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mtgondal Tuesday, May 22, 2007 11:12 AM

Direct tax policy principles: a review-I
 
[B][U]Direct tax policy principles: a review-I [/U][/B] By MOHAMMED ASHRAF

[U]ARTICLE (May 22 2007): TAXES - a source of Public Finance: [/U]Taxes are essential to finance public services, but there are good and bad ways to collect them. The design of the tax system can have a significant economic impact and can influence the residents of a country and multinationals in deciding where to invest.

Tax collection has long been a despised activity. But taxes are essential. Without them there would be no money to build schools, hospitals, courts, roads, airports or other public infrastructure that helps business and society to be more productive and better off.

TAX REGIMES:
There are two types of tax regimes - complex and simple as there is no third type.

[U]COMPLEX TAX REGIMES:[/U] Tax regimes, with relatively high marginal rates and which include a number of exemptions and allowances, tend to be less economically efficient in relation to encouraging employment, saving and investment. Such regimes generally also impose higher tax compliance and administration costs which is evident from the Income Tax Ordinance, 2001.

We have experienced Acts of 1918 and 1922, which have lead to the basis of the creation of the Income Tax Ordinance, 1979, however, the Income Tax Ordinance, 2001 was created to make things simple. We know from our experiences about acts and ordinances, burdensome tax systems served as a deterrent and normally lead to tax evasion. According to a World Bank survey, Companies in 90% of surveyed countries [175 countries including Pakistan] rank tax administration among the top five obstacles to doing business.

[U]THE MAIN FACTORS CONTRIBUTING TO THIS ARE: [/U]

1. The large number of business taxes to pay

2. Lengthy and complex tax administration

3. Complex tax legislation

4. High tax rates

[U]SIMPLE TAX REGIMES:[/U] Evidence suggest that simpler tax systems promote economic growth and can help achieve a win:win for the government and industry. To help with paying taxes and implementing reforms, the government and CBR need to consider all aspects of the tax system. All taxes borne and collected by businesses should be recognised, alongwith the related tax compliance costs not just federal taxes.

[U]IMPACT OF TAX RATE OVER COMPLIANCE:[/U] In the ongoing reforms, tax administration and compliance, being significant an obstacle to businesses, needs to be considered as part of the decision on reform. One should not loose sight of the fact that the government imposes taxes to finance public services, but taxes must first be collected and high tax rates do not always lead to high tax revenues. However, the larger the share of informal business activity before reform, the higher the revenue growth after, and it is evident in Pakistan.

On average, Middle Eastern and East Asian countries make paying taxes the easiest. OECD countries impose the smallest administrative burdens and charge moderate tax bills. According to a World Bank study, between 1982 and 1999, the average corporate income tax rate world-wide fell from 46% to 33% while corporate income tax collection rose from 2.1% to 2.4% of national income [Hines (2005)].

This outcome was achieved because more businesses entered the formal economy and because tax exemptions and other tax incentives were reduced or eliminated.

Developed countries tend to have lower business taxes and less complex tax administration processes. Simple moderate taxes and a fast, cheap administration mean less hassle for businesses - as well as higher revenues.

In contrast, Developing countries tend to use business as a collection point, charging higher business taxes. Latin American and South Asian countries impose the heaviest burdens, mainly because of high compliance costs. Africa follows, largely because of high taxes.

As stated earlier, Developing countries try to levy the highest amount of tax on businesses on the premise that these high taxes are needed to fund public services and correct fiscal deficits. However, the evidence suggest otherwise. Higher rates typically do not lead to higher revenues in developing countries. Instead, they push businesses into the informal economy. As a result, the tax base shrinks and less revenue is collected.

Lower rates work best when their administration is simple. Growing evidence shows that tax reforms creates more vibrant businesses and this is evident in Pakistan. A smaller tax burden encourages firms to invest. However, they are undermined by exemptions that the shrink tax base. I would like to share an adverse experience, tax revenues has fallen in Uzbekistan, where the enthusiasm for income tax cuts was not matched by efforts to improve tax administration and expand the tax base.

RECENT REFORMERS TAX RATE CUT AND HIGHER REVENUE TARGET:

=========================================================
Ghana Exceeded its mid-year revenue targets
Despite significant cuts in Corporate
tax rates in the last two years
Albania Corporate tax revenue rose 21%
after the rate was cut
Moldova Corporate tax revenue rose 28%
after the rate was cut
Latvia Corporate tax revenue rose 37%
after the rate was cut
Romania Corporate tax revenue rose 8% in real
Terms after cut in tax rate In 2004
=========================================================

Economic growth in these countries is a factor in the increased revenue but compliance is also up [Source: World Bank (2006)]. Overall growth is also higher with lower taxes and better collection [Lee and Gordon (2004)].

Overall growth is also higher with lower taxes and better collection. And with tax incentives aligned to encouraging work, more firms and more jobs are created. One study shows a cut of one percentage point in corporate tax rate is associated with up to a 3.7% increase in the number of firms and up to 1.1% higher employment [Goolsbee (2002)]. Tax reforms inspire political debate and can be hotly contested. But both businesses and government benefit when taxes are simple and fair and set incentives for growth.

TRANSPARENCY and CORRUPTION: Transparency is the key - Governments need to be accountable for how taxes are spent. Businesses will potentially be more willing to pay taxes if they can see the benefits of improved public services and infrastructure.

Businesses are more willing to pay taxes if they see that the money is used to improve public services. Yet many developing countries with high tax rates fail to improved business infrastructure or education and training - two things that employers care about.

Across countries, higher taxes payable are not associated with better social outcomes, even allowing for country income levels. They do not increase government spending on health and education, raise literacy or life expectancy or lower child mortality, nor are they associated with better infrastructure and other public services.

Burdensome taxes do, however, generate other undesirable outcomes. They are associated with more informality, as entrepreneurs often choose to avoid the formal system altogether and operate underground. They also breed corruption as every point of contact between a bureaucrat and an entrepreneur could present a danger of bribery and confusion on voluminous, often contradictory, rules, which may create room for discretion.

Simplifying the tax regime by reducing tax rates and eliminating exemptions is the main way to reducing corruption in the tax administration. According to a World Bank survey, Georgia introduced major reductions in tax rates and simplifications to the tax system in 2004 - and has seen a drastic fall in perceived corruption of tax officials. Georgia showed the sharpest drop in perceived corruption among 27 transition economies.

RECENT REFORMERS - TAX RATE CUT AND CORRUPTION:

=========================================================
Georgia - Previous level 44% Current level 11%
Romania - Previous level 14% Current level 8%
Slovakia - Previous level 11% Current level 5%
=========================================================

[Source: World Bank (2006)]

All the above referred factors, tax rate cut and corruption, tax rate cut and transparency, tax rate cut and increased compliance etc present a good case for reduction in corporate tax rate.

[U]TAX COMPLIANCE COST:[/U] Businesses need to understand and communicate their total tax contribution, so that they are more able to manage and control it and demonstrate the full extent of their contribution made to public finances. I would suggest using indirect tax expense and taxing compliance cost as a separate head of expense in the profit and loss account instead of rent, rate and taxes.

