EntErprisE survEys EntErprisE notE sEriEs 68274 EntrEprEnEurship Business Environment Perceptions in Afghanistan 2011 and Pakistan Judy S. Yang T his note compares business environment perceptions using a unique panel data set of Afghani and Pakistani firms interviewed between 2007 and 2010. Examining the evolution of business climate perceptions within the same group of firms over time allows for a clear picture of how the broad business environment is changing. Firms in both countries are operating in a time of dynamic economic, political, and social changes. However, perceptions EntErprisE notE no. 27 of the severity and challenges posed by certain business environment elements differ in the two countries. The World Bank’s Enterprise Analysis Unit surveyed the same group of 319 Afghani firms in 2008 and 2010, as well as a group of 385 Pakistani firms in 2007 and 2010. Survey results show that firm perceptions of the severity and priority of certain business environment elements have changed over time, especially in the areas of electricity, political instability, and corruption. Changes in top obstacle reporting should only be Subjective and objective measures of interpreted as changes in what element is currently the business environment most relevant to firms. The World Bank’s Enterprise Surveys have been For example, suppose a firm in Afghanistan considers completed by over 120,000 firms in over 125 countries. electricity and corruption to be its top two concerns. Responses offer objective statistics and subjective In 2008, the firm selects electricity as their top obstacle opinions regarding business environment elements because it is fundamental to daily operations. The affecting firm operations. The first type of statistic firm acquired a generator by 2010, so electricity was used in this note is objective, such as the number of no longer a top concern, and corruption was selected power outages in a month or the number of visits by as the top obstacle. The important nuance is that tax officials. the severity of corruption may not have improved or Additionally, two subjective measures are used; they worsened, it was identified as the top obstacle only are the “top obstacle� and the “major constraint.� after their electricity supply was resolved. The top obstacle statistic captures which business The degree of obstruction a business environment World Bank Group environment element is the most relevant obstacle element poses to firm operations is captured by faced by a firm, while the major constraint reflects the the major constraint statistic. Major constraints are degree to which each individual element is an obstacle derived from a different set of survey questions, where to daily operations. firms are asked to assess each business environment Firms identify only one business environment element individually and to report the element’s degree element out of a list of fifteen1 that “represents the of severity as an obstacle to operations. A business biggest obstacle faced by this establishment.� The environment element is labeled a “major constraint� if frequency an element is selected as the top obstacle in a firm reports it to be a major or severe obstacle. 2 a country will accurately reflect what firms perceive to Responses to subjective survey questions may be be the most relevant business environment obstacle confounded by unobserved attitudes and individual affecting daily operations. When there are changes in interpretations. Subjective responses may not align with top obstacle reporting, this should not be interpreted answers from objective questions. Even though a panel that a specific element is improving or deteriorating. data set is used where identical firms are interviewed over time, different managers from the same firm may survey years compared to only 6 percent globally. respond, or individuals’ tolerance for certain business From top obstacle reporting, the business environment elements may have changed over time. environments in Pakistan and Afghanistan appear to Nonetheless, large changes in perception across have different weaknesses. In Pakistan, opinions on hundreds of firms can still suggest that there are real electricity reflect a low quality of basic infrastructure. changes in the business environment. In addition, the fact that the number of Pakistani firms selecting political instability as the top obstacle Perceptions of the top obstacle increased from 4 percent to 20 percent shows that these Table 1 displays the percentage of firms that report firms are also operating in a country that is becoming a particular business environment element to be their more conflict ridden. Together, electricity and political top obstacle globally, in the South Asia region, and instability are the top obstacles for 85 percent of the in Afghanistan and Pakistan. There are a number of Pakistani firms surveyed in 2010, nearly twice as many observations that stand out. First, the percentage of firms as in 2007. In Afghanistan, top selections of crime, in Pakistan reporting electricity or political instability to corruption, and practices of the informal sector suggest be the top obstacle to daily operations increased from operational difficulties are primary concerns. 