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OP-ED: What can your iPhone teach you about regulatory reform?

  • Published at 11:27 pm February 13th, 2021
The total revenue income target for FY22 has been set at Tk330,000 crore Pixabay

Regulations can become useless and obsolete, so they too need to be updated every few years

The iPhone is a very popular and much-desired commodity for almost all ages and not only that, the latest iPhone is considered a status symbol, or at least one that was released within the last couple of years or so, is. 

Apple, the legendary manufacturer of the iPhone, is very clever, because with every new release of its famous phone, it also introduces certain new features which the previous versions did not have, and this is a way to entice buyers to upgrade. Although in recent years, how meaningful or truly “new” these features might be, is a matter of great debate and a worthy topic for a technology-based discussion, which this is not. 

Apple also constantly changes and updates the “iPhone Operating System” (IOS), and this is perhaps the most vital component of the phone, because without it, the phone is almost useless. These updates are needed to keep up with and also support the new features as well as the new technology and applications, or “apps,” which are constantly popping up in the market. In some ways, one could say that the IOS is the regulatory protocol of the iPhone, because it dictates the way in which the phone will function and how it will interact with various third party applications such as WhatsApp, Facebook, YouTube, etc. 

It is well known that if an iPhone is too old, then it simply won’t function with the newer versions of the IOS and it cannot interact with most of the newer third-party applications because those applications have also been changed. Therefore, a new or newer iPhone with a capable IOS is required just to keep up with the ever-changing technologies and innovations. 

Based on this, it may be argued that a nation’s overall regulatory framework comprising of various laws, rules, and regulations for the proper governance of different sectors is just as critical to the successful operation of the economy and government, as the IOS is for the optimum operation of an iPhone. 

Upgrades needed

This analogy may seem oversimplified or even far-fetched, but there is no doubt that there are certain similarities. If a nation’s regulatory framework is archaic and outdated, then it simply will not be effective, and it will not be able to interact with or enable effective governance over the ever-changing dynamics of a constantly growing and evolving economy. It is critical that the regulatory framework also be continuously updated in order to make it compatible with the latest systemic functionalities of the economy. 

Apple’s IOS is so dominant and powerful that third party applications are developed so that they may be compatible with the latest IOS version. Similarly, the government can directly influence the various sectors of the economy through the regulations it puts in place and by also ensuring that such regulations are acceptable and will have the effect of further boosting growth and development. Anyone wishing to operate and function in Bangladesh would be obliged to develop their modus operandi in compliance with the regulatory framework, and if they don’t then they will fail. If the regulations themselves are weak, not enforced properly, and are outdated, then the market’s operations will not respect them and therefore the very power and dominance of the entire regulatory framework will fail, which will cause revenue leakage and various undesired consequences. 

Considering this, the current regulatory structure and framework of Bangladesh certainly deserves some scrutiny and review because certain upgrades and immediate changes are necessary in order to keep up with the rapidly growing and ever-changing dynamic of the overall economy. Further discussions will emphasize specific and targeted reform actions which may be taken to strengthen and tighten certain critical sectors which require the urgent attention. While these sectors may require additional reforms to address other weaknesses and flaws, following discussions will attempt to focus on specifically where immediate change and update is deemed most necessary and may have the highest beneficial impact. 

Export revenue reform and diversification into technology

Currently, Bangladesh is too reliant on the RMG sector for its overall export earnings. More than a significant majority of the country’s export earnings comes directly from the RMG sector and this is highly worrisome because such a mechanism cannot be sustained in the long run. The entire economy of a quickly transforming and developing nation cannot be allowed to remain so heavily dependent on just one sector, because it is inevitable that the success and steam of this sector will eventually start to run out at some point. 

Currently, the primary advantage which Bangladesh has over other developing economies that allows its global dominance in the RMG sector is cheap labour. However, it is very doubtful that the availability of such readily obtainable cheap labour will be sustained for too long, as Bangladesh is about to graduate out of LDC status and become a developing middle-income country in 2024 or little later. 

Such a shift will no doubt create upward pressure on worker wages, and therefore it will continue to become more expensive to source the same labour in the near future. As a result, Bangladesh will start to lose its competitive edge against other less developed nations whose labour wages are still very cheap, hence naturally pushing RMG manufacturing to those nations.  Therefore, commercial and industrial regulatory reforms are urgently needed to motivate, encourage, and boost other sectors which may start to replace the export earnings currently being generated primarily by RMG. 