A better way to meet revenue targets is to encourage tax compliance by keeping rates moderate. Russia's large tax cuts in 2001 did exactly that. Corporate tax rates fell from 35% to 24% and a simplified tax scheme lowered rates for small business. Yet tax revenue increases - by an annual average of 14% over the next three years. One study showed that the new revenue was due to increased compliance [Ivanova, Keen and Klemm (2005)].

It is not just businesses that gain from reforms. Streamlining taxes also brings savings for the government. A complicated tax system costs a lot of money to run - funds that could be better spent on education, health care and infrastructure. In Denmark, one Kroner spent on tax administration generates 113 Kroner of tax revenue. In Hungary, one forint produces only 77 and in Mexico one peso produces only 33. Such data is missing from performance measurement and must include the loans and grants received.

[U]COMPLEXITY AND ITO, 2001:[/U] A particularly worrying consequence is that with the sheer volume of tax legislation, no one individual can possibly read all of it. So the days of a tax director being confident of spanning all the relevant parts of the tax code seem to have all but disappeared. Embodying all previous SRO's of section 50 of Income Tax Ordinance, 1979 by virtue of section 239 (10) did the rest.

Similarly, at least as regards advising large to medium size corporate bodies, the ability of a single tax advisor to span all the relevant tax legislation is circumscribed, hence, increased relevance of specialists and sub-specialists.

This leads to an at least two tier market - those who can afford the necessary advice, and those for whom such advice may be of only marginal benefit, on a cost/benefit analysis. It is also leading to a situation where the primary tax legislation is being read by fewer and fewer people.

The boldest reform is to simplify tax law so that every business faces the same tax burden - with no exemptions, tax holidays or special treatment for large or foreign businesses. Income Tax Ordinance, 2001 has also started in that way! But when hard times come and government needs revenue, tax rates are froze at the current level.

This is unpopular, and large or well-connected businesses usually obtain special treatment. Soon the tax law becomes riddled with exceptions, generally at the expense of small businesses, which have the least ability to lobby.

Often they are pushed into the informal sector. Few reformers dare eliminate exemptions, like Egypt - 3000 Exemptions.

To conclude, the Central Board of Revenue needs to reflect on the likely deterrent effect of the ever increasing complexity of the Income Tax Ordinance, 2001 and the resulting probable reduction in their international competitiveness. Ultimately, when tax legislation becomes too voluminous, compliance drops more through ignorance than deliberate evasion.

SIMPLER TAX REGIME with CONSOLIDATED TAXES:

=========================================================
Number
---------------------------------------------------------
Corporate Income Tax Payments 5
Labor Tax Payments 25
Other Tax Payments 17
Total Tax Payments 47
Hours
Compliance Time - Corporate Income Tax 40
Compliance Time - Labor Tax 40
Compliance Time - Consumption Tax 480
Total Compliance Time 560
Corporate Income Tax - Average 27%
Statutory Corporate Income Tax 37%
Labor Taxes - Average 14.6%
Other Taxes 1.8%
Total Tax Rate 43.4%
=========================================================

Consolidating taxes is also a worthwhile reform.

For instance, Pakistan has more than one labour tax, yet such taxes are typically based on gross salaries, why not unify them? Tax offices can then distribute the revenues among government agencies Slovakia did just that.

A practical problem arose in many countries where social security agencies here reluctant to part with their powers - especially if there was a chance that tax offices won't give them their share of revenue.

To gain their trust, an automatic separation of revenue can be introduced so that there is no room for discretion through codes on tax payment receipt. Moreover, stamp duty needs to be collected by the Central Board of Revenue along with CVT on tax payment receipt.

=========================================================
Recent Reformers - Cut in number of Taxes
---------------------------------------------------------
Georgia [2004] - Number of taxes from 21 to 9
Russia [2001] - Number of taxes from 20 to 15
Iran [Recently] - Number of taxes from 3 to 1
=========================================================
[Source: Georgia Business Council Interview and FIAS (2004)]

Reforms should also target minor taxes like stamp duties - which cost money to administer but do not raise much revenue - or particularly distorting taxes. Small businesses have a particularly hard time dealing with multiple tax payments. Why not help them by making their interactions with the tax agency simpler? The Central Board of Revenue Chief should work with the federal and provincial ministries in this regard.

(To be continued)

mtgondal Tuesday, May 22, 2007 02:49 PM

Road To Economic Progress
 
[B]Road To Economic Progress [/B]

[I]Amrit P. Shrestha Tuesday May 22, 2007
Source : GORKHAPATRA [/I]

What the modern industry needs is better infrastructure. Traditionally, infrastructure services across the world were provided by governments in limited areas like airports, electricity and roads. Today infrastructure must improve in all parameters, which requires immense financing through external and internal channels. Without basic infrastructure development, no sector can achieve any sort of target.

To keep the wheels of the economy running, countries must make enormous progress in attracting private investment in the infrastructure sector, as the government alone cannot invest huge amounts in it. In order to send the right signal to international investors, there is a burgeoning need to create sophisticated infrastructure in selected key cities and projects as seen in Beijing, Shanghai and Kuala Lumpur, which have emerged as the investor's choice in the last three decades.

Infrastructure needs three key inputs - large amounts of money, skilled manpower and selected projects. Governments must realise that the only way to become the nation's doorway to economic zoom is to give new thrust to infrastructure development. Thus, the Essential Facility Doctrine has been recognised by most of the developed and developing countries. Australia, Singapore, South Korea and India have been adopting the doctrine.

Investment requires long-term funds with a long payback profit period. More importantly, Public-Private Partnership (PPP) is a signal to investors in general that the policy framework is sound and environment conducive for investment. Such models have to be initiated in key sectors like roads, airports, power and tourism.

Nepal lacks the necessary physical infrastructure to qualify as an international investment centre. Investments must have easy access, and there should be well-developed infrastructure within acceptable parameters. At present, we must have suitable strategies to convert challenges into opportunities. Better infrastructure helps in alleviating poverty and expanding the industrial base because accessibility to services improves as a result of it.

Currently, GDP's contribution to infrastructure development is less than 4 per cent, which is less than the share of our neighbouring countries. Actions must be accelerated on the following track, to help build trunk infrastructures in the country. First, Modernisation or industrialisation require massive expansion of national highways, airports, electrification and telephones linking every village with the urban areas. Ground water exploration, minor irrigation, water supply and sanitation are other priorities.

Highways form the economic backbone of the country. Likewise, rain water harvesting and human resources management must be developed, which is sorely lacking in the country. Given the size of the country, air travel has become the swiftest mode of transport. Hence, Nepal should take bold steps to expand and upgrade its airport infrastructure.

Second, among the bottlenecks to achieving growth in the country is electricity supply. Power and its allied sector play a crucial role in economic development. Electricity is the lifeline of our lives as its use ranges from mundane applications to complex tasks and operations. Our productivity is affected because of this.

Third, the tourism industry could gather momentum if the government plans innovative promotions. Tourism should introduce new products such as monsoon tourism, helicopter tourism and the like. Such programmes will attract visitors, especially from India and Europe. With Nepal becoming a business hub especially for tourism, regional disparity can be minimised upto a certain extent. Likewise, growth of tourism will help enrich the lives of traditional workers and artistes. Unfortunately, lack of roads, accommodation, safety measures, well established communication systems and hospitality management centres are some of the hurdles in its promotion.

