ECONOMIC TRANSACTION SLUDGE: BUILDING EVIDENCE FROM PAKISTAN1

Naseem Faraz2 and Ahmed Waqar Qasim3

ABSTRACT

The excessive time and money spent in undertaking an economic transaction impose unnecessary costs
upon the economy in terms of waste of resources and the opportunity costs incurred. These frictions termed
as “Sludge” by Sunstein (2021) also impose hedonic (psychological) costs. To curb the sludge, knowledge
of the kinds and magnitude of sludge involved in an economic transaction is critical. The PIDE Sludge
Series develops tools and collects data on sludge and opportunity costs incurred on the economic
transactions in Pakistan. Using this unique data, we estimate the expected economic gains of cutting the
sludge. In the difference-in-difference setting, we introduce hypothetical policy intervention for Full
Elimination, Partial Elimination, and Digitization of unnecessary procedural steps. These policy
experiments allow us to compare the magnitude of the sludge and opportunity gains in response to the
cutting sludge in different sectors. Our findings suggest that only digitalization and partial removal of
unnecessary documents and office visits reduce the time cost by more than 40 percent. It reduces monetary
costs by approximately 34 percent of the total cost incurred in the existing structure. Further, only
digitalization is not much effective in reducing the opportunity cost. The opportunity cost reduces more
than 60 percent when the government is likely to intervene with partial or full removal of documents and
disintegration among the public offices. This magnitude varies across the sectors with variations in policy
intervention. Overall, the sludge in transactions reflects the source of low productivity and constrained GDP
growth.

Keywords: Sludge, economic transaction, documentation, monetary cost, opportunity cost,

productivity, Pakistan

1
We gratefully acknowledge RASTA for allowing us to use PIDE Sludge Series data for this research.
2
Senior Research Economist, Pakistan Institute of Development Economics
3
Research Economist, Pakistan Institute of Development Economics
1. INTRODUCTION

Productivity, a key determinant of growth, is quite low in Pakistan. The rather low productivity
keeps the return on investment lower and this constrains investment – another key determinant of
economic growth. Therefore, to achieve growth acceleration productivity must be given a boost.
Sludge is one of the constraints to productivity and investment – to increase productivity and
investment sludge must be checked.

The excessive time and money spent in undertaking an activity impose costs upon the economy in
terms of waste of resources and the opportunity costs incurred. Moreover, these frictions impose
psychological costs as well (Sunstein, 2018). To curb sludge, knowledge of the kinds and
magnitude of sludge involved in an activity is required. For instance, the waiting time involved in
making payment, preparing documents, paying speed money or rents to execute the transaction,
and the opportunity cost of such wait-time. Another type of sludge could be the number of trips
required to public offices to make the transactions such as visiting car electricity offices for
electricity connection, visiting banks to open of company bank account, visits to the revenue
department to get agriculture loans, visits to Patwarkhana to obtain registry, visits public officer
to get attested CNIC, etc.

Once the kinds and magnitudes of sludge are known, the next logical step should be to suggest
measures for cutting down the sludge. The sludge can be reduced by; (1) elimination of steps not
required (2) bringing in efficiency through; (a) improving the design of the entire process and, (ii)
partial or full digitization of the entire process.

Sludge increases transaction costs and therefore constrains transactions. GDP being the sum of
transactions is constrained by the increase in sludge. Therefore, cutting down sludge will increase
transactions and hence GDP. The knowledge of the magnitude of sludge involved in undertaking
an activity e.g., will focus policy attention on finding ways and means of cutting down the sludge.

The PIDE Sludge Series develops tools and collects data on sludge and opportunity costs incurred
on the economic transactions in Pakistan. Using this unique data, we estimate the expected
economic gains of cutting the sludge. In the difference-in-difference setting, we introduce
hypothetical policy intervention for Full elimination, Partial Elimination, and Digitization of
unnecessary procedural steps. These policy experiments allow us to compare the magnitude of the
sludge and opportunity gains in response to the cutting sludge in different sectors.
Our findings suggest that only digitalization and partial removal of unnecessary documents and
office visits reduce the time cost by more than 40 percent. It reduces monetary costs by
approximately 34 percent of the total cost incurred in the existing structure. Further, only
digitalization is not much effective in reducing the opportunity cost. The opportunity cost reduces
more than 60 percent when the government is likely to intervene with partial or full removal of
documents and disintegration among the public offices. This magnitude varies across the sectors
with variations in policy intervention. The magnitude of the sludge in selected sectors reflects that
it lowers productivity, increases the opportunity, and is, therefore, a source of low GDP growth.

