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October 23, 2020

The crafty bureaucratic rents


October 23, 2020

LAHORE: Rampant corruption is eating the competitiveness of our industries as private sector alone cannot compete in the global economy unless the cost of dealing with bureaucracy is drastically reduced.

A manufacturer must deal with over two dozen government agencies for one reason or the other. The man hours lost in this process are non-productive and expensive.

Almost all governments in power agree to the suggestions by the industries that one government department should deal on all matters concerning federal, provincial, and local taxes licenses and permits.

But nothing in this regard has been done because it would deprive scores of bureaucrats of a lucrative income they generate monthly through rents. This income is much higher than the salaries they draw from the exchequer.

Similarly, labour, and environmental compliance issues should be entrusted to another department. This would reduce the man hours entrepreneurs spend on dealing with an army of departments.

The point to note is that the entrepreneurs expect that fewer departments would spare them from the hassle of dealing with many, but they probably do not expect the rent seeking culture to go away.

Every government offers one window facility to new investors, but bombards the operating industries with departmental regulatory brigades. The bureaucrats instead of prudently regulating the industries use their interaction as a license to collect illegal gratification for ignoring the regulatory lapses.

The labour inspector for instance would be satisfied with an appropriate monthly rent (bribe) for ignoring the labour law violations. There are numerous industries that fully comply with labour laws and do not want to pay bribe.

The inspector would then engineer some violation like unclean toilet (leakage of water from one of the several totally clean toilets). Or they would term the factory canteen unhygienic (food accidently dropped by some worker or a stray fly roaming in the dining hall, which would have been removed by the cleaning staff in due time).

Most compliant industries are forced to pay the standard rent for getting clearance or face the harassment and engineered violations. Those enterprises that do not pay their workers overtime according to the law or those that comply by law are treated uniformly.

Both must pay the standard rent. Otherwise the inspecting member would ask the

administration to bring the attendance and overtime register of workers for the last six months.

He might not find any discrepancy, but would engage a staff of the company for weeks. Salary paid to the staff for unproductive work is a cost that the company must bear. Some bear this cost and wastage of time, but most pay the rent.

The fall out of this corrupt bureaucratic culture is that we have four types of entrepreneurs serving our consumers. The first though fewer in number are those that fully comply with all state labour, environment, and tax laws despite bearing the rent that they must pay to the corrupt.

The second type of entrepreneurs, are those that partially comply with state laws. Since they must pay the bribe any way, they register fewer workers in Employees Old Age Benefit department and in social security departments.

To the unregistered workers they pay less than minimum wage. They under report their incomes and pay less sales and income tax than their actual liability.

They do not pay double overtime to their workers that are not registered with the labour department. Type three are the trader, service providers, and small-scale manufacturers that do not pay any tax (or if they do in case of imports they heavily under-invoice). They may not be paying the state any taxes, but most of them are bound to pay the rent to the relevant bureaucracy to stay out of government regulations.

The fourth are smugglers who are anti-state elements. Besides consumable and industrial goods some of them bring in arms and narcotics.

This segment of entrepreneurs operates freely without any fear. It is the most harmful segment that must be eliminated to provide level playing field to our industries and peace and harmony in our society.

Another damaging loss of the way we operate our businesses is that even the most efficient companies are losing competitive edge over their global competitors because the cost of bureaucratic corruption is very high.

The tax avoiding segments of trade and industry are constantly losing their productivity by paying their workers less and keeping their technologies obsolete.

Bringing normalcy in our economy is a herculean task. It would require highest political will to tame the vested interests that have spread like cancer in our society.