Growth in any country has one of the determinants in the form of investment which influences the rate of economic growth and also influences the productive capacity of the economy. Within this whole process business investment tends to be more fluctuating as investor has the focus on economic forecast of the countryi.e. businesses need to focus on improvement in economic forecast and investment to meet future demand.
To support this idea, Pakistan from inception started working on bilateral investment and supported country to country connection. Pakistan first went into the bilateral investment treaty with Germany signed in 1959 and it entered into the agreement in 1962. Studies have showed that this time period is important because it represents the union of major geo-political fears in Western states: the expansion of Soviet communism beyond its post-World War two boundaries, and the growth in decolonization that was to rapidly emerge during the 1960s.
Latest investment treaty was signed back in 2014 with Bahrain with which enforcement took place in 2015. Before this the treaty signed with Turkey in 2012 and enforced was the one with Kuwait in 2013.
With this brief overlook and history of bilateral investment treaty, number of investment determinants need exploration while looking into the indicators of cost of doing business. Investment determinants which are primarily taken into the consideration the stock of capital, the level of economic activity, the cost of capital goods, capacity utilization, technology change and public policy.
Determinants as mentioned above are somehow interlinked in cost of doing business and plays a significant role in showing strengths and weaknesses of economy of a country. So, when one looks at Pakistan having ranking of 136 out of 190 countries in the world and is only above Afghanistan, Bangladesh and Maldives. This number shows that indicators within doing business are still significantly weak.
First, while looking at the stock of capital in case of Pakistan it should be noted that for setting enterprise for doing business there is a threshold level of stock required which is to be maintained. To maintain this minimum level of stock, there are costs associated as well. These costs include taxation regime (more focus on indirect taxes) and limited capital available in the market resulting in high import cost.
There is need to capacitate labor with more technological skills through technical and vocational institutes which will be helpful in scaling up the business primarily. This itself will help in generating more economic activity thus bringing economic outlook of the county on encouraging side
Second, Level of economic activity measured more comprehensively by Net National Product which is measured by GDP, net property income from abroad, GNP and Capital Consumption. While looking at counties such as Pakistan, dependence is primarily on the income from abroad but GDP still remain a challenge and high rate of consumption of the available capital which therefore is therefore brining in uncertainty in policies which thus hinders the investment outlook in long run. Uncertainty in the policies mostly takes place in case of Pakistan with the short-term objectives and desperate measures to make growth and development trajectory going upward. Such type of desperate measures does bring short term gains but at the cost of low investment incoming which Pakistan is also observing as number of bilateral investment treaties are greater in number (signed) in comparison to enforced bilateral investment treaties with the only spike coming from China in the form of China Pakistan Economic Corridor.
Third, important thing for investment and doing business in Pakistan is primarily linked to policy narrative at large including public policies. The major challenge in this case is tight taxation i.e. making investor to bear the compliance cost which shows that investor has to face the tax authorities more in comparison to doing business. Similarly, looking at the current government narrative, uncertainty brought in over the period of year in terms of policies linked to investment has also been the question of time adding to the low investment. Beside tight taxation regime and policy uncertainty high number of regulators coming into play the role also adds to the compliance cost for investor while doing business.
For current government in Pakistan at federal and provincial levels, to bring investment there is need to have focus on integration of policies i.e. there is need to have a single window operation which will reduce time and cost for investor he has to spend facing regulators in different forms.
Second, in order to bring in long run sustainability in investment and improvement in the doing business ranking, there is need for more research-based approach while analyzing policies. For example, in order to reform the tax system there is need to dig deep into the tax reform commissions and their reports starting from 1948 till to-date. Need is to identify gaps from these policy documents and come up with the implementable policy which should facilitate all the key stakeholders. Benefit of more research-based approach in bringing implementable policies will itself help the government in attracting more investment.
Third, there is need to capacitate labor with more technological skills through technical and vocational institutes which will be helpful in scaling up the business primarily. This itself will help in generating more economic activity thus bringing economic outlook of the county on encouraging side. This will only be possible with the need-based assessment for such institutes in upgrading the curriculum i.e. curriculum upgradation should be according to the market demand.
Thus, to bring investment in Pakistan and improve doing business rankings, key lies in policy integration, more research-based approach in formulating implementable policies and upgradation of curriculum at technical and vocational institutes to capacitate the labor.
Author is Research Associate at Sustainable Development Policy Institute