The remainder of the paper is organized as follows: Examples of sludge are explained in section
2. Literature is reviewed in section 3. Section 4 describes data while section 5 specifies the
methodology. Results are presented in section 6. Finally, section 7 provides concluding remarks.

2. SOME EXAMPLES OF SLUDGE IN PAKISTAN

Examples of sludge include seeking permissions absence of which affects no one, waiting for
approvals (bureaucratic red tape), waiting in queues to get a task done, doing manually what is
possible digitally at little cost to stakeholders, waiting for court hearings involving cases that land
in courts and securing attestations/verifications and fulfilling legal requirements (agreements on
stamp papers, securing persons to sign as a witness on agreements, notarize the legal documents).

For example, in the wheat procurement process, farmers need to have multiple visits to the bank,
the opening of bank account in public banks and receiving of cross-cheque as the payment of wheat
after a long process. The most stressful task is documents preparation for the collection of gunny
bags. During this process, the farmer has to visit the government wheat store and Patwarkhana
multiple times. In the documentation process, the farmers has to take support of speed money to
have legal documentation get timely completed. Farmers have to bear the refundable cost (the
price of gunny bags) at this process. All the responsibility of preparation and transportation of
gunny bags lies with the farmers. All these processes bring a lot of financial burdens and mental
stress.

Another example, opening a company bank account requires excessive documentation i.e.
letterhead and stamp, Certificate of incorporation, Articles of association, Memorandum of
association, Copy of Form 29, CNIC copies of signatories, Copy of NTN certificate. It requires a
lot of time and monetary cost to fulfill these documentation requirements. Further, receiving
cheque book and ATM cards takes several weeks to receive. Although these documents are in the
record of SECP where a company has already registered. Banks have no use of certificate of
incorporation, Articles of association, Memorandum of association, Copy of Form 29, etc.

Similarly, in real estate, it takes almost 3 years to seek approval of the CDA for the construction
of a high-rise building. The biggest source of sludge comes from the NOC required from Civil
Aviation Authority and the Environmental Protection Agency – the two agencies together take
around 1.5 years (9 months each) to allow construction of a high-rise building.

3. LITERATURE REVIEW

This study makes two contributions to the growing literature on sludge. First, we provide a sectoral
magnitude of the sludge which is important to simplify the policy design. Second, we provide
evidence from a developing country. In developing countries such as Pakistan complex
documentation and long delays, speed money, or rent-seeking become the structural issue. The
sludge in transactions not only affects productivity it also kills the economic transactions which
hinder the economic growth in developing countries.

In both the private and public sectors, examples of sludge include unnecessarily complicated and
time-consuming paperwork and form-filling requirements, hidden add-on fees, lengthy and
confusing fine print, unfavorable default settings, inconvenient cashback and refund conditions,
messages that induce negative emotions, subscription traps, and bureaucratic red tape (Akerlof &
Shiller, 2015; Sunstein, 2020; Thaler, 2018).

For example, Soman et al., 2019; Sunstein & Reisch, 2019; Thaler, 2018 explain that, as a result
of sludge, government programs may receive low enrolment, business profits may increase at the
price of consumer welfare, people may become dissatisfied, stressed, and occasionally humiliated,
and practicing certain basic human rights may become more difficult. The primary reasons for
improving our understanding of sludge are to be able to recognize it, speculate on its welfare
repercussions, and devise methods for reducing sludge if necessary (Soman et al., 2019; Sunstein,
2020).