Fourth, building IT Parks in important cities can offer a unique confluence of advantages - robust physical infrastructure, power and data connectivity and trained technical manpower. All this will effectively reduce the operational cost.

Fifth, there is a need to hand over the entire infrastructure development to the private sector with no political interference. There should be no bureaucratic controls over enterprises. They should not be asked to get approval for minor decisions.

Sixth, an act to form an independent Infrastructure Authority, similar to the National Highways Authority in India, Afghanistan, Laos and the Philippines, has to be announced without delay. Meanwhile, a vision paper with priorities and national consensus must be flashed, emphasising on infrastructure development to attract investors and also to make the entire cycle of investment, productivity and wealth creation sustainable.

Seventh, special packages of tax incentives must be introduced as a tool to encouraging private enterprises or an undertaking engaged in the development of infrastructure facilities. This is particularly important for infrastructure developing companies.

[U]Human development[/U]
Most importantly, the overall environment needs to be free from prevailing corruption and petty-mindedness. For the common man, good economics is all that he cares. The government should accelerate the process of human development by delivering services in electricity, transport, water and sanitation that the poor need in order to live and participate in economic growth.

A leader of outstanding merits, efficient bureaucrats and a graft-free culture are the invisible infrastructure to race with the modern world. Let us start from a good today to a better tomorrow.
([I]Shrestha is ex-director of the Department of VAT and a financial management and VAT expert deputed in Tanzania by UNDP)
[/I]

Yasser28 Wednesday, May 23, 2007 12:05 AM

[B][COLOR="DarkOrchid"]Public-private Partnership[/COLOR][/B]

[I]By Dr Noman Ahmed[/I]

IN the second week of this month, the deputy chairman of the Planning Commission announced several measures under consideration by the government to facilitate the role of the private sector under partnership arrangements. The proposed sectors included energy, roads and highways, aviation and airports, ports and shipping as well as water and sewerage.

The emphasis on such a development management structure has evolved owing to several reasons. The capacity of public sector institutions has declined sharply, even in such domains where they were the sole players. Under the overwhelming influence of corporate and venture capitalists, the government has been forced to open up those sectors for entrepreneurship which were traditionally the spheres of public sector operation.

Above all, there is a drastic paradigm shift in the organisation and working of the state. It is reducing its role from a provider and custodian to that of a facilitator. The rules of the game obviously cannot be determined by the government alone. The rising influence of the private sector has led the country to reappraise the entire state structure. Many issues have become crucial in this respect.

The context and background of public-private partnerships has to be properly understood. A public-private partnership is an institutional concept introduced by international donor agencies as an alternative to public service provision. It exists in various forms depending upon the objectives of the project/programme, socio-economic conditions, and institutional capacities.

Public-private partnership, in a conventional sense, can be defined as a contractual arrangement between an agency or unit of the public sector and a private organisation for a defined scope of services.

There are several pre-conditions that can lead to public-private partnership as the choice for service delivery or enterprise development. One, it requires recognition at the macro level for it to be useful in service delivery. Two, it is normally effective in contexts where free market practices have an acceptable background. Three, it requires an aware clientele that considers the provision of an urban service to be a chargeable product depending upon the nature of production. Four, it needs a clientele that is socially and economically stable enough to pay for the services. Finally, it needs a capable private sector that has the capacity to efficiently provide and sustain the contracted part of the service to the identified clientele.

There are several pre-requisites to be considered before a public-private partnership approach can be adopted. Experts say that a favourable economic environment is a basic criterion. Low inflation rates, high GDP growth, rising real incomes and limited value of unemployment and inequality are the usual parameters.

But economists and experts from other domains also point out that stakeholders can twist and turn the value of these variables to suit their working agenda. Evidence from independent economic analysis has often validated this objection.

What is more objectionable is the manner of economic decision-making. Public-private partnerships can be successfully created, and function where the right institutions are involved in determining priorities and choices after obtaining inputs from the concerned stakeholders. However, when decisions are taken on a personalised basis that bypasses institutions, partnerships are not likely to be sustained.

At present, an extremely centralised and non-transparent decision-making process is involved where neither the institutional viewpoints are incorporated nor any recourse to the concerned laws taken.

A potential investor seeks a direct appointment with the prime minister. He arranges an attractive computer presentation for his proposed venture. If the prime minister or his representatives are satisfied, they send the investor/venture capitalist to the presidency. Once presidential approval is obtained, the decision is communicated to the concerned institutions, ministries and authorities to extend full cooperation to the approved venture in the shortest possible time.

Merit, transparency, rules and regulations are all mutilated in the name of investment and progress. While the entire country is flooded with projects approved in this manner, Karachi has borne the brunt of these products of short-sightedness and corruption.

Public-private partnerships require corresponding inputs from several interest groups to make them sustainable ventures. The foremost among them are public sector institutions. As a norm, partnerships are created in a bid to hand over certain roles, responsibilities, services and opportunities controlled by public institutions to private groups.

Institutional culture and psyche in our context is such that every public body wishes to acquire more and more control on various domains, even those that fall beyond their rational jurisdiction. We find port authorities making roads and underpasses, air force chiefs supervising and controlling the game of squash, housing authorities initiating desalination and power plants and the armed forces launching institutions of higher learning.

It becomes very painful for these institutions (and their heads) to part with control and authority. Whenever they are forced to do so, it is done with reluctance. Thus the spirit of partnership is violated.

As observed, the offers of partnerships emanate from aggressive venture firms with little association with the local private sector. The sustainability of these ventures is greatly questionable because after the foreign groups leave, the eventual responsibility to run the affairs automatically falls on the local private sector.

The rising interest shown by investors from Dubai, Malaysia and Singapore shows that they intend to exploit the most lucrative avenues with the maximum of state guarantees. The potential affectees in the process are not consulted in these decision-making exercises. Public criticism is on the rise with regard to almost all such deals and contractual arrangements. In other words, these partnerships are finalised as clandestine marriages of convenience rather than equal opportunity enterprises.

It is generally believed that by instituting a regulatory body at the national scale, a level playing field can be created for the participating stakeholders. This assumption has very little validity. The regulatory environment can be effective if it is a logical continuation of an integrated institutional set-up. There is little that a regulatory authority can do when the basic decisions are taken arbitrarily without involving the concerned institutions.

For instance, it is the mandate of the Planning Commission to review and recommend development proposals. As is routine, it is asked to rubber-stamp the recommendations of the prime minister or president without objective assessments. Most regulatory bodies are located and function in the capital. Projects and programmes are being undertaken all around the country. Thus, it is impossible for the common people and even certain stakeholders to visit and participate in the proceedings.

The true spirit of public-private partnerships can only be achieved when investment opportunities are worked out openly, decision-making is undertaken through public institutions, economic, social and environmental impacts are outlined clearly to identify the beneficiaries and those affected and the participants are made to accommodate the legitimate concerns of stakeholders.