One particular and vast sector which is still highly untapped is the technology outsourcing sector. Bangladesh has tried to make some progress in this sector, and the government is definitely very interested in further growing this sector, but it is not nearly adequate as of yet. 

While India is currently the dominant player in the technology outsourcing arena, it is also facing similar issues as it continues to develop and grow, which is going to make its own technology and outsourcing labour force too expensive to continue its dominance. Thus, the most ideally situated nation to take advantage of this upcoming and inevitable shift in the tech outsourcing sector would be Bangladesh. 

Consequently, those major international firms which are deeply reliant on India for their outsourcing needs, would not have to move very far, since Bangladesh is right next door, geographically, and the two nations are also culturally very similar, such that these firms would not require too many adjustments or adaptations. 

However, the biggest challenge for Bangladesh that may obstruct this natural shift of technology outsourcing from India to Bangladesh is the lack of skilled workers capable of actually getting the job done. Currently, Bangladesh does not have enough adequately skilled labour to take on this sector at a massive scale. 

As such educational and incentive-related reforms aimed at increasing technical training of the labour force in this sector is vital. Also, local entrepreneurs who are willing to invest in this sector must be actively sought out and given all kinds of required incentives and motivations so that they may quickly establish the infrastructure necessary to meet the future demands of foreign firms desiring to move to Bangladesh. 

All barriers, impediments, and red tape must be removed to pave the way for fast set-up. If local entrepreneurs and investors are not duly motivated to enter this field, then what will happen is that the already existing and major Indian technology outsourcing firms will move into Bangladesh and completely capture and dominate the sector. If the technology outsourcing sector is correctly cultivated and allowed to grow, it has the capability to yield export revenue earnings well beyond what is currently yielded by RMG. 

Automation and revenue reform on collections

One of the most vitally needed reforms in Bangladesh is revenue reform because, very simply put, not everyone who should be paying taxes are paying taxes and those who are paying taxes are not paying what they should be paying. Under the current revenue collection structure, there are way too many opportunities for escaping the revenue net without being detected. On the other side, the tax reporting and paying process is too complicated and cumbersome to motivate enough people to come forward and become legitimate tax paying members of the economy. 

The current system allows for too much dependence on the integrity and honesty of the individual tax collecting officials and this has opened the gateway for unscrupulous negotiations between tax-payers and revenue officials. Such a system allows for personal benefits to the ill-motivated revenue officials as well as the tax dodging tactics of those who wish to escape from paying what is owed. 

In the end, it is the overall economy and the nation itself that loses out, because the government is not receiving what is critically needed for financing many imperative public sector projects. Furthermore, funds and capital that belong to all the citizens of Bangladesh are being siphoned out of the country via illegal methods by numerous tax-dodging individuals and fraudulent business enterprises.

Among a few possible solutions and mitigating measures available for updating and fixing this sector, one effective reform that may be taken is automation. Introduction and integration of new and available technology, artificial intelligence, and software within the tax collection infrastructure would quickly remove the heavy reliance on the judgment and integrity of individual revenue officials. Automation would also make the system user-friendly and easily manageable at the tax-payer end. It would remove the possibility of any kind of undue harassment. Nationally integrated databases may be used to keep track of bank accounts, earnings, inflows, and outflows of tax-payers to come up with an advanced estimate of how much tax might be owed by specific tax-payers. 

This would make the system more transparent and therefore allow little room for escape or leakage.  

Credit history and banking reform on loans

While automation might be a potential saviour for the revenue collection infrastructure, it could also potentially achieve similar advancements in the ailing banking sector of Bangladesh. One of the greatest problems faced by most Bangladeshi banks, both private and state-owned, is bad loans. Thousands and thousands of crores in loans remain uncollected, and it is highly doubtful whether or not they will ever be collected. 

Systematically defaulted loans represent a direct and undesired outflow of national wealth and capital from the financial and public sectors into the pockets of individuals with dishonest ulterior motives. 

Currently, the loan approval and payback system in Bangladesh is for the most part based on the personal connections and influences the debtor has within the executive and political branches of the government as well as the lending institution itself. Often, it is noted that the approval of loans has little to do with the actual credibility or merit of the loan-seeker or the feasibility of the business purposes. The more politically and institutionally connected a person or business enterprise is, the faster their loans will be approved and the bigger the amount of loan will be. 