2007 to 2010 (from 44 percent to 65 percent in electricity, and 4 percent to 20 percent in political instability), while Electricity improving in Afghanistan the percentage reporting corruption decreased (from In Afghanistan from 2008 to 2010, firms have 19 percent to 2 percent). Changes in the reporting of improved perceptions on the severity of electricity corruption as a top obstacle should not necessarily be as an obstacle to daily operations. The percentage of interpreted as a result of improvements or declines in firms perceiving electricity to be a major constraint corruption; but possibly the result of shifting attention fell from 66 percent in 2008 to 38 percent in 2010. to the deterioration of electricity. The percentage of firms that ranked electricity as the Firms in Afghanistan have opposite changes in their top obstacle facing their business also dropped from perceptions, with fewer firms reporting electricity 17 percent in 2008 to 7 percent in 2010. Over half of and political instability to be top obstacles, and more Afghani firms assessed electricity less severely in 2010 firms reporting corruption as their top obstacle. The than in 2008. Changes in perceptions also vary across percentage of firms in Afghanistan selecting crime in subnational regions—in the northern Mazar region for both survey years is also high compared to the South example, 60 percent of firms assessed electricity more Asia region and global averages. About 20 percent of severely in 2010 than in 2008. This is in contrast to Afghani firms report crime as the top obstacle in both firms in Kandahar and Kabul where almost 80 percent Table 1 Percentage of firms reporting a business environment element to be the top obstacle Practices of competitors in Crime, theft and disorder Business licensing and Inadequately educated Tax administration Political instability the informal sector Customs and trade Labor regulations Access to finance Access to land regulations Corruption Electricity workforce Transport Tax rates permits Courts Country GLOBAL3 15 3 3 7 1 6 3 16 6 2 9 11 3 11 3 South Asia region 4 13 4 2 6 0 6 2 29 2 2 14 6 3 4 3 Panel Firms Pakistan 2007 6 6 1 19 0 8 1 44 2 1 4 1 1 5 1 Pakistan 2010 2 2 1 2 0 3 1 65 1 0 20 2 0 1 0 Afghanistan 2008 17 12 0 9 0 20 1 17 0 0 17 3 2 0 1 Afghanistan 2010 5 2 1 24 0 18 5 7 2 1 10 10 5 6 2 Source: Enterprise Surveys. 2 of firms perceive electricity to be less severe in 2010. Figure 1 Change in the number of power By firm size, the perception of electricity as an obstacle outages 2007 to 2010, Pakistan, did not vary in 2010. Improvements in perceptions by region were seen across all firm sizes—in contrast to Pakistan where small firms are more likely to perceive electricity Total to have become more severe. The incidence of power outages per month and the durations of power outages declined across all firm sizes in Afghanistan as well. Lahore Declines in the average number of power outages per month ranged from 18 to 8 power outages for large Karachi firms and 23 to 12 outages for small firms. Objective statistics on the status of electricity are also consistent with perceptions that electricity is Islamabad improving. By region, some areas saw more reduction in outages than others. The average reported number 0% 20% 40% 60% 80% 100% of power outages country-wide dropped from 22 to 12 per month, and the average duration from 11 to 4 Fewer outages Same More outages hours. In Jalalabad, not a single firm reported more Source: Enterprise Surveys. power outages per month in 2010 than in 2008. Improvements in electricity were also reported by firms in the Kandahar and Kabul regions. However, than in 2007—from 30 in 2007 to over 120 in 2010, or there is still room for progress in electricity provision an average of once a day to four times a day (figure 1). in the Hirat region as well as in five smaller cities that The Karachi region saw the smallest increase (from 33 were surveyed throughout Afghanistan. outages per month in 2007 to 80 in 2010), while firms in Islamabad and Lahore both saw much higher increases Electricity is a severe obstacle in the number of power outages (averaging about 150 in Pakistan outages a month in 2010). While these numbers appear incredibly large, the demand for power in Pakistan The perceived severity of electricity as an obstacle vastly exceeds the supply and the shortage of electrical in Pakistan could not be more different from power in Pakistan is a real and urgent problem. Afghanistan; the deterioration of electricity provisions in Pakistan is indisputable. Almost 60 percent of panel firms (224 firms out of 380) assessed electricity more Firms in Afghanistan perceive corruption severely as an obstacle in 2010 than in 2007. In the to be a more severe obstacle Islamabad area, almost all firms perceive electricity Among countries in the South Asia region, to be more severe in 2010 than when surveyed in Afghanistan in 2010 leads in the percentage of firms 2007 (69 out of 75 firms). In