Emens, 2019; Emens, 2014; Herd & Moynihan, 2019 argues that when a huge population of
consumers saves a defined amount of time, say 100,000 hours, the benefits are significant. Some
of the psychological and hedonic benefits of sludge reduction include decreased frustration,
anxiety, etc.

The interventions to reduce sludge can significantly increase access to goods and services, such as
anti-poverty programs, education, job training, and economic possibilities. Simpler interventions,
such as form simplification (Bhargava & Manoli, 2015), easy and simplified access to information
that enables consumers to make better choices (Richburg-Hayes et al., 2017), the presence of
sensible defaults that are consistent with inherent consumer preferences (Jachimowicz et al., 2019),
are all examples of simple interventions. Such activities have the potential to transform the lives
of consumers, students, and employees. They can help businesses grow revenue and goodwill.
They have the potential to significantly improve government performance. They have the potential
to stimulate economic development and progress.

To safeguard consumers, investors, and employees, businesses and private and public institutions
should undertake Sludge Audits on a regular basis. Sunstein advises conducting sludge audits in
both commercial and public entities in order to determine where and when sludge is present and
whether it should be decreased. Sunstein views that while conducting sludge audits, cost-
effectiveness and cost–benefit evaluations should be conducted and that a combination of
quantitative and qualitative methodologies should be utilized to examine sludge on an individual
basis (Sunstein, 2020).

Numerous institutions in Pakistan need to perform routine sludge audits and Government should
unquestionably do so. The same can be said for a diverse array of private institutions. Banks,
insurance organizations, hospitals, universities, and publishers might save significant amounts of
money and significantly improve the experience of those who contact with them by decreasing
sludge.

4. DATA

To develop knowledge on sludge in economic transactions, the knowledge of the kinds and
magnitude of sludge is critical. The PIDE Sludge Series develops tools and collects data on sludge
and opportunity costs incurred on the economic transactions in Pakistan. Using this unique data,
this study estimates the expected economic gains of cutting the sludge. This PIDE sludge series
provides information on what steps have been, how much time was spent on each step, how much
processing monetary cost, and allied cost has been incurred on them.

Sludge Identification Approach

This data identifies the sludge by examining and understanding the process of each activity. The
process of each activity has broken down into several steps and sludge (if any) at each step is
calculated. To examine the process of each activity and measure the potential sludge, PIDE Sludge
Series has consulted with stakeholders. The stakeholders include (i) Departments/Entities
managing the activity (ii) public/users at whom the output of the concerned activity was
interviewed.

• PIDE Sludge Series4 has measured sludge in terms of time wasted: The time (hours) consumed
in performing the unnecessary steps. Also, the time consumed in undertaking manual steps that
can be digitized or performed online e.g., payment of driving license fee online instead of
queuing up in the bank to pay the fee.
• The money wasted, the cost of sludge steps (unnecessary steps) will be estimated by assigning
an opportunity cost to such steps.
• The opportunity cost will be assigned using the per capita Gross National Income (GNI). The
opportunity cost time spent in undertaking an activity manually over above the required to
perform it in a digital mode/online.

Assumptions

1. The average travel time to any office within Islamabad/Rawalpindi is 45 minutes. The
roundtrip takes 90 minutes.
2. The cost for a one-way trip is Rs.500/-. This is the average fare of transport services.
3. Applicant visiting a government agency to meet an official manages to meet the person during
the said visit.
4. Agency time: The time taken by the concerned department to process/approve the transaction.
5. Overhead Time: Part of the day lost due to being involved in this activity for a fraction of the
day.

4
For example, see this report https://pide.org.pk/research/trade-license-pide-sludge-series/
 Table 1: Summary Statistics

Variable Obs Mean Std. Dev. Min Max

Treatment 116 1.5 1.1 0.0 3.0
Time Consumed 116 46613.4 71093.4 5.0 336480.0
Opportunity Cost 116 49575.9 172585.9 0.0 1191113.0
Total Monetary Cost 116 207326.5 446423.2 0.0 2369268.0
Time in hours 116 776.9 1184.9 0.1 5608.0
Time in Days 116 97.1 148.1 0.0 701.0

5. EMPIRICAL METHODOLOGY

We suppose s simple model in a difference-in-difference setting with fixed effects.

