large domestic market, a growing middle class, excellent land and climate, a developed telecommunication sector, and its strategic location are some of the strengths which Pakistan can utilize to enhance its national competitiveness. Its biggest strength is, however, its young population. Pakistan has one of the largest youth bulges, with 35 % of its population aged 15 or under. This youth bulge is both a threat and opportunity for Pakistan. If Pakistan fails to substantially enhance social spending in education and public healthcare, this bulge may turn out to be a disaster and may lead to further social polarization and upheavals.
 The author is a graduate from Columbia University. Email: firstname.lastname@example.org
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