The government may consider using the partnership approach in a strategic manner. The input of the private sector can be effective if applied to stimulate activity in dormant sectors. It can also be useful in creating solutions for non-conventional sectors such as housing for low-income groups. Merit in business and open competition are two attributes which can be made the virtues of public-private partnerships. Whenever any contractual arrangement has to be finalised, it must be done through the open invitation of proposals. This helps build up the trust of stakeholders, and breaks cartels and monopolies. It also strengthens the trust of ordinary private sector operators and leads to the scaling up of local entrepreneurs.

If the capacity and robustness of the local private sector is achieved, it would be a significant achievement of the partnership approach. The government may be convinced to use this mechanism for achieving long-term visions in need of innovative input. If handled appropriately, a worthwhile outcome can become a reality.
[url]http://www.dawn.com/2007/04/28/ed.htm#4[/url]

Yasser28 Wednesday, May 23, 2007 12:10 AM

[B][COLOR="DarkOrchid"]Punjab’s Rich Inheritance[/COLOR][/B]

[I]By Shahid Javed Burki[/I]

IN the first article of what I would like to call “the provincial series”, I suggested that the next big move in the development of the Pakistani economy must come from the provinces. For this to happen, Islamabad must grant greater autonomy in economic decision making to the provincial capitals, and the provinces, in turn, must permit greater space to the newly created local administrations.

These moves are needed to bring the government closer to the people and make it more accountable to the citizenry. No new laws and rules are required. The Constitution has provided for a reasonable amount of provincial autonomy and the Local Government Act of 2001 has provisions for transferring authority to local bodies to raise resources for economic development. What is missing is the political will to carry out the intent behind these constitutional and legal provisions.

Change is always difficult, especially in societies that have weak institutional foundations. It is resisted by those who see advantages for themselves in the maintenance of the status quo.
What I found particularly impressive was the move the administration has made from managing finance and development in a passive way to defining medium-term frameworks for development and fitting finance into it. This allows the provincial government to look at some of its financial liabilities in the context of development needs and plan for dealing with them.

Among those the administration is actively dealing with are pension and GP fund liabilities. The approach it is adopting will not only reduce the burden the government currently carries but it will also deepen the financial markets by creating new instruments of finance.

I have ideas for the 13-year period between now and 2020 which is the end point for the government’s programme. My vision factors in the province’s inheritance, its history since the partition of the province in 1947, and its endowments to a greater extent than the official approach. I will begin by discussing the province’s rich inheritance.

History is important not only to understand the past but also to prepare for the future. In focusing on some aspects of Punjab’s history — recent history, not history of the distant past — I will highlight only those aspects that have relevance for the present and are pertinent for discussing the future.

Several of these are important. They include the province’s demographic inheritance, skill endowments of some of its people, its irrigation system and the agriculture it supports, its system of governance, and the trading ties it once had with areas that are now part of India. Since these legacies will have a significant impact on the future development of the province, it is my suggestion that in designing public policy those responsible for taking decisions should remain fully cognisant of them.

The first of these legacies is concerned with demography — the movement of people into the province and from the province into many parts of the world. Punjab was formed by many waves of migration. These movements of people have a great deal to do with the character of the people who are now the citizens of the province; in particular with the way they view economic and social opportunities.

The two migrations that matter the most for today’s Punjab occurred at the mid-point of the British rule of the province and at the very end of the century-long colonial domination of the province. The first brought tens of thousands of small farmers from the eastern part of the provinces — the parts that are now the Indian states of Punjab and Haryana — to “colonise” the land the British had prepared for cultivation by bringing water for irrigation from the Indus River system.

One consequence of this wave of migration was to juxtapose small and medium scale farming with the large farms that were then common in the province. This positioning of small and medium farms alongside large farms is both a reason for the underdevelopment of the important sector of agriculture as well as the reason for hope for the future. I will return to this point later in this series of articles.

The second wave of migration was much larger and much more significant than the one before. It brought, by my estimate, millions of refugees from east Punjab to west Punjab after the British decided to leave their Indian empire in the hands of the successor states of India and Pakistan. It is possible to estimate the number of people involved in this wave of migration by using censuses for 1941 and 1951 for the various provinces of India and Pakistan.

I estimate that while five million people left Pakistan for India, about the same number of people came to Pakistan’s Punjab from India. In the late 1940s, more than one-quarter of Punjab’s population of about 19 million was made up of refugees. These refugees were settled in both the urban areas and the countryside. They brought with them skill sets and social and cultural outlook that were different from those that were prevalent in the province before it became a part of Pakistan.

While the question of the influence this migration had on Punjab’s social and cultural development is a subject for sociologists and anthropologists, it has also relevance for economists and for the economy. Much of the economic dynamism that has become the defining part of Punjab’s urban landscape — in particular of the dozens of small towns that straddle the roads connecting Lahore with Gujarat in one direction and Lahore with Faisalabad and Sahiwal in the other — is largely the consequence of the enterprise of the people who came from the eastern parts of the province and settled in these towns.

They were given the businesses, lands and houses the Hindus and Sikhs had left behind. They could have made greater contribution to the economy’s growth and to the direction of social change had the policymakers better understood their potential. The province’s second legacy, therefore, is the direct outcome of the wave of migration that accompanied the partition of Punjab in 1947.

In an article published several years ago in “Asian Survey”, a journal of the University of California, I suggested that the green revolution that brought considerable prosperity to some parts of the Punjab would not have been possible had it not been supported by the remarkable engineering skills on display in the province’s many small towns.

These towns supported the development of the tubewell technology and the mechanisation of agriculture, two of the many developments associated with the green revolution that brought profound economic and social change to Punjab’s countryside. It was these skills that were behind the remarkable development of the electric fan industry in the towns of Gujranwala and Gujarat. This industry later became the foundation of the electric appliances industry in the area which flourished before it was hit by competition from China.

A senior official from Islamabad, while speaking at the Punjab Development Forum the other day, told his audience that the Chinese had agreed to set up an industrial zone near Lahore of the type that energised China’s east coast and made it the work horse of the world’s industrial production system. Much of the consumer electronic goods sold in the West these days are made in the industrial zones strung along the eastern coast of China from the city of Dalian in the north to Shenzen in the south.

He said that that was the first time the Chinese were setting up such a zone outside their country and if the one in the vicinity of Lahore succeeds, they may repeat the experiment in other parts of the world, possibly also in Pakistan. He did not reveal what kind of industries will be established in this estate.

If the agreement with China allows Pakistan and the province of Punjab to influence what kind of enterprises get located in this zone, then it would be useful to build on the skills already available and the experience gained by the industries that are already operating in the area. The engineering skills that are available to the province need to be more fully exploited as a resource.

By focusing on two of Punjab’s legacies — the fact that this province was formed by people constantly on the move and that one set of the citizenry when it came to this province brought extraordinary engineering skills with it — the provincial government could accelerate the rate of economic growth and social change.

I have tried to illustrate how good knowledge of inheritance can make a difference to the content of public policy by suggesting that the engineering skills possessed by a segment of the population could underpin the development of a vibrant manufacturing sector.

Edited version from Dawn by Yasser

Yasser28 Wednesday, May 23, 2007 12:13 AM

[B][COLOR="DarkOrchid"]How Critical is American Assistance?[/COLOR][/B]

I WELCOME your editorial (April 23) on my article (April 16) as it triggers a debate on this important subject. Let me make three submissions. First, my article was an analytical research piece and not intended as advocacy for policy change. I am no longer a policymaker but a humble student of economic development, who believes that we should inform and educate the public at large about the facts and analysis rather than confuse them with subjective opinions.

