The vicious impact of bureaucracy in business

When we were students, we hated red tapism—we spoke and wrote against it and vowed to change it in the future. But after being recruited into government service, we forgot our old promise, or dared not to talk about it. Young public servants turned into the most obedient disciples of the mammoth bureaucracy. They turn into a group of hypnotised followers of the black magic of bureaucracy—which goes on with its ever-increasing vigour and dominance. It doesn't change although this model is fundamentally flawed, and it warrants massive corrections for the sake of business and economic growth in the country.

Bureaucracy is needed to run the administration of the government. It is the body of public servants who are authorised to ensure that people follow a set of rules while opening and running their businesses. Nevertheless, in practice, bureaucracy impedes businesses rather than streamlining them. Bureaucracy has more sanding effects than greasing ones.

A World Bank study (2017) found that the higher the level of bureaucracy, the higher the level of corruption. The case of Latin American countries such as Argentina, Brazil, Venezuela and Columbia are testimony to this hypothesis. The WB study also vindicates that the level of corruption doesn't necessarily rise with the level of poverty; rather a positive association between bureaucracy and corruption is more evident across nations. Many African countries with acute poverty have lower level of corruption than that in many Latin American countries where institutions are often debased.

In contrast, East Asian countries such as Japan, South Korea, Singapore and Taiwan enjoyed a booming time of business particularly from 1965 to 1995 when they minimised the intervention of bureaucracy into their rules of business. The WB termed the case as the East Asian Miracle, which includes the four Asian Tigers—as mentioned above—the emerging economies rapidly streamlined their bureaucracy to make it user-friendly even for foreign enterprises. As a result, foreign direct investment (FDI) easily flowed into those countries, augmenting labour productivity and employment. Bureaucracy invariably breeds corruption and lowers growth by complicating the normal flow of businesses. Bureaucracy is anti-business—by default, by design, by function. And Bangladesh can't be an exception in this regard.

Bangladesh's bureaucracy finds FDI as a threat to its existence mainly because foreign experts easily expose the level of inefficiency and disguised unemployment in bureaucracy. Bureaucrats prefer seeing a big part of the annual development programme (ADP) remain unused rather than inviting foreign involvement that will ensure quality work and better use. That's why the construction cost of roads or rails per mile in Bangladesh turns out to be one of the highest in the world.

Bureaucracy abhors accepting fixed completion dates for the projects since flexible deadlines are conducive to the continuity of rent seeking. All mega projects including the Padma Bridge or the metro surface train are testimony to this claim. The total financing cost reaches to an insane figure for most public projects, making the overall rate of return for the country much lower than expected, because businesses thrive on the rapid progress of public projects.

In the late 1970s, China began its reform that minimised the bureaucratic rules for enterprises, and the country reaped the harvest of double-digit growth for three decades in a row since—the unprecedented era of growth and development that defines what modern China means right now.

In the early 1990s, India dismantled the License Raj—the all-pervasive regime of bureaucratic “permission-ism”. The Raj lasted for 40 years when India's average growth couldn't exceed even a number as low as 3 percent—which some economists derisively termed as “Hindu growth”—a satirical connotation to mean the plain and simple life of a Hindu saint. The country entered a new era of growth and dynamism since then, evidencing more than 6 percent growth for the subsequent decades. Simply, ripping up the red tapes described what modern India is right now.

In the latest “Doing Business Index 2019,” constructed by the World Bank, Bangladesh secured the lowest possible position in South Asia. India tops it ensuring the least bureaucratic business environment in the region. Not a few years ago was India's ranking more than 120—now it's only 77 out of 190 nations included in the WB study. The lower the ranking, the lower the bureaucratic tangles of doing businesses in the country. If we proceed serially for South Asia, the ranking for Bhutan turns out to be 81, Sri Lanka 100, Nepal 110, Pakistan 136, Maldives 139, Afghanistan 167, and Myanmar 171. And the ranking for Bangladesh is as low as 176. Actually, this is not only the poorest ranking in South Asia, but also one of the lowest positions in the world.

