Cost of doing business in Pakistan

LONDON: The cost of doing business in Pakistan is prohibitive. Latest figures for the cost of doing business in different countries of the world rank Pakistan at a dismal 138th position, according to the World Bank.

The ranking is based on 10 parameters that are not a focus of argument here though.

There are certain regulatory and administrative barriers to entry in Pakistan. However, despite the government’s failure to present itself as an improved state in terms of bureaucratic procedures, the state institutions responsible for regulating businesses have lately proven to be very helpful.

The real challenge of running a business in Pakistan or dealing with businesses is the transaction cost associated with negotiations and bargaining, which form a lengthy and frustrating process before one may seal a deal.

There are a number of reasons for the costly and lengthy negotiations. Some of these are delay in communications, centralised decision-making, lack of loyalty and commitment of workforce including the top management, beggar-thy-partner approach and free rider problem.

Almost all Pakistani businesses do not have standard operating procedures for responding to communications. This results in emails not being replied to or replied with long delays.

Those dealing with Pakistani businesses must follow up their emails with telephonic calls that in most cases also result in no response from the people concerned.

Those taking external calls are not sufficiently empowered to intervene in the schedules of senior officers. The secretaries and personal assistants use sticky notes to put on tables of their bosses to inform them of any urgent matters. These sticky notes keep on piling up until a major external or internal intervention takes place. This, however, may take weeks if not months.

Bosses in Pakistani businesses are control freaks. They do not want to decentralise authority that makes it extremely difficult for the middle management to make decisions at lower levels.

Consequently, the labour force is not fully committed to their employers, giving rise to huge operational inefficiencies.

Beggar-thy-partner refers to tough negotiations aiming to squeeze maximum benefits, even if it happens to be at the expense of a business partner. This results in sub-optimal results for the international businesses attempting to do business with their Pakistani counterparts.

This primarily owes to the large differential between opportunity costs of dedicated resources in negotiations, representing Pakistani and international businesses. Pakistani businesses obviously employ cheaper human resources as compared to their foreign transacting parties.

Bargaining may help in determining the most favourable price for the buying party. However, it may not be socially optimal to bargain hard. Optimum level of bargaining is the one that maintains a balance between individual benefit and the social outcome.

Unfortunately, free-riding is a norm in Pakistani businesses. Pakistani businesses want to have free breakfast, lunch and dinner, not recognising the fact that there is nothing called a free lunch in the world.

Free riding is a huge problem when Pakistani businesses negotiate with consultancy firms and other service providers.

The problem of free riding is not limited to Pakistani businesses only. Government officials and politicians also suffer from this syndrome. Charitable organisations’ business is based on nothing but free riding.

Most of Pakistani businesses are time wasters. This adds significantly to the cost of doing business. Experience of foreign firms of working with the so-called reputable and respectable charitable organisations has also been frustrating.

Example of an organisation is relevant here. After committing to co-invest with a UK-based firm, it pulled out just a day before they were going to float the business on the then Islamabad Stock Exchange.

It really put them off and they decided to abort the project in Pakistan. In the end, it was a loss for the country – Pakistan – in which it was going to start a wonderful social enterprise.

The writer is an economist and PhD from Cambridge University

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