𝑌𝑖𝑠𝑡 = 𝛼𝑠𝑡 + 𝛽𝐷𝑖𝑠𝑡 + 𝛾𝑋𝑖𝑠 + 𝜀𝑖𝑠𝑡

The 𝑌𝑖𝑠𝑡 is the outcome of cutting the sludge. It includes the time cost, monetary cost, and
opportunity cost incurred on economic transactions in a specific sector. The subscript i represent
the type of the transactions and s represents the sector in the economy. Whereas t denotes the time
period of pre- and post-intervention time period. Here, 𝐷𝑖𝑠𝑡 is our main policy intervention
indicator, this indicator is specified to introduce the three-tier policy interventions. We have
identified three hypothetical policy interventions to see the potential impacts.

(i) ( 𝐷𝑖𝑠𝑡 = 1) if there is digitization improves in the particular sector

(ii) ( 𝐷𝑖𝑠𝑡 > 1 𝑏𝑢𝑡 𝐷𝑖𝑠𝑡 < 3) if there is a digitization and partial reduction in
paperwork
(iii) if there is improvement in digitization and full elimination of unnecessary
paperwork. ( 𝐷𝑖𝑠𝑡 > 1)

Finally 𝑋𝑖𝑠 represent the control variables. This variable controls for sectoral and transaction
differences. For example, some sectors already employ better digitization, but they require more
documents. While others contain less digitized and huge documentation and multiple office visit
requirements. Controlling for the sector level differences allow us obtained precise estimates of
sludge for time and monetary costs.
 6. RESULTS

This section provides an interesting insight on the policy intervention to reduce sludge and its
potential impacts on the time, money, and opportunity cost. We introduce the three policy
interventions: We proceed from the removal of paperwork and digitization of most of the process
to the full elimination of the processes and documentation requirement which unnecessarily
increase the document preparation time and monetary and opportunity cost.

A. POLICY INTERVENTION TO REDUCE TIME COST

The time cost is incurred when we make transactions. For example, waiting for approvals
(bureaucratic red tape), waiting in queues to get a task done, doing manually, etc. On one hand, it
increases the time cost. On the other hand, it increases the opportunity cost like one can do another
task while wasting time in wait or doing things manually. In figure 1, we present the graphical
representation of the benefit of cutting the sludge in terms of reduction in time cost. we provide
analysis for nine different sectors.

Figure 1: Cutting the Sludge Policy Intervention and Reduction in Time Cost (no. of days)

Agriculture Sector Consumer Services Education Financial Services

18

20

320

9
16

300
15

8
14
Days

Days

Days

Days
280
12

10

7
260
10

240

6
8

0 1 2 3 0 1 2 3 0 1 2 3 0 1 2 3
Policy Intervention Policy Intervention Policy Intervention Policy Intervention

Health Services Real Estate Sector Retail Business Tourism Sector

170 180 190 200 210 220

30
65
300

60

25
55
Days

Days

Days

Days
250

50

20
45
200

40

15

0 1 2 3 0 1 2 3 0 1 2 3 0 1 2 3
Policy Intervention Policy Intervention Policy Intervention Policy Intervention
Overall, we observe that more than 50% of time cost (no of days) reduce if the government adopts
the digitalization of processes across the sectors. For example, in electricity the document
preparation step is lengthy. The digitalization of the documentation preparation could reduce the
time by 50 percent. The time cost could reduce through interconnected governmental departments
like electricity Distribution Companies, Patwarkhana and NADRA.

Why digitalization? First, the general public is not aware of it, so they directly visit the concerned
offices. The officers don’t guide them properly, instead, they adopt rent-seeking activities. The
officials ask people to submit their documents to them and give them a lump-sum amount.
Afterward, the officers submit the application and follow the process by themselves. Second, if an
individual does not use speed money and tries to follow the standard method, his application gets
stuck. He is unable to get electricity new connection. The underlying reason is that, prior to
issuance of demand notice, the application file requires the signature of many officials and a survey
of applicants’ property sites. In these procedures, officials create many hurdles and require speed
money. Even if the application is perfectly correct and there isn’t an issue, even the application is
unable to move from one table to another without the time to time visits of the applicant. This is
one example of how digitalization reduces the time cost.

