Seeking a new economic model

A state does not deserve to be called one if it fails to provide to its citizens universal schooling, at least up to the primary level, universal primary healthcare, free potable water, universally affordable two square meals a day, universally affordable gas and electricity, and universally affordable road, rail and air transport.

Since Pakistan's scorecard on all these essentials is totally blank, the state, therefore, finds itself continuously in a state of tentativeness. There are many reasons why Pakistan as a state has landed itself on such a slippery slope. The main one, however, being the economic policy it has been following all these years. Evidently, this policy appears to have been inspired by the so-called Washington Consensus emerging out of Reaganomics and Thatcherism of the early 1980s, which gave birth to the callous concept of letting the market determine the ups and downs of the economy, even if it meant neglecting a state's essential obligations towards its have-nots.

Unless Pakistan realizes the inappropriateness of this economic model to our peculiar circumstances and opts for a more socially inclusive one, that would guarantee equitable sharing of socioeconomic gains, as well as the associated hardships, it is hardly likely to be called a state.

The model that we need to adopt to make it possible for even our have-nots to share the fruits of development and progress equitably can be called social market economy, which as opposed to deregulated market economy would ensure an all-inclusive society in which every citizen is allowed equal opportunity to better his/her lot irrespective of his/her class, creed, caste, religion, sect or faith.

Over the years, Pakistan has become more and more dependent on foreign dole and less and less on domestic revenues. And whatever little we make from our own resources, plus the amount we borrow and beg from rich countries, we spend on amortization of past loans, defense, law enforcement and civil administration. Obviously very little or nothing is left after funding these functions for social essentials.

So, the most essential function of the state of Pakistan, if it intends to become one in the real sense, to start with, is to enforce its tax collection laws with all the powers at its command. Secondly, it should rationalize its defense expenditure, bringing it in line with our funding capacity after having taken care of the social needs of the population.

With income from all those who earn over and above taxable income and savings from the defence budget, the state should be able to do most of what it is obliged to do for its citizens for them to enjoy a sense of belonging and feel proud of being Pakistanis and defend the country with their own lives against all those forces which are trying to take it over or are trying to destroy it.

A handful of Pakistanis have succeeded in cornering almost the entire national wealth, as well as the sources that generate it, thanks largely to the 'neo-liberal' economic policies that we have been forced to follow since the mid-1980s by the proponents of the infamous Washington Consensus. The most devastating side effect of these policies has been the emergence of an enormous inequality gap between the rich and poor. Meanwhile, this policy of minimal government interference and letting free market forces determine prices of even minimum essentials has reduced the state to a skeleton incapable of formulating a way out.

The trickle-down theory in practice has failed miserably to deliver worldwide. In Pakistan, its failure has been spectacular. Using the rule of thumb some economists have estimated that to lift even 20 per cent of the population living in crushing squalor out of poverty, Pakistan's economy would need to grow at the rate of over 10 per cent a year for at least 10 years at a stretch. Considering our mounting debt and declining incomes, this appears well nigh impossible. So far in Pakistan, the trickle-down theory in practice has only widened the gap between the rich and the poor. And more of the same is not going to reverse the trend.

The inequality gap would continue to widen unabated unless land reforms are introduced and concurrently all incomes, irrespective of their sources, are brought into the direct tax net. The ownership of agricultural land, besides property and financial assets is the primary manifestation of inequality in Pakistan. Small farmers with less than five acres, constitute as much as 65 per cent of the farming population in Pakistan, but own only 19 per cent of farmland. There are about 26,000 farmers only (0.4 per cent of total), who own as much as 14 per cent of the land. Large landlords have preferential access to irrigation water and own tractors, tube wells and other agricultural equipment. And since they also wield enormous political power, they have frustrated all attempts to introduce land reforms and have also seen to it that their incomes continue to remain outside the tax net. Furthermore, the top 20 per cent of the population accounts for almost 52 per cent of property income, while the top one per cent of depositors account for 80 per cent of the deposits. Banks extend 77 per cent of the credit to the top one per cent of borrowers.

There are an estimated one million shareholders of publicly quoted companies. Market capitalization of $70 million is part of the wealth of these one million individuals. Family ownership of companies still dominates the corporate world, making them too vulnerable to the vagaries of the market. These wholly family- owned corporate entities, in order to offset the effects of such risks to their incomes and assets, indulge in tax evasion and pilfer public utilities. Lobbyists of big business buy political influence to ensure governments keep making 'business-friendly' taxation policies.

Meanwhile, the incidence of poverty in the country is estimated to have reached 37 per cent. And due to continued under-investment in the people, rate of improvement of Pakistan's Human Development Index (HDI) is estimated to be slowing down considerably.

One of Pakistan's eminent economist and former federal finance minister, Dr Hafeez Pasha, has recommended the following measures for lifting the country out of its present state of economic depression: i) tax policy must focus on more progressive direct taxation. The key areas of focus are agricultural income, property and unearned capital income from financial assets; ii) focus on regional disparities. It is an issue to be tackled by the NFC and the PFC (to be constituted after the establishment of local governments). The PFC will have to design an appropriate revenue-sharing formula to tackle intra-regional inequality; iii) development allocation to focus on maximum employment potential sectors, like agriculture, rural development, small-scale manufacturing and construction; iv) social protection policies, especially designed to help workers, women, youth and minorities; v) appropriate pricing of agricultural inputs, support prices for inputs and income supplement programs; vi) a higher share of public expenditure will have to be devoted to social services, especially education and health.