Our intelligentsia has the perception that we owe everything to the US largesse and the moment it is withdrawn we would be in deep trouble. I wanted to disabuse them of this widely-held notion with the help of objective facts and analysis. I realise that policy formulation is a more complex process that takes into account many factors and interests into consideration but the data and analysis are the staples for this process. I am not for the moment advocating any change in our policy but presenting the costs and benefits of this policy.

Second, there are many countries in the world which have excellent economic and political relationship with the US without receiving any official assistance that is tied to the narrow political interests of the US. I believe that we should decouple our official assistance and strengthen other economic relationships with the US on the pattern of these countries.

I argue that we should intensify our trade, investment and technology transfer with this superpower without being constantly threatened by the editorial writers, think tanks and congressmen. I am a great believer that we can benefit from this kind of relationship. The US administration and the people have been more than helpful to us and we should continue to reciprocate with warmth and friendship.

Third, I do not foresee any downgrading of our credit rating or any other adverse impact if we decide at any point of time that we would unilaterally, respectfully and politely forgo the $750 million of Congressionally-appropriated aid. The international financial markets and domestic investors would consider this as a sign of strength of the economy as the uncertainty and unpredictability associated with this aid will no longer be an issue in their minds.

Our external debt ratios are projected to come down further despite the trade and current account deficits (these are by no means worst: we had much larger deficits in the 1970s, 1980s and 1990s) and the Gulf states have excess liquidity looking for higher returns. There are very few countries that can provide 20-25 per cent annual returns with four-year payback period. If the economy continues to be stable and growing, the foreign direct investment flows and international financial market access will not be much of a problem. I hope that this letter will help to further advance the debate on the issue.

DR ISHRAT HUSSAIN
Former Governor, State Bank of Pakistan, Karachi
[url]http://www.dawn.com/2007/04/27/letted.htm#1[/url]

Yasser28 Wednesday, May 23, 2007 12:14 AM

[B][COLOR="DarkOrchid"]International Political Economy[/COLOR][/B]


YOUR editorial (‘How critical is American assistance?’, April 22) concludes that “whether one likes or not, the overwhelming financial clout the US wields at present in this globalised world is a fact of life. It would, therefore, be advisable for our economic policy makers to think twice before taking a leap in the dark.”

Nothing could be farther from the reality of the international political economy today. As some one who worked for the world’s biggest bank (an American bank) for nearly 20 years and managed its over $1 billion emerging markets equity portfolio across the developing world, I cannot but strongly disagree with both your conclusion and the merits of the argument you have made. To be brutally frank, the conclusion displays lack of in-depth analysis of Pakistan’s situation and knowledge of the changing dynamics of international political economy.

Let me first address the point of international political economy. In a global context, the greatest change in the dynamics of international capital flows and their importance to the developing countries since the early 1990s is the fact the global private investors (companies, funds, etc.) have replaced the US/other G5 countries, the World Bank and other multilateral institutions as the largest and dominant source of financing their growth and development. Yet, many analysts here, in the government as well as in the media, appear to be living in the 1980s.

The occompanying data illustrates this point (See table).

In summary, while the emerging economies no longer are net recipients of ‘aid’ from multilateral institutions and western governments, they managed to earn a current account surplus of $317 billion in 2006 while receiving $501 billion in investment capital from international private companies, funds and banks. At the same time, they repaid $25.7 billion in the so-called “aid and loans” to the US, western governments and multilateral institutions.

This has been the case across all the developing economies from Asia to Eastern Europe to Latin America. Today, due to massive repayments from the developing world, the IMF (a proxy for the US) loan book has shrunk, with Turkey accounting for nearly 40 per cent of its total loan portfolio as most other countries have got rid of its loans by financing their needs through international private capital markets. Even Ghana and Congo are able to raise private capital today due to a huge change in the nature of the world’s financial flows.

As regards the comments about Pakistan’s current and fiscal deficits, it is simply wrong to look at the absolute numbers as a measure of anything. Both current account and fiscal deficit are not at their highest in terms of their percentage to the GDP. Most of the American assistance goes to the military and its impact on the economic development is highly questionable due to reasons I have articulated in various articles written for Dawn’s EBR weekly during the last couple of months.

Actually, it may even be better for the development and reforms process if we reduce the inflow of ‘aid’ and mobilise domestic and international private capital as many other Latin American and Asian countries have successfully done since the early 1990s. A mere five-point increase in tax-to-GDP ratio from 10 to 15 per cent would eliminate any need for official (US or not) aid, would bolster confidence in our debt repayment capacity (hence credit ratings) and mobilise resources for sorely needed ‘real’ development expenditure (i.e., infrastructure and education) and not military hardware.

YOUSUF NAZAR
Former Head of Emerging Markets, Citigroup
Karachi

Sources of Emerging Market Economies’ External Financing

(billions of U.S. dollars)

2004 2005 2006

Current account balance 150.2 257.8 317.0

External financing, net:

Private flows, net 348.8 509.3 501.8

Foreign Direct investment, net 156.0 198.7 185.3

Portfolio investment, net 39.1 55.8 69.7

Commercial banks, net 60.8 141.8 143.3

Non-banks, net 92.9 112.9 103.4

Multilateral institutions -15.0 -40.4 -25.7

Governments -2.3 -18.1 -22.5
[url]http://www.dawn.com/2007/04/28/letted.htm#1[/url]

mtgondal Wednesday, May 23, 2007 09:58 AM

[B]ADB's struggle with success[/B]

The Asian Development Bank was founded four decades ago to help lift Asia out of poverty. At the time, per capita GDP in the region was less than $170; the 31 founding countries sought to create an institution that would help them gain access to scarce capital and speed their development.

Today, average income is six times that level, the region is an engine of the global economy, and the ADB's roster has more than doubled to include 67 countries. Asia's changing profile obliges the ADB to change as well. But as it adapts to new economic realities, it is vital that the institution not lose sight of its core mission -- reducing the number of Asians who continue to live in poverty. The bank must balance the needs of its poorest constituents with those of its more affluent members.

Asia is best characterised by its diversity. It has some of the richest and most dynamic economies in the world -- Japan is one of the world's most affluent nations, while South Korea and the other "tigers" and "dragons" of East and Southeast Asia are setting the pace for economic growth -- and simultaneously is home to some 1.9 billion people living on $2 a day. It produces some of the most advanced technologies in the world, while including some nations whose agricultural sectors have not changed for centuries. Its countries include some of the largest in the world -- India and China -- and some of the smallest (Singapore). While the ADB was formed to help its members acquire capital for development, today the region holds an estimated $3.1 trillion in currency reserves and even provides financing in some developed nations.

That diversity creates entirely new challenges for the bank, as the problems of middle-income countries are very different from those of poor and undeveloped nations. Moreover, the ADB estimates that extreme poverty -- people living on less than $1 a day -- in the region will be eradicated in 15 years. Thus, the bank spent its 40th annual meeting, held earlier this month in Kyoto, debating the appropriate mission and policy mix for the institution.

