If we want to encourage investment in the developing world, we need to take a hard look at the regulatory regime
In 2003, the World Bank Group introduced the Ease of Doing Business (EODB) indicators. These indicators assess different dimensions of a country's regulatory regime for businesses and help produce annual rankings of countries based on their composite score on the indicators.
Ever since their publication, the indicators have attracted the attention of people, heads of governments included, who eagerly wait for the annual Doing Business report each autumn to see how their country has done. And, in between the publication of each annual report, governments work on reform programs to help improve their scores and rank.
The EODB indicators reflect the increasing influence of global indicators. There is indeed a plethora of such indicators. Many of these are designed and implemented by global organisations such as the World Bank, the UN (e.g., the Human Development Index) or the World Economic Forum (e.g., the Global Competitiveness Index). Even some private consulting firms have come up with indicators, as have national governments and international NGOs.
There are two major uses to which indicators can be put.
One is to draw attention to subjects that are considered important. For example, 30 years ago I had the privilege of working on the first Human Development Report, which the UNDP now brings out every year. In that report the UNDP introduced the Human Development indicators to draw attention of people away from GDP, which used to dominate the development discourse of that time.
The UNDP wanted to give the message that while the GDP is an important indicator, other indicators are needed to better capture human development.
Similarly, with the EODB indicators, the World Bank sought to draw attention to the fact that the regulatory environment is an important dimension of a country's investment climate and deficiencies in this regime discourage investment.
In other words, if we want to encourage investment in the developing world, we need to take a hard look at the regulatory regime.
The second objective is to trigger action. It is hoped, that by drawing attention to some problems, such indicators will trigger discussion and debate among various stakeholders, including the media, and that this would hopefully lead to some agreed reform actions.
While the rest of the world has for long been animated by the Ease of Doing Business indicators, the South Asian countries, for some reason, had paid relatively less attention.
However, things started to change a few years ago. When the Modi government came in power in India, it declared its intention to improve India's rank and bring it to the top 50 within two years. India is not quite there yet but significant progress has been made in the last two to three years.
The Nawaz Sharif government took a similar approach in Pakistan and the results are beginning to materialise now. Bangladesh has been relatively slower, but a concerted effort is finally being made to improve our performance on the EODB indicators.
That is good. But there is always the danger that if we focus too much on improving our score, we may end up neglecting reforms that are more important. Thus, while Bangladesh endeavours to move up in the EODB ranking, it must make sure it is also addressing the hard problems.
An example of a hard problem is regulatory uncertainty.
A couple of years ago, when I was still with the World Bank Group, my colleagues and I conducted a survey of businesses in Bangladesh on different types of regulatory uncertainty faced by them.
The survey was revealing.
Regulatory uncertainty was a pervasive problem that discouraged investment. A large proportion of the surveyed businesses said that they did not plan investments at all in the two years prior to the survey, or dropped investment plans they had made, due to uncertainty.
Uncertainty is manifested in several ways. Let me mention some.
First, there are many contradictions within the legal and regulatory framework - between one law and another, between one regulation and another.
There are several reasons for this. While the laws must go through a review process before being passed by parliament, sometimes the review fails to check if the provisions of the proposed law conflict with those of other laws.
The review discipline is weaker in the case of regulations because these need not go to parliament. Different parts of the government have their own authority to pass regulations and they often do so whimsically without adequate review or impact analysis.
Legal and regulatory contradictions is a major source of uncertainty.
The solution to this is to introduce a practice of periodic regulatory reviews as is the case in many other countries. Such reviews will, from time to time, look at existing laws and regulations, and identify areas of inconsistencies which the government may then remove through regulatory reforms.
Also, when formulating a new regulation, the government may consult with stakeholders who may point out any inconsistency of the proposed regulation with the existing ones. Such ex-ante consultations and ex-post reviews will also tell us if some regulations are redundant or duplicative.
The second source of uncertainty is poor access to regulatory information.
Businesses often do not know which regulations are in force and what they need to do to comply with these. In more advanced countries, this information is easily available on the internet.
For example, if I want to open a restaurant, a website will tell me which regulations I need to comply with, which permits and approvals I need, how to apply for these, and what documents I need to submit - everything is clear.
But not so in Bangladesh. Business thus suffer from uncertainty as they try to navigate the regulatory maze.
A third problem is regulatory surprises caused by ad-hoc regulations. A major culprit are the SROs (Statutory Regulatory Orders), especially in the case of taxation. A businessperson may wake up one morning and suddenly see a new regulation or a tax imposed, without prior discussion and sometimes with retroactive effect.
Foreign investors often complain that they had come in to invest with certain policy and regulatory expectations and then are suddenly confronted with changes that upend their calculations.
The same is true of local investors. Investors often say, "we do not mind high taxes necessarily, but we do mind frequent changes in the tax rates".
These are just some examples where the problems are not being addressed. I don't think the Bangladesh government is doing enough to even acknowledge the problem of regulatory uncertainty, leave alone address it.
We may note that some deficiencies of the investment climate, such as inadequate infrastructure and poor supply of skills, will take time to address. But regulatory improvements can happen fast if the government is willing to act decisively.
Another problem is lack of coordination within government.
Different parts of the government do not coordinate with each other. Multiple agencies are involved in almost all regulatory areas.
Even if you think of company registration, it is not just the Registrar of Joint Stock Companies - many other offices are involved. Unless we can ensure coordination, collaboration and information sharing between the agencies, it will be difficult to improve our investment climate.
In brief, we need to focus on these hard problems instead of just focusing on indicators and indices.
Nonetheless, indicators are useful for at least two reasons. Improvement in indicator scores does help increase business confidence, especially that of foreign investors.
Secondly, a discussion of indicators may trigger an exploration of deeper problems that matter a lot to businesses. So, we should take indicators seriously, albeit not at the expense of hard reforms.
The author recently retired from the World Bank Group. He was a co-author of the World Bank Group's Private Sector Development Strategy in 2002.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.)