There are only 14 countries below Bangladesh and most of them are torn by civil war, terrorism, racial discrimination, sectarian violence, and ethnic cleansing. Those countries such as Syria, Chad, Congo, Libya, South Sudan, Eritrea, Somalia and the like are in no way comparable to a stable country like Bangladesh. Simply, within the space of the normal countries, Bangladesh's position is the lowest in the ease of doing business—thanks to its all-pervasive bureaucracy and unfriendly business policies. It's a shame. And it's a threat to all future prospects of business in the country. If the nation can still manage the second highest growth figure of the region just close to India's, Bangladesh wouldn't have been far below the double-digit growth had the country removed the stumbling blocks of bureaucracy from the path of doing businesses. Red tapism is killing the potentials of the economy.

When internally disturbed countries such as Benin, Zimbabwe, Sudan, Ethiopia, Burundi, Angola, and Liberia lie above Bangladesh in the ranking, the claim that there must have remained some defects in Bangladesh's bureaucracy can't be ruled out. It's rusty and most of its characteristics are deeply stained—and thus hard to remove. When retired bureaucrats are placed at the top positions of major institutions, bureaucracy is reenergised and revitalised by design, deserting any hope of reforms or innovations. That practice is at the root of Bangladesh's ingrained bureaucracy which remains sluggish and backward-looking mainly due to the government's rehabilitation practice of retired bureaucrats. This vicious circle must be broken to make institutions more dynamic and innovative—the way China, India and South Korea have carried out their pro-market reforms and they succeeded in accelerating business.

It can't be argued that retired bureaucrats are less meritorious. It's not a question of simply merit or talent. Rather, it's a question of professional habits, attitudes, and outlook. A retired bureaucrat is habitually a person of compliance of rules and regulations without asking its effectiveness to economic outcome and business expansion. A man with a professional habit of wholesale compliance is subconsciously reluctant to confront existing rules and regulations no matter how outdated they are. He or she is less likely to confront existing circulars—more likely to ask what the rule is and less likely to ask why. And a man, who is afraid of asking why or how, whether the rule is good or bad for the newer reality of the business world, can't be a reformist either.

Designing reforms also require deep-rooted academic backgrounds, theoretical knowledge, and expertise——most of which are lacking in bureaucracy because of its grooming process. Bureaucrats are subject to frequent transfers between various ministries, making them jacks of all trades and masters of none. That doesn't happen for academics or other professional practitioners who are selectively placed in the leading positions of most institutions in the developed, western world. This makes a big difference in policymaking and dynamism in those countries. The answer to the question of why India was able to make commendable strides forward in the doing business index lies in how the regime placed knowledgeable experts in leading most of its financial institutions instead of deploying unquestioning retired bureaucrats.

In contrast, regimes in Bangladesh look for retired public servants with administrative footprints of dutifulness and sometimes partisan loyalty, but no track records of innovations or advocacy to crown most top positions of its institutions supportive to businesses. And that paid off mercilessly by dumping the country in the lowest segment of the doing business index for ages particularly since the early 1990s—a time during which when most of our neighbouring countries stepped up in the same index. Alarmingly, the upper positions of other lower-growth nations such as Pakistan and Afghanistan invariably warn us that our institutional leaderships must be changed.

Private investment is the leading component of business expansion in any country. The share of private investment in Bangladesh's GDP remained stubbornly stagnant at 22 percent for a decade prior to 2015. Recently it has marginally inched up to 23 percent. The main reason why Bangladesh's investment ratio has edged up from 26 percent to 30 percent is the increment in the government part of investment that rose from 4 percent to 7 percent in the last 10 years. But that is not necessarily a good sign because higher public investment is likely to crowd out some segments of private investment. So, the main point of business expansion is to boost private investment including FDI. The government appointed a retired bureaucrat to head the country's Board of Investment (BOI) which couldn't boost neither private investment nor FDI considerably. FDI remained as low as one percent of GDP for years since the late 2000s.