Secondly, we introduce the partial reduction in the number of documents such as hard copy filling
application form, documents from Patwarkhana, etc. it further reduces the time cost 15 to 20
percent. Figure 1 shows that along with digitalization the partial reduction in the unnecessary
number of documents makes transactions speedier in each sector. Finally, if introduce full
elimination of unnecessary steps and documents. It includes multiple visits to offices and
documents such as CNIC copy, attestations, copy of CNIC witnesses, form filling, in-person
submission of forms, documents from Patwarkhana or union councils, proof of residence, so many
similar documents make the process lengthy and costly. In Figure 1, we have shown that the time
needed to execute the transaction reduces from 60 to 80 on average.

Next, using the data of nine sectors, we empirically examine the overall and sector-level magnitude
of sludge for the hypothetical experiment of cutting sludge in the economy. Table 2 presents the
cutting the sludge policy intervention and reduction in time cost.
 Table 2: Cutting the Sludge Policy Intervention and Reduction in Time Cost (no. of days)
Sectors Digitization Partial Elimination Full elimination
Average Effect
-0.222*** -0.188** -0.201**
(based on 8 sectors)
(0.042) (0.022) (0.032)
Sectoral Effects
Agriculture -0.342*** -0.200*** -0.244***
(0.051) (0.054) (0.031)
Consumer Services -0.265** -0.205** -0.440**
(0.162) (0.066) (0.166)
Education -0.148** -0.082*** -0.055**
(0.064) (0.029) (0.017)
Financial Services -0.103** -0.256*** -0.201**
(0.031) (0.051) (0.031)
Health Services -0.184** -0.118** -0.101***
(0.080) (0.033) (0.021)
Real Estate -0.253 -0.190** -0.155***
(0.214) (0.075) (0.039)
Retail Business -0.309** -0.170** -0.139**
(0.166) (0.075) (0.039)
Tourism Services -0.485*** -0.242** -0.166**
(0.156) (0.096) (0.055)
Note: The standard errors are presented in parenthesis. *, **, *** represent the 10%, 5%, and 1% level of
significance respectively.

Our results show that overall, the digitization intervention could reduce 22 percent less time to
execute the transaction. This effect further improves by 19 percent if partially reduces unnecessary
documents and visits to public offices. The full elimination of unnecessary documents further
reduces the 20 percent time required to execute the transaction. However, there is huge variation
across sectors for different policy interventions. Generally, digitization shows a huge effect on the
reduction in time cost. It reduces 35 to 50 percent cost in time spent in performing the transaction.
Particularly, it has huge effects on retail, real estate, and tourism services.

B. POLICY INTERVENTION TO REDUCE MONETARY COST

Besides time cost, sludge in transactions also makes transactions costly. It increases the processing
monetary cost several times high due to several other allied costs such as transportation,
documentation fees, and documentation preparation consultancy, speed money, etc. This section
provides insight into the monetary cost incurred due to unnecessary procedures and documents.
 Figure 2: Cutting the Sludge Policy Intervention and Reduction in Time Cost (no. of days)

Agriculture Consumer Services Education Financial Services

135000140000145000150000155000

120000

14000 16000 18000 20000 22000

40000

110000
Monetary Cost (PKR)

Monetary Cost (PKR)

Monetary Cost (PKR)

Monetary Cost(PKR)
35000

100000
700008000090000
30000
25000

0 1 2 3 0 1 2 3 0 1 2 3 0 1 2 3
Policy Intervention Policy Intervention Policy Intervention Policy Intervention

Health Services Real Estate Sector Retail Business Tourism Sector

150000200000250000300000350000

490000 495000 500000 505000

700000750000800000850000900000

100000 120000
Monetary Cost (PKR)
Monetary Cost(PKR)

Monetary Cost(PKR)

Monetary Cost(PKR)

0 1 2 3 0 1 2 3 0 1 2 3 80000
60000 0 1 2 3
Policy Intervention Policy Intervention Policy Intervention Policy Intervention

Inefficient processing methods and excessive document requirements cause individuals to bear a
lot of financial and opportunity costs. Figure 2 provides a graphical representation of three policy
interventions and the benefit of cutting the sludge. On average, the monetary cost reduces with
only the digitization policy interventions.

