Should Pakistan’s policymakers, worried as they must be about security, also be concerned about the cost of doing business? It is well known that this is an important determinant of the decision to invest.

For foreign investors, stories about kidnappings, demands for ransom, and killing of some hostages pose serious issues in their decisions to bring capital to Pakistan. Security concerns must also weigh heavily with domestic investors particularly in troubled areas in Balochistan and the North-West Frontier Province.

While these are weighty concerns, the government should be mindful of the fact that the cost of doing business is an important factor in investors’ calculus. This is one reason why the World Bank is spending a significant amount of its resources on estimating the cost of business in the developing world and publishing it findings in a report titled Doing Business. The report for 2009 has recently been released and has some interesting findings for Pakistan.

The first Doing Business Report was published in 2003. It covered five indicator sets in 133 countries. The more recent report has a wider country coverage. It has data on 181 countries. It has also expanded the issues of likely concern for the investors. The bank has looked at ten indicator sets.

These include the ease of starting a business, the cost of obtaining construction permits, the cost of employing workers, the ease (or conversely difficulties faced) in registering property, availability of credit and the cost of obtaining it, what kind of protection is available to the investors, how difficult (or easy) is it pay taxes, what are the problems encountered in cross-border trade, can contracts be enforced and what are the costs of closing businesses.

The bank’s work is focused on small and medium-size industries since it is this type of entrepreneurship that ultimately determines the pace and scope of economic growth in the developing world.

How does Pakistan fare in this exercise and how does it compare with other countries in the region and with the countries that are its competitors in the global market place? There are some surprising conclusions concerning Pakistan, especially when we compare the various elements in the perceived cost of doing business with those in India and Bangladesh.

Pakistan ranks 77th compared to Bangladesh’s rank of 110th and India’s 122nd out of the 181 countries studied by the bank. India’s relative low rank is particularly surprising considering the strong interest in the country shown in recent years by the community of international investors.

There are two other areas in which Pakistan does relatively well. These are ease of closing businesses and obtaining credit for business. The country’s ranks in these areas are respectively 53 and 59 out of 181 countries. Once again the question of the cost of closing business is relevant for the formal sector. For the informal sector which accounts for the vast majority of the enterprises, shutting down a business is not problematic. The burden falls on the family and is not too difficult to bear.

Most often, the entrepreneurs set up industries producing another line of products or providing another kind of business. Access to credit, however, is important for businesses of all sizes. In most developing countries the formal financial sector – banking as well as non-banking – is open to large businesses.

Small enterprises have to make do with informal parts of the financial sector. The cost of obtaining capital from these sources may be high but the time and cost of enforcing informal contracts can be quite low. This is one reason why small and medium-size industries may not be keen to graduate the search for capital to the formal part of the financial sector.

For Pakistan the best ranking among the ten indicator sets is for “protecting investors”. This set has four indicators, all concerning the way publicly listed companies are managed. This is an important indicator. A recent study suggests that the presence of legal and regulatory protections for investors explain up to 73 per cent of the decision to invest. In contrast, company characteristics explain only between four per cent and 23 per cent. “Thus both government and businesses have an interest in reforms strengthening investor protections.”

However, much of the small and medium-size sector is outside the formal capital markets.. Consequently a relatively high ranking in terms of investor protection is of limited consequence.

What is of great consequence is the relative ranking on another score – enforcement of contracts. For this indicator, Pakistan has the worse score among the ten used by the bank for the purpose of evaluation. Contract enforcement has three elements – number of procedures that have to be followed, the time it takes to enforce a contract, and the cost of enforcement. The three are assigned the same weight in the rating for this indicator.

In Pakistan’s case, 47 procedures have to be followed for the enforcement of contracts compared to 21 in the case of Singapore that has the top ranking in terms of ease of doing business. In Pakistan it takes an average of 976 days to reach a settlement on a contract dispute compared to 150 in Singapore. The cost of settlement of a contract in Pakistan is 23.8 per cent of the total value, a bit lower than Singapore’s 25.8 per cent.

Justice may be rapid in Singapore but it is costly. India does considerably worse than Pakistan in two of the three elements of contract enforcement. It has 46 procedures that need to be followed, it takes 1420 days for the courts to enforce contested contracts and the cost of enforcement is 39.6 per cent of the value of the contract.

It is obvious that this is one of the areas where Pakistan has to put in real effort in order to reduce the cost of doing business. As the World Bank report puts it: “In many countries only the rich can afford to go to court. For the rest, justice is out of reach. In the absence of efficient courts, firms undertake fewer investments and business transactions. And they prefer to involve only a small group of people who know each other from previous dealings.” Problems associated with contract enforcement not only inhibit investments, they also work as disincentives against scaling up. Firms prefer to remain small, fearing that by growing in size they will invite more legal problems.

Employing workers for businesses is another area where Pakistan does poorly. This indicator has five elements – difficulty in hiring, rigidity in the number of hours worked, difficulties in firing, the cost of firing, and the rigidity in employment. A lot of the problems in this area can be traced to the 1970s when fairly stringent labour laws and regulations were adopted.

Some obvious conclusions flow from this analysis. The most important is that while Pakistan may rank relatively high in terms of its rank in the group of 181 countries studied by the World Bank in its latest Doing Business report, not much comfort should be drawn by the policy makers from this conclusion.

The high ranking scored by Pakistan is on account of the factors that are less relevant for the success of the businesses that dominate the real sectors of the economy. In the case of those that really matter, the country does relatively poorly. That is where the policy makers have to concentrate their attention.