A panel of experts has devised a plan for a "new ADB" that will shift its focus from poverty reduction to environmentally sustainable growth, regional integration, and technology and knowledge management. In addition, the panel recommended paying more attention to infrastructure development as well as financial sector improvement to better use those growing currency reserves.

While some ABD members and supporters applaud the attempt to adapt to the evolution under way in the region, others are concerned that shifting priorities will unduly harm the millions of Asians who continue to live in dire poverty. With countries like East Timor, Laos, Cambodia and Afghanistan still grappling with the very issues that inspired the creation of the ADB, the prospect of a shift in strategy risks their continuing marginalisation.

ADB officials insist that will not happen. President Haruhiko Kuroda told members that the proposal "does not mean the bank can dilute its devotion to poverty reduction." Key shareholders, such as Japan and the United States, agree. Even reformers acknowledge that widening inequality within the region is dangerous.

As Mr Kuroda pointed out, large income disparities within the region "threaten social cohesion and puts at risk the process of growth itself." While political integration has been slow, the economies of the region are deeply intertwined and one of the most important lessons of the last decade is that problems in one state can quickly spill over into others -- and not only neighbours. All countries ignore the poor and the disadvantaged at their peril.

Of course, reform is not an either-or proposition. Infrastructure development is needed in all Asian countries, even economic powerhouses like Japan and South Korea. By one estimate, Asia needs more than $3 trillion in infrastructure spending over the next decade. Given growing trade and production networks within the region, the regional gain from national investments is hard to miss. Investments in education will always pay off, as will more attention to health care and clean governance. Similarly, emphasis on sustainable development will benefit all ADB member countries; breakneck growth only postpones the day of environmental reckoning and is sure to incur greater costs over time.

Japan has agreed to set up two funds at the ADB to help fight global warming and to facilitate investment in the region. Tokyo will provide $100 million to the bank and two billion yen in loans over the next five years to jumpstart these efforts. The money is useful, but more important is a strategy that ensures that it is put to good use.

The Japan Times
May 22

mtgondal Wednesday, May 23, 2007 10:03 AM

[B][U]Direct tax policy principles: a review-II [/U][/B] By MOHAMMED ASHRAF

ARTICLE (May 23 2007): WHT AGENT RISK:Withholding Tax agents' costs have three folds - taxes borne, taxes collected/deducted and tax administration. The question arises whether Withholding Tax agents are properly focused on managing these significant tax costs. Bear in mind that risks in the tax arena generally come in many guises and Withholding Tax risks are no different.

==================================================================
Operational Risk - The possibility of processing errors
Which because of volume involved could
lead to significant additional costs
in the shape of additional tax.
Compliance Risk - The possibility of late submission with
consequent penalties
Reputation Risk - Making errors in the employment tax
arena is unlikely to Lead to adverse
external publicity, but it could impact
on staff relations
==================================================================

Some might argue that these risks have always been present. However, it is apparent that tax authorities see the Withholding Tax compliance arena as a fruitful area for their efforts. It is suggested that companies and governments alike need to consider them and make sure that they factor them properly into planning. The important issue is transparency through WHT Audit and that they are properly reported.

The recent mechanism of filing of Withholding Tax forms does not seem an effective system as accountants are normally busy in management reporting during the first 10 days of the month and this includes monthly closings, apart from the preparation of monthly profit and loss accounts.

It is suggested that the filing date of the 15th of every month needs to be extended to the 25th of every month, quarterly statements needs to be submitted after one month and annual statements after three months, instead of the current two months. However, these statements need to be submitted branch-wise without any need of consolidation, alongwith the Cash/bank ledger of every branch and a summary of adjustments of payments involving the deduction of tax.

Concept of adjustment needs to be specifically incorporated into the Withholding Tax sections of the Income Tax Ordinance, 2001. However; this needs to be reflected in the Foreign Exchange Manual of Pakistan. Any amendment in this regard needs to be made after close consultation with the State Bank of Pakistan. This will also provide ease to the local and multinational businesses. However, transaction involving foreign exchange needs to be reported to Central Board of Revenue and SBP.

RECONCILING PRINCIPLES FINANCIAL ACCOUNTING AND TAX ACCOUNTING The IASB is developing a financial reporting matrix, whereby the various components of a company's result are split broadly into two categories - Operating income which comprise of cash or near-cash items and valuation adjustments, leading to a total performance column described as comprehensive income. This future format of the profit and loss account needs to be incorporated into section 34 of the Income Tax Ordinance, 2001.

I believe that items falling into operating income should form a reasonable basis for tax reporting and assessment. Items included as valuation adjustments need to be considered in more detail. They may include items such as provisions for doubtful debts and obsolete stock etc, they may form a normal part of taxable income according to the provisions of the Income Tax Ordinance, 2001 and various precedence.

However, valuation adjustments are of more subjective and volatile nature and do not therefore posses the features which have traditionally been seen necessary of costs having been incurred or income having been realised, or certainty as to the amount appropriate to be utilised for tax purposes.

There needs to be a detailed review of the items falling into the valuation adjustment category and principles must be developed in the common rules chapter of the Income Tax Ordinance, 2001, for dealing with these items and any other items that may arise in the future.

The main principles should revolve around the distinction between assets readily convertible into cash, where adjustments would be taxed or allowed, and other assets which would be dealt with on a realisation basis for tax purposes. Moreover, the plethora of precedence relating to principles of capital and revenue expenditure/income and realised and unrealised income needs to be immediately considered in the common rules chapter of Income Tax Ordinance, 2001.

COHERENT STRATEGY OF ACCOUNTING AND RECORD KEEPING: Section 32 to 36 of the Income Tax Ordinance, 2001 and Chapter VII - Records and Book-keeping must be aligned with the organisational hierarchy of the tax department and needs to be aligned with the indirect tax laws. A suggestive structure is as follows.

SUGGESTIVE STRUCTURE:

==================================================================
Category Tax Policy Record Type Legal
Organisational
Structure
------------------------------------------------------------------
Large Tax according IAS/IFRS Incorporated/
to normal Fourth Schedule Unincorporated
accounting Of Companies'
practice Ordinance, 1984 -
SME Medium Tax according Fourth Schedule Incorporated/
to normal Of Companies' Unincorporated
accounting Ordinance, 1984 -
practice -
SME micro Tax according Fourth Schedule Incorporated/
to normal of Companies' Unincorporated
accounting ordinance, 1984 -
practice -
or -
------------------------------------------------------------------
Category Tax Policy Record Type Legal
Organisational
Structure
------------------------------------------------------------------
Final Tax Record Keeping -
Regime Postulates prescribed -
in Income Tax Rules, -
2002 - Chapter VII -
SME small Final Tax Suggestive record Unincorporated
Regime format to be -
prescribed in -
Schedule of Income -
Tax Rules, 2002 -
==================================================================

Following is a suggestive structure which may be used in conjunction with existing threshold for LTU, MTU and RTO.