It reduces costs by more than 30 percent in all sectors. With partial elimination of some visits to
offices and the preparation of repetitive documents decrease monetary cost more than 50 percent.
Along with processing fee, the allied costs such as transportation, document preparation fees, and
speed money increases the total monetary cost by several times.

For instance, for wheat procurement transactions performed by a farmer, sludge costs a huge
monetary cost. The current obsolete process reduces wheat support prices by 11 percent. The
farmers need to have multiple visits to the bank, the opening of bank account and receiving of
cross-cheque as the payment of wheat after a long process. The most stressful task is documents
preparation for the collection of gunny bags. During this process, the farmer has to visit the
government

Table 3: Cutting the Sludge Policy Intervention and Reduction in Monetary Cost (PKR)

Digitization Partial Elimination Full elimination

-0.178** -0.188*** -0.197***
Average (based on 8 sectors) 0.024 0.022 0.040

Sectoral Effects
Agriculture -0.204* -0.140* -0.148**
(0.114) (0.055) (0.040)
Consumer Services -0.162* -0.151** -0.441*
(0.088) (0.046) (0.207)
Education -0.078 -0.131 -0.111
(1.125) (0.452) (0.259)
Financial Services -0.144** -0.264*** -0.199***
(0.031) (0.049) (0.031)
-0.075** -0.120** -0.111**
Health Services (0.033) (0.048) (0.028)
-0.313 -0.187* -0.122**
Real Estate (0.256) (0.098) (0.054)
-0.074 -0.044 -0.031
Retail Business (0.072) (0.027) (0.016)
-0.602 -0.301 -0.215
Tourism Services (1.069) (0.495) (0.303)

Note: The standard errors are presented in parenthesis. *, **, *** represent the 10%, 5%, and 1%
level of significance respectively.

wheat store and Patwarkhana multiple times. In the documentation process, the farmers have to
take support of speed money to have legal documentation get timely completed. Farmers have to
bear the refundable cost (the price of gunny bags) at this process. All the responsibility of
preparation and transportation of gunny bags lies with the farmers. All these processes bring a lot
of financial burdens.

The empirical results are presented in table 3. It suggests that when the government introduces the
digitization of the process in all 9 sectors, it reduce the monetary cost by 20 percent. It reduces due
to reduction in allied cost including the speed money. It further reduces by 15 percent when
government intervenes to partially reduce the document requirements. At the sector level, the
tourism, real estate, and agriculture sector will more be benefiting sector from these policy
interventions.
 C. POLICY INTERVENTION TO REDUCE OPPORTUNITY COST (PKR)

The complex documentation and unnecessary visits to public offices increase the time cost in terms
of the number of hours and days. Alternatively, it costs the opportunity cost to individuals. In the
data section, we have measured the opportunity cost in terms of Gross National Income.

Figure 3: Cutting The Sludge Policy Intervention to Reduce Opportunity Cost (PKR)

Agriculture Consumer Services Education Services Financial Services

(PKR)14000

(PKR)8000

3500 4000 4500 5000 5500 6000

3000030500310003150032000
Opportunity Cost (PKR)
Cost12000

4000 Cost6000
10000

2000Opportunity
6000Opportunity
8000

0 1 2 3 0 1 2 3 0 1 2 3 0 1 2 3
Policy Intervention Policy Intervention Policy Intervention Policy Intervention

Health Services Real Estate Sector Retail Business Tourism Sector

100000150000200000250000300000

100000

10000 11000

20000
Opportunity Cost (PKR)

Cost (PKR)
Opportunity Cost (PKR)

60000 70000 80000 90000

15000
8000 9000
7000Opportunity

10000
5000

0 1 2 3 0 1 2 3 0 1 2 3 0 1 2 3
Policy Intervention treatment Polciy Intervention Policy Intervention

