Taking donors on board
By Shahid Javed Burki
Monday, 31 January, 2011
OFTEN people ask the question that do the economic policymakers know what they need to do to prevent the economic system from further deterioration?
The answer is that an able and experienced group handling the economy knows, what needs to be done but, none of the men in charge has a strong political base. It is politics that has to be managed to put in place the desired set of policies.
What is required immediately is to restore the confidence of the international community in the process and content of policymaking in Islamabad.There was expectation that the civilians, once in power, will be able to focus on economic policymaking aimed at two goals. One, the economy would become less dependent on external capital flows, relying more on internally generated resources. After all Zulfikar Ali Bhutto, the founder of the party that now holds the reins of power, emphasised independence from foreign influence as an important economic goal.
In his widely read book, The Myth of Independence, he questioned the viability of the Ayubian model of economic development. Strong economic and financial links with the West were an important part of that approach. The Bhutto book was a rejoinder to the one published by President Ayub Khan under the title of Friends, Not Masters.
Ayub had argued that the relationship with the West, in particular with the United States, was based on friendship, not on dependence. The second important goal of economic policymaking would be to provide greater benefits to the poorer segments of the population than was the case during the periods of repeated army rule.
Neither of these two outcomes has been realised. In fact, economic policymaking in the post-military period is in rough waters.This should have been expected since the new political system that was replacing the old military order would have taken a long time to shape. The process is still underway and those involved with policymaking continue to be distracted by the demands placed on them by the developing political system. What was not expected was the quality of governance-- a cause for concern.
A number of assessments point to the deterioration in this respect; the latest report published by Transparency International provides estimates of the level of corruption in the system as perceived by those who operate in it. Pakistan’s position has slipped with reference to other countries.This is an area of considerable concern for international donors. .
It is important to repair the damage since the country will continue to depend on external flows for as long as it is not able to rely on internal resources for financing development.
The current domestic discourse on economics suggests that most of the commentators dislike this continuing dependence on external flows. Their distaste may be understand but the country has to turn to its friends and increasingly to its citizens living and working abroad, to have the economy grow at the rate which would help to maintain social stability and public policy.
Islamabad, therefore, has to play particular attention to improving the quality of governance and demonstrate to the donors – and also to the citizenry – that steps are being taken to improve the system of governance.
Reforming the system of accountability and making example of the people who have exploited their positions for personal gain are some of the measures that need to be adopted quickly.
The other short-term measures relate to the system and structure of taxes.. Pakistan today has the lowest tax-to-GDP ratio among major emerging nations. Improving it is one of the conditions of continuing support by the IMF.The first set of initiatives the governments was required to take related to the reform of the general sales tax. That turned out to politically unacceptable for two reasons, one of which was correct.
The MQM saw it correctly as a regressive tax which was being levied to spare the rich and the well-to-do from making their contribution to the government’s tax revenues. It was right for the MQM, a party that represents the urban poor and the lower middle class, to stress the need for equality in the structure of taxes.The first emphasis should be on getting the betteroff to shoulder their responsibility for paying for de velopment and for financing the legitimate government functions.
In that context, it would be good if Islamabad focuses on the taxes that tap the wealth and income of the rich rather than burden the less well-to-do. It was extraordinary that President Musharaff’s finance minister removed the wealth tax from the list of taxes, further shifting the weight in tax generation away from the rich.There are other taxes that should be levied or levied at higher rates.
The most obvious ones are the tax on urban property and the tax on agriculture.The incidence of former is low and the latter cannot be collected by the federal government for constitutional reasons.
There is no reason why the constitution cannot be amended in order to treat the income from agriculture as any other income.
In so far as the tax on houses is concerned that should be collected by the local authorities. Properly levied and collected, it could become a major source of revenue and help the sub-national governments to carry out the functions that are coming their way as a result of the 18th amendment.
Those who opposed the government’s effort to levy what was called the reformed general sales tax also wanted a careful review of public sector expenditure to eliminate waste.
Where the opposition was not correct was to insist that the reformed sales tax should be collected by the provinces. The tax was envisaged has to be collected at the point of consumption and that is only feasible if the authority for doing it is with the federal government.
What is required, therefore, is a fundamental restructuring of the tax system so that the burden falls more on the well-to-do.What is also needed is a review of all government expenditures so that waste and corruption are eliminated.
These steps can only be taken by an administration focused on economic issues rather than consumed with political concerns. Regime survival is always an important concern in all political systems. In an evolving political system, Pakistan has taken a heavy toll on the attention of the policymakers. That is perhaps proper but it has to be recognised that economic degradation could also affect the government’s longevity.