==================================================================
Category Sub-category Quantitative Monetary limit of
Criterion Quantitative
Criterion
------------------------------------------------------------------
Large 1. listed companies Nil Nil
2. Susidiary of a -
listed company -
3. PE or -
Non-Resident -
Company -
4. Monetary Turnover -
Criterion of Staff -
LTU Capital -
SME Medium 1. Non-Listed Nil Nil
2. Private Limited Nil Nil
company -
3. Manufacturing Turnover 2 Billion
Staff 500
Capital 500 million
4. Trading Turnover 900 Million
Staff 200
Capital 200 million
------------------------------------------------------------------
Category Sub-category Quantitative Monetary limit
Criterion of Quantitative
Criterion
------------------------------------------------------------------
5. Service Turnover 500 Million
Staff 200
Capital 200 million
SME Micro 1. Single Member Nil Nil
Private Limted -
Company -
2. Manufacturing Turnover 500 Million
Staff 250
Capital 50 Million
3. Trading Turnover 90 Million
Staff 100
Capital 10 million
4. Service Turnover 50 Million
Staff 50
Capital 10 million
SME Small 1. Manufacturing Turnover 50 Million
Staff 50
Capital 5 Million
3. Trading Turnover 10 Million
Staff 10
Capital 1 million
4. Service Turnover 50 Million
Staff 50
Capital 0.5 million
==================================================================
ACCOUNTING QUALIFICATION'S: The ACCA syllabus is a benchmark for the whole world according to the United Nations Pakistan's students have the option to choose Pakistan's tax and corporate as part of their studies for appearance in exams. A level playing field with a conducive environment needs to be provided.

This will also help the Central Board of Revenue in interacting with various accounting bodies like the ACCA, ICAP and ICMAP which will enable them to draw the conclusion on the opinions of these public accountants. Moreover, this will also bring healthier competition which will end in quality improvement.

AUDIT: A section is not enough and a chapter needs to be devoted to Audit. Moreover, the existing audit section needs to be rephrased under one chapter which may include audit management, taxpayers' obligation, authorised representative obligation, modus operandi of audit, modus operandi of audit decision, postulates of an audit order and time frame to conduct and complete the audit.

STANDARDIZATION OF ORDERS: There seems to be a dire need to finalise a standard format of orders for assessment, amendment in orders, revision, appeal effect and audit.

Moreover, a standard format of order is also required for CIT Appeals and ITAT, however, when I use the word standard, this means that basic principle based postulates needs to be prescribed, for instance for appellate forms of transaction nature, sections applied, sections not considered, beneficial circulars, accounting and tax principles applicable, department's argument, taxpayer's argument, precedence available, reasons for not considering any of the aforementioned points, argument or precedence and finally the decision itself.

A good speaking order normally reflects this but we must strive to make all orders speaking! Moreover I would request honourable chairman to please specify a time limit for appeal effect orders.

TRANSFER PRICING: Internationally, the horizon is much bigger than the pharmaceuticals and time has come to bring certainty to the businesses. I would suggest that Chapter VI - Transfer Pricing needs to include what the State Administration of Taxation of China has done in line with the OECD guidelines.

THEY HAVE INCLUDED A PRINCIPLE SET OF DOCUMENTATION WHICH INCLUDE:

1. Business and Industry Analysis, that is, description of the industry in which the company operates.

2. Functional Analysis, that is, description of the functions carried out, the assets used and the risks borne by the company in question.

3. Identification and quantification of the related party transactions.

4. Selection of the most appropriate transfer pricing methodology to analyse at arm's length the nature of the related party transactions and;

5. Application of the most appropriate methodology, with conclusions at arm's length of the nature of the pricing of the related party transaction.

This documentation should be prepared before the tax return for the year in question is submitted. There will be no need to submit the report to the Income Tax at the time of return just facing a box. However, no time will be given when the report is required to be submitted through a special notice.

APA is an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria for the determination of the transfer pricing for those transactions over a fixed period of time.

An APA is formally initiated by a taxpayer and requires negotiations between taxpayer, one or more associated enterprises and one or more tax administrations, hence, can be unilateral, bilateral and multilateral.

TAKAFUL INSURANCE AND REINSURANCE: There is need for the introduction of a new schedule for re-insurance and the provision of special exemptions or deductions to the payers. This will not only help in the development of a new industry, but will also save the outflow of foreign exchange.

SHARIAH COMPLIANT FINANCIAL PRODUCTS: It is high time that a framework needs to be incorporated in the Income Tax Ordinance, 2001, whereby Shariah compliant products are taxed in a way that is neither more nor less advantageous than equivalent banking products. The intended effect must be to allow providers to offer Shariah compliant products, without facing commercial disadvantage, and to enable customers to take up these products without encountering uncertainty or disadvantage over tax treatment.

MURABAHA: The most common problem of Shariah compliant financial products is the involvement of series of a transaction which falls within the ambit of minimum tax, capital gain and fair market value-related provisions which is not the case under conventional financial products.

Section 113 needs to be amended to exclude the sale transaction of a Shariah compliant financial product from the definition of turnover. Moreover, section 153 also needs to be suitably amended to exclude deduction of tax from the instalments by the customer instead of exemption certificate approach.

In furtherance, section 37, 68, 75, 77 and 78 needs to be amended in such a manner that transactions, involving capital gain, entered into by a Shariah compliant financial product provider, should not be taxed under any provision of the Income Tax Ordinance, 2001 in the hands of the Shariah Compliant financial product provider.

IJARA, IJARA WA IQTINA AND DIMINISHING MUSHARAKA: Section 18 needs to be suitably amended to incorporate the concept of Ijara and Ijara wa Iqtina. In the absence of a suitable amendment, the Ijara wa Iqtina relating to a house will fall under section 15 and would put the Shariah compliant product provider at a disadvantage over the conventional bank. The core basis of such an amendment is based on the fact that it involves the payment of rent and principal with rent.

WAKALA - AGENCY: It is suggested that such an income needs to be considered in line with section 151 in the hands of the customer.

(To be concluded)

mtgondal Thursday, May 24, 2007 10:05 AM

Inflation
 
[B]In the jaws of inflation[/B]

By Sultan Ahmed


INFLATION, which is plague for the poor and a curse for low-income groups, is expected to exceed the official target of 6.5 per cent as the financial year ends on June 30. Optimists expect the figure to be 7 to 7.5 per cent. Food inflation has risen by 17.6 per cent in the last ten months of the year, with the prices of 18 key items shooting up and staying high.

The State Bank of Pakistan on its part has tried to restrain inflation through its tight monetary policy but private sector credit expansion has touched its peak in the first ten months of the year instead of the full year and as the weather gets hotter, the vegetable prices are soaring further.

The tight monetary policy is a partial success in restraining inflation, but it is only one of the many instruments for checking inflation which includes the supply side abundance, effective administrative measures against hoarding and profiteering and social pressure against high prices and real competition in the market. Sufficient attention is not given to combating inflation through by other means as it is a very complex problem.

In India an inflation rate of five per cent was promised by the Manmohan Singh government in the new financial year beginning April 1 but now it is 5.4 per cent which is a disturbing trend and the government is looking for diverse remedies and acting promptly.

We are told that the core inflation is low and it exceeds food and energy prices which are very important in a developing country like Pakistan with a third of the people living below the poverty line. The energy prices are important as workers have to spend a good deal of money to reach their places of work and to return home and in a country with large families depending on a lone wage earner to feed so many mouths, food inflation is an important issue. In fact it becomes the core of the inflation for the poor and the low income groups.

