In a country lacking in natural resources, entrepreneurial talent is an important asset
There was a time when Bengalis were known to be just dreamers, philosophers and poets. That image is changing as Bangladeshis are fast becoming a nation of entrepreneurs.
But businesses, whether an entrepreneur trying to make a breakthrough or a long-established business, whether a large, modern industrial enterprise in Dhaka or a small, traditional handloom weaver in Pabna, all face a multitude of hurdles. Some hurdles are well known, and some are more subtle. Some have been there for a long time, while some are just emerging. But all discourage investment.
In a country lacking in natural resources, entrepreneurial talent is an important asset. Business hurdles need to be removed to make the most of this asset.
The constraints faced by businesses may be grouped into a few categories. First is access to inputs, such as capital, raw materials, skilled labour and power. Second is the availability and quality of physical infrastructure, such as roads, railways and ports. Third are services, such as insurance, logistical services, laboratories to test product quality and vocational training centres. Fourth is demand for products and services, including constraints affecting exports and entry into global markets. Finally, there are regulations, as written and as enforced.
According to the World Economic Forum's 2019 Global Competitiveness Index, Bangladesh scores reasonably well on two fronts, market size and macroeconomic stability. Bangladesh's per capita GDP is low, but its economy is huge. According to IMF data, Bangladesh's total GDP (in purchasing power parity terms) was 870 billion dollars in 2019, making it the 31st largest economy in the world, ahead of countries such as Singapore, Chile and Ireland. Bangladesh's macroeconomic performance has been good with the GDP growth rate showing limited fluctuation around an upward trend, inflation under control, impressive foreign exchange reserves and manageable fiscal deficits.
However, these favourable factors are offset by other deficiencies in competitiveness. Bangladesh ranked 105th out of the 141 countries covered by the 2019 GCI. Examples of problematic areas (with Bangladesh's rank given in parentheses) include incidence of corruption (125), quality of land administration (130), strength of auditing and accounting standards (126), road connectivity (117), workforce skills (123), trade tariffs (130), and extent of market dominance (122).
The World Bank's Ease of Doing Business (EODB) indicators point in the same direction. According to the 2020 EODB indicators (published in 2019), it takes 281 days, 264 days and 1442 days respectively to obtain a construction permit, register property, and enforce contracts, compared to South Asian averages of 150 days, 108 days and 1101 days, respectively. Regulatory uncertainty is also a big problem. A 2017 IFC survey of businesses in Bangladesh found, for example, that almost 70% of businesses felt that laws and regulations are often inconsistent with each other and 60% felt the government officials use undue discretion in their dealings with businesses.
Each business constraint does not affect all firms equally. This is reflected in the chart below, which is based on firm-size specific data from the World Bank's Enterprise Survey of 2013 (the last year for which the World Bank's Enterprise Survey data is available for Bangladesh). For the two factors related to access to finance, small sized firms were the most constrained, followed by mid-sized and large firms. However, the shortage of an educated workforce was felt most strongly by large firms and relatively least by small firms, while access to electricity was relatively most constrained for the mid-sized firms. The IFC 2017 survey on regulatory uncertainty paints a similar picture. For example, mid-sized firms seem to be most affected by the impact of adverse policy and regulatory decisions on costs and revenue streams followed by small firms (61% and 48% respectively cite this as a problem). Large firms feel more secure by comparison with only 30% complaining that their costs and revenue streams are made uncertain due to adverse policy or regulatory decisions.
The government needs to be better organized to address these constraints. It needs to be better in both formulating and implementing policies and regulations.
Listening to the private sector
Governments need to have a structured mechanism to consult with the private sector in order to understand better the constraints faced by businesses, jointly identify actions to remove these and build private sector ownership of such actions. Such consultations also provide a good opportunity for government to articulate its expectation from the business community about investment, job creation, export earning, environmental protection, treatment of workers and productivity improvements.
The Bangladesh government does have a tradition of consulting with business associations, but these may be made more structured, evidence-based and results oriented. Public-private dialogue platforms may be organized at the national or district levels, or on sectoral lines. These may be complemented by periodic business surveys, such as Investment Climate surveys every 2-3 years to understand mid-term and long-term constraints faced by them, and Business Confidence Surveys, conducted every 3-6 months to assess business confidence and short-term developments.
The government also needs to become more results-oriented to reduce gaps between their actions on paper and what investors experience on the ground. Implementation gaps are manifested in many ways. Reforms may be good on paper but not on the ground. They may be good for some but not for others (for example, I may get my company registered in a few days but for others it may take months).
An important reason for this is a lack of results-orientation. There is too much focus on outputs (a new policy or law) and not on outcomes, such as genuine improvement in the investment climate. When implementation gaps exist, the expected benefits from policy actions or reforms do not materialize. Businesses do not respond through increased investment or job creation since they do not feel the reform impact on the ground. Thus, the government needs to put in place mechanisms to monitor the implementation of policy actions and other reforms. It should clarify at the outset what results it expects from its actions and what conditions need to be satisfied for these results to materialize. It should then monitor regularly whether these conditions are being fulfilled.
Such monitoring systems should include feedback mechanisms to collect real time information from businesses and other stakeholders on implementation quality. Governments often mistakenly believe that reforms are having the desired impact on the ground. Such complacency can be corrected if the government institutes reform or service specific feedback loops, i.e., short surveys focusing on a specific policy action, regulatory reform or service provided by government that reveal implementation failures and trigger corrective actions.
The Indian government benefited from such feedback loops as it sought to improve its ranking on the World Bank's Doing Business indicators. In 2017, India jumped by 30 places in the rankings with effective reforms in several areas, one of which was automation of construction permitting. Its implementation was closely monitored through a 6-monthly series of business-to-government feedback exercises, which revealed implementation gaps, triggered corrective actions, and validated the effectiveness of these actions. Encouraged by the usefulness of these exercises, the Indian government is now replicating these in other regulatory areas.
Deepening and sustaining reforms
Businesses look at the policy and regulatory environment in its totality and are not encouraged by piecemeal reforms. Thus, a single reform is not enough. The government needs to think of a reform continuum. For example, laws need to be followed by regulations, procedures, and manuals. A new law aimed at improving the investment climate will often need to be accompanied by appropriate regulations, and training, guidance notes and manuals which will guide front-line officers on how to administer the new regulation. Similarly, the full impact of an automated system will not be felt if the front-end of the system is automated while the back end remains manual and archaic.
Coordinating better within government
Another problem is a lack of coordination within the government. Multiple agencies are involved in most policy or regulatory areas. For example, the Registrar of Joint Stock Companies is the primary, but not the only, agency involved in company registration. A lack of coordination among agencies has many implications. Implementation is slowed down, reforms are started but not sustained, reforms in one area are contradicted by actions in other areas, and there are variations in regulatory behavior that create uncertainty. All these discourage investment. Unless we can ensure coordination, collaboration and information sharing between various government agencies it will be difficult to improve our investment climate.