Such a disproportionate and unfair system has almost crippled the state-owned banking sector and has also adversely impacted and even failed a few private banks whereby they needed to be bailed out by Bangladesh Bank. Such occurrences are very costly to the citizens of Bangladesh, as they derive no benefits from it but rather have to pay the price for the corrupt behaviour of certain individuals. 

This is where strict regulatory reform in the banking sector in the form of automation may be of great benefit when also combined with autonomy from negative influences. In most developed economies, the loan approval process is significantly more automated instead of being based on personal individual judgment. 

For example, in the US, an individual’s capability to obtain loans, the rate of interest, the principal, the payment structure, etc is directly dependent on their “credit history.” 

Credit history is an appraisal of an individual or business’s capability to repay debts and their proven ability for repaying them based on past history. Such an assessment is compiled in what is called a credit report, which fully details the number and types of credit accounts, the length of time of each account, amounts owed, the amount of available credit utilized, if amounts due were paid on time, and the number of recent inquires as to their credit. Such a report will also show whether there are any liens, bankruptcies, collections, or judgments against the loan seeker. 

In the US, this is a highly sophisticated system of assessing whether or not someone is worthy of a loan and it is highly automated. A person’s credit score is usually the single most important determining factor on whether or not they will be approved for a loan. It is time Bangladesh also fully implemented and cultivated such an automated system to determine loan worthiness and this can only happen if there are definitive and strong regulatory reforms which would pave the way for such a change. 

Capital market reform and restoring the faith

A nation cannot sustain its ongoing growth, progress, and transformation without continuous influx of capital to fuel it. While public financing or aid and loans are good sources of capital, they cannot be sustained for an extended period. Public funds are limited and do tend to run out quickly and as an economy develops. 

Donor aid and preferential loans also tend to get reduced and shift away to poorer nations. However, private capital investment is one source of funds which has the capability to be infinite and will only keep on increasing with the ever-growing needs of the economy. Therefore, a mature and vibrant capital market is very important for fuelling any growing nation. Relative to its size, GDP rate, population, and growth aspirations, the capital markets in Bangladesh are nowhere near where they should be. 

In fact, it is almost embarrassing how far behind Bangladesh is lagging in terms of being able to generate critically-needed financing from its own capital markets. The greatest challenge is investor confidence and trust in the capital markets which has diminished to low levels. Potential investors with excess funds have major trepidations about pouring in any funds into the local capital markets. 

The public perception, and correctly so, is that these markets are dominated and controlled by a few very influential and well-connected players who have formed syndicates which allow them to manipulate the market. As such, the individual private investor is very worried that they do not stand a chance to be treated fairly, and their earnings would simply be sucked dry by these syndicates as they invest in the capital markets. One of the issues further blowing these fears is the lack of transparency in the system and the lack of any protections available to those investors who have been unfairly treated by the existing regulatory framework which is supposed to govern the capital markets. 

As a result, huge amounts of funds by Bangladeshi individuals remain un-invested in the capital markets or even worse, are being invested in more trustworthy capital markets abroad.

To revitalize the capital markets in Bangladesh, regulatory reforms may be targeted specifically towards increasing transparency in the transactional and reporting activities of investors. Currently the potential individual investors lack the visibility needed in order to make an informed decision regarding their trades. The “Financial Reporting Act” which came into effect in 2015 was a needed reform which had the goal of increasing faith and trust in the minds of the investors but it is yet to be seen whether this act actually has any teeth and if the regulators will be able to truly utilize it. 

Thus far, this act hasn’t accomplished its intended purpose. Devious and fraudulent accounting manipulation in reporting makes a company look much more investment-worthy and reliable than what is the actuality. To earn back the trust of the common investor, the regulators must strictly enforce existing regulations and show people that they are indeed capable of taking very severe and firm action against market manipulators and unethical syndicates. 

After a few years of usage, even something as amazing and powerful as the iPhone eventually needs to be replaced. The particular iPhone might have still been functioning and completing certain basic tasks, but its internal mechanism and technology was outdated and could no longer keep up with the latest developments in the technological arena. 

Similarly, regulations which might have once been effective in the past, can and do become useless and obsolete and therefore they must always be regularly reviewed and updated in order to keep up with changing economic dynamics. Those who want to dodge regulations are very clever, and therefore those who make policy and implement regulations need to be even smarter and wiser.

Mamun Rashid is a Partner, and Yamen Jahangeer is a Director with PwC Bangladesh. Views expressed in this article are their own.

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