The fact is that the tight monetary policy is neutralised by the inflow of money from many other sources. Record home remittances of overseas Pakistanis of $4.450 billion in 10 months against $3.629 billion in the same period last year, foreign investment of about six billion dollars, foreign borrowing which has raised the external debt to $39 billion or significant factors in increasing the money supply. In addition, the informal economy is very strong and tax evaded money moves faster.

Even in the area of tightening of the monetary policy the picture is not too bright. Within the first ten months of the financial year, the private sector credit meant for the whole year has been distributed. How much more will be lent during the remaining next two months has to be seen. But the private sector credit of Rs273.8 billion is far less than the credit of Rs345.6 billion provided in the same period last year.

In addition, the government borrowing for budgetary support is too heavy this year. It has borrowed Rs196 billion so far compared to Rs64 billion during the same period last year and that money is flooding the market through the currency notes printed by the State Bank of Pakistan for the government.

All that along with the inflow of six billion dollars as foreign investment, including portfolio investment and the record home remittances of overseas Pakistanis of $4.45 billion have increased greatly the money in circulation. In such circumstances it is not easy to achieve the level of 6.5 per cent inflation promised for the current year without far larger supplies than available. So the inflation figure is likely to be far above 7 or 7.5 per cent expected by the spokesman of the finance ministry Dr Ashfaq Hasan Khan. It is likely to be between 8 and 8.5 in reality. Even wheat flour prices are seen rising following the decision to export the surplus wheat. The Sindh government has objected to the export and the centre has rejected that objection. What will happen to onion prices now as onion export is to be resumed because of its abundance?

In such a situation the right remedy to increase the supply level of essential or sensitive goods through a far better supply chain than the traditional system we have with the middlemen having the best of the consumers and the growers. In India the government has promised an inflation rate of five per cent and is disturbed by the rise of inflation to 5.44 per cent and it is looking for far better supply chains particularly in the retail sector which is undergoing radical change. India is trying to overcome the supply system handicaps. At present only four per cent of the retail trade is in the organised sector. It wants to raise that to 20 per cent of the retail trade so it is encouraging industrialists to set up supply chains. New entrants to this sector include the Aditya Birla group which is investing $1.7 to 1.9 billion, the Reliance industries, the Bharti group and the Pantaloon.

They will buy from the growers and manufacturers and sell to the consumers for which they see a tremendous scope. But what we are doing in Pakistan is setting up supply chains to sell to the wholesalers or wholesale buyers as Makro is doing in Karachi.This is not what the country needs now. It needs a supply chain which buys it from the growers and sells to the buyers direct and cuts out the exploitative middlemen or Artis who some time stores the fruits and vegetables in cold storages for a long period to multiply the prices. We need consumer resistance to profiteering, poor quality and gross adulteration. It has to be done through organised resistance which will not put up with the anti-consumer abuses any longer.

If the rich countries of the world with their organised trade can have proper consumer resistance assisted by the government the poor countries need that much more and the earlier that comes through the better.

The people should not rely on the government to solve all their problems or help them effectively but the district governments can certainly come to their help and not merely talk of highways and byways and underpasses. In a low wage and high priced economy the masses should get a fair deal. In last week’s Algerian parliamentary elections the voter turnout was only 35 per cent. The workers argued the election offered them no solution to their everyday problems and hence stayed away from the elections, disillusioned by the process. The same is the case in Pakistan. Elections come and go but the people’s basic problems remain unsolved. But a democratic form of government in Pakistan has not delivered either.

So the people have to take the responsibility for changing the system and find day-to-day solutions to their problems instead of looking towards the government for everything. You cannot debunk the officers as corrupt and inefficient and then expect good governance and proper economic administration from them. The people must assert themselves and prevail.

As the world price of palm oil continues to rise, its impact is felt deeply in Pakistan and there is a demand for the reduction of heavy import duty on it. But the government has been resisting the demand which India had met a long time ago.

“There is no question of reduction of import duty on palm oil. Don’t talk about it” says the advisor on finance to the prime minister Dr Salman Shah and the minister for industries Jahangir Tareen says any tax concession given by the government to the vanaspati ghee industry would not be passed on to the consumers and so there is no duty reduction.

The Malaysian government wants Pakistan to reduce the import duty. But the government is firm on its refusal. All this is happening in an election year when all kinds of hints are given about the coming tax relief. Making the inflation far worse is the report of the Asian Development Bank which says unemployment is increasing in Pakistan particularly in Balochistan and the Frontier province.

Regardless of that our GNP this year would be 150 billion dollars and per capita income dollars 950, says the government. That can attract more foreign investment and open more Makro and Metro stores. But the poor have to find their niche amidst such gathering affluence with the rich getting richer.

Wounded Healer Thursday, May 24, 2007 11:50 PM

Less than 2% on Research
 
[B][SIZE="5"]Pakistan spending less than two percent of budget on research[/SIZE][/B]

KARACHI (May 24 2007): [COLOR="Red"]Pakistan is among 162 countries in the world for contributing less than two percent of the budget on research, which is the major reason for deterioration in economics and technology.[/COLOR]

Academia in the country has failed to develop linkages with the industry and presently there are no sign of creativity of knowledge to enhance industrial and trade activities, Dr Ayub Mehar, Head of Research Department, Federation of Pakistan Chambers of Commerce and Industry (FPCCI) told Business Recorder on Wednesday.

Dr Mehar identified three missing links in the system of higher education and said that these gaps should be bridged on priority basis for country's economic growth in the arena of free trade. [COLOR="red"]"First missing link is between the strategy for promotion of research culture and the curriculum. The policy for the development of academic research and the system of examinations work in opposite direction," he said.[/COLOR]

This system stresses on the memorisation of texts and mechanical use of the concepts and formulas, he said and added that this problem was created because of the stereotyped lectures and the extensive use of the study guides and short notes.

[COLOR="red"]The second missing link is the disconnection of research degrees with knowledge creation. This system has checked only the ritual requirements and unable to verify the objectivity, originality and acceptability of research work, Dr Mehar said.[/COLOR]

[COLOR="red"]The third missing link is between the academic research and economic development, he said and added that universities have failed to convert knowledge into economic development, which leads the industrial growth.[/COLOR]

FPCCI research head said that country's trade bodies have to enhance research activities and have to play important and non-traditional role. He said that industries in the country are contributing in the employment generation, participating in national revenue, building of foreign exchange reserves and addition in the GDP. But they have also to become the part of economic planning and decision making.

"During the recent years the responsibility of economic development has shifted to corporate sector from government agencies and in the age of globalisation, the role of trade bodies have become more important," he said.

[COLOR="red"]He said that FPCCI is going through restructuring and enhancing phase of research activities. Several types of research work including applied and policy research in the areas of business competitiveness, fiscal and monetary policies and the globalisation related issues were being carried, simultaneously.[/COLOR]

The apex trade body was also establishing links with the institutions of higher education. While, two research projects were assigned to the Applied Economics Research Centre, University of Karachi for the study on the Industrial Competitiveness and Protection in Free Trade Regime.

[COLOR="DarkGreen"]http://www.brecorder.com/index.php?id=568161&currPageNo=1&query=&search=&term=&supDate=[/COLOR]


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