addition, 100 percent of that rank corruption as the top obstacle to business firms in Islamabad experienced power outages in 2010 operations—at 26 percent. Corruption is more compared to 66 percent in 2007. Firms in the Karachi commonly a top obstacle for large firms (32 percent) region, however, are about evenly split between how than small firms (22 percent). By region and over time, they perceive electricity to have changed as an obstacle fewer firms reported corruption to be a top obstacle from 2007 to 2010. in Kandahar (from 26 percent in 2008 to 12 percent Small firms are more likely to view electricity as a in 2010), while there was an increase in Mazar (3% to major constraint to daily operations. In 2010, small 28%) and Kabul (12% to 27%) (figure 2). The Jalalabad and micro-sized firms reported electricity to be a region saw the highest change in the percent of firms major constraint at a significantly higher rate than reporting corruption as their top obstacle, up from 0 medium or large firms (90% of small, 78% of medium, percent in 2008 to 32 percent in 2010. and 74% of large). Twenty-seven percent of firms in Afghanistan The deterioration of electricity is evident from reported corruption to be a severe obstacle in 2008, objective reporting on outages. Although the average and 47 percent did so in 2010. Sometimes there duration of power outages decreased in Pakistan from is contradictory evidence in what firms report 3 to 1.5 hours, the number of power outages per subjectively and what objective data illustrates. Even month increased substantially. Electricity supply is though more firms selected corruption as their top intermittent and inconsistent and almost all firms in obstacle, over time and across most firm sizes, fewer Pakistan report more power outages per month in 2010 firms reported that they were asked to give informal 3 gifts in 2010. Discrepancies among responses to Figure 2 Corruption in 2010 vs. 2008, corruption questions can be expected since it is a sensitive topic; honesty and candor to this particular Afghanistan, by region topic is a noted concern. Total Firms in Pakistan report corruption to be less severe Mazar In Pakistan, perceptions on corruption are improving. From 2007 to 2010, the percent of firms that consider Kandahar corruption to be a severe obstacle decreased from 27 percent to 14 percent, and the percent perceiving it to be a major obstacle decreased from 38 percent Kabul to 15 percent. Among objective measures, Pakistani firms spend more time dealing with regulations, face Jalalabad fewer visits from tax officials, and are less likely to be expected to give gifts in meetings with tax inspectors. Across regions, firms in Islamabad report the fewest Hirat visits by tax officials (1 visit) and managers spend the least amount of time dealing with tax officials (6 5 smaller cities percent). In all regions of Pakistan, at least 75 percent 0% 20% 40% 60% 80% 100% of firms ranked corruption less severely as an obstacle to daily operations in 2010 than in 2007. The Lahore Less of an obstacle Same More of an obstacle region showed the greatest decline in the percent of Source: Enterprise Surveys. firms reporting that they were expected to give gifts, 35 percent in 2010 compared to 54 percent in 2007. Notes Similar to Afghanistan, large firms in Pakistan also 1. The Pakistan 2007 survey also includes macroeconomic face more interference from regulation and corruption. instability as an option for Top Obstacle. In 2010, senior management from large firms spent 2. In the 2010 surveys, the Very Severe Obstacle is labeled as about 15 percent of their time dealing with regulations, Severe Obstacle. had about 6 visits a year from tax officials, and 66 3. Global surveys include all Enterprise Surveys following the percent of large firms were expected to give gifts in global methodology and all South Asia Region surveys. In these meetings. Compared to Afghanistan, large cases where a country has two global surveys, only the latest Pakistani firms have more visits and are more likely to surveys are included to compute the global average. be asked to give gifts. Although objective measures 4. South Asia Region surveys include: Sri Lanka 2004 & 2010, appear more negative in Pakistan than in Afghanistan, Nepal 2009, Bhutan 2009, India 2006 & 2010, Afghanistan the improvements in subjective perceptions on 2008 & 2010, Pakistan 2007 & 2010, Bangladesh 2007 & corruption may be due to the fact that other elements 2010. such as electricity and political instability are much more severe in comparison. In other words, tolerance for corruption may have changed in light of the emergence of more urgent issues, and corruption appears relatively less problematic. The Enterprise Note Series presents short research reports to encourage the exchange of ideas on business environment issues. The notes present evidence on the relationship between government policies and the ability of businesses to create wealth. The notes carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this note are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. 4