Figure 3 showing that the processing time for some transaction costs more than PKR 100,000.
Higher opportunity cost also the incentive to make transactions and affect economic activity
adversely. For instance, in real estate, the long processing time and documentation preparation
time, and wait time reflect huge opportunity cost to individuals. It increases the total costs by 20
to 30 percent on average. The high opportunity cost discourages investments, lowers productivity, and
therefore constrains GDP growth.
Table 4: Cutting the Sludge Policy Intervention to Reduce Opportunity Cost

Digitization Partial Elimination Full elimination

Average based on 8 sectors -0.242** -0.219*** -0.227***
0.069 0.032 0.034
Sectoral Effects
Agriculture -0.264 -0.173* -0.195**
(0.214) (0.085) (0.046)
Consumer Services -0.428 -0.303** -0.492
(0.319) (0.131) (0.164)
Education -0.036 -0.023 -0.029
(1.129) (0.490) (0.295)
Financial Services -0.133** -0.279*** -0.214***
(0.033) (0.046) (0.029)
Health Services -0.089* -0.141 -0.148
(0.035) (0.047) (0.028)
Real Estate -0.187 -0.107** -0.070**
(0.109) (0.046) (0.027(
Retail Business -0.133*** -0.169*** -0.136***
(0.008) (0.028) (0.022)
Tourism Services -0.919* -0.459* -0.362*
(0.528) (0.271) (0.152)

Note: The standard errors are presented in parenthesis. *, **, *** represent the 10%, 5%, and 1% level of
significance respectively.

For example, Pakistan Post provides financial services like money orders including vast remote
areas of Pakistan. In the current modern world, PAK-POST adopts obsolete methods to deliver
money orders. It requires a copy of the CNIC of the sender, drawing cash from banks/ATMs for
money orders, visiting the post office, filing printed forms, and waiting in queue for booking the
money order. Secondly, mostly GPOs provide this service. This whole increase monetary and
opportunity cost to individuals. The money order facility should be digitalized. So, the customers
don’t have the need to visit the post office, make CNIC copy and filling up of form, traveling to
post office. All these steps are just a waste of financial resources.

Our results in Table 3 provide the magnitude of the reduction of opportunity cost due to the policy
intervention. In column 1, we observe that digitalization could reduce the major opportunity cost
in the real estate, agriculture, and customer sector. To bring a substantial reduction in opportunity
cost in all sectors, the government has to remove the unnecessary time-wasting document
requirements. Only digitalization will improve the processing time and monetary cost, but it would
not reduce the opportunity cost-effectively.
7. CONCLUSION

The recently developed literature highlights that the excessive time and money spent in
undertaking an activity imposes costs upon the economy in terms of waste of resources and the
opportunity costs incurred. Further, these frictions in transactions cause anxiety, and psychological
costs as well. To reduce the sludge and increase transaction efficiency, we require knowledge and
the extent of this sludge. In the case of Pakistan, PIDE Sludge Series develops tools and collects data
on sludge and opportunity costs incurred on the economic transactions. We employ this data to estimate the
expected economic gains of cutting the sludge. We introduce three hypothetical policy interventions for
Full elimination, Partial Elimination, and Digitization of unnecessary procedural steps. Under these policy
experiments, our findings suggest that only digitalization and partial removal of unnecessary documents
and office visits reduce the time cost by more than 40 percent on average in each sector. It also reduces
monetary cost by approximately 34 percent of the total cost incurred in the existing structure. Further, only
digitalization is not much effective in reducing the opportunity cost. The opportunity cost reduces more
than 60 percent when the government is likely to intervene with partial or full removal of documents and
disintegration among the public offices. This magnitude varies across the sectors with variations in policy
intervention.

Overall, we observe Sludge increases transaction time and monetary costs significantly and therefore
constrains transactions. As GDP is the sum of transactions that are constrained with the increase
in sludge. Therefore, cutting down sludge will increase transactions and hence GDP.

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Emens, E. F. (2014). Admin. Geo. LJ, 103, 1409.

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