During its performance, BOI gradually turned anaemic and eventually succumbed to death quite naturally in the mid-2010s. Bangladesh Investment Development Authority (BIDA) was born from the ashes of BOI. But again, the government chose to appoint a retired bureaucrat to make the leader of BIDA. Initially, its leader vowed to achieve Bangladesh's ranking in the doing business index at 100 or even below, but no improvements took place practically. Rather, a country like Afghanistan jumped above Bangladesh in the index. These institutions require massive reforms and retired public servants are not likely to be aggressive reformers for sure. This is historically true for the whole subcontinent that still drags the legacy of the outmoded bureaucracy which originated from the dire need of the British rulers to harness benefits from Colonial India for centuries. The British themselves transformed its bureaucracy to move in tandem with the modern world, and so did Australia or Canada. But Bangladesh didn't.

When key institutions—covering the tasks of central banking, private and public bank management, the capital market, investment promotion, public-private partnership, strategic development goals, insurance marketing, and infrastructure financing—are headed by mostly retired bureaucrats, expecting for a gradually easing business environment turns out to be simply an absurdity.

Bureaucracy believes in replacing one rule by another which may be thornier than before, making the overall progress of business almost impossible.

As a result, the growth of a purely professional business community has been discouraged in Bangladesh's context. Rather, profitable for businesspersons is the art of achieving political clout before learning the ABCs of business. Now top business magnates occupy more than 60 percent seats in parliament. The corresponding figure for legal practitioners is around 10 percent, and that for academics is as awfully low as 2 percent, telling at least partly why the country does so poorly in the knowledge economy index. Our institutions hardly see academics at their leading positions.

Simply, the businesspersons prefer to earn more political power to circumvent bureaucratic tangles. Those who fail to do so mainly resort to bribing the government apparatus. That says why the level of corruption is so high in a country where red tapism eclipses all walks of business. Bribes and power feed each other, making a healthy growth of business almost impossible. A high growth country may experience a high level of corruption if bureaucratic impediments are conserved purposefully by retired bureaucrats who administrate the key financial institutions.

This mania generates a vicious circle which has three manifestations: i) parliament is being gradually occupied by businesspersons; ii) both bank defaults and illicit financial transfers are on the rise without any sign of abating; and finally, iii) growth in the ratio of private investment to GDP moves at a snail's pace.

The reforms that are intended to improve Bangladesh's ranking in the ease of doing business index should include a bunch of non-typical and courageous steps such as: i) appointing knowledgeable and innovative experts at the policymaking positions of all institutions instead of just obedient, retired bureaucrats; ii) appointing a dynamic minister at the helm of BIDA and make him or her submit annual investment report to parliament; iii) Assign a minister to run the board of revenue since a poor fiscal capacity can't help businesses grow; iv) select the central bank governor from a pool of renowned economists—as is the practice of most developed and emerging nations—and empower him or her with reasonable independence in policymaking; v) make the capital market transparent and powerful so that culprits can be punished in an exemplary way; vi) encourage small and medium businesses rather than oiling the oily heads; and vii) the monitoring of the government over all financial institutions must be impartial and communicative to the public.

In summary, red tapism is contributing to concentration of wealth, income inequality, bank defaults and moral hazards for otherwise honest entrepreneurs, slow growth of employment and social frustrations, debility in FDI, and a growth performance of the economy lower than its potential mark which is close to 10 percent. A structural change in the leadership of all financial institutions by engaging expertise and knowledge is the precondition to ensuring massive reforms that can foster faster growth and rapid development for the economy.

Dr Biru Paksha Paul is professor of economics at the State University of New York at Cortland. His new book is Empowering Economic Growth for Bangladesh.

Email: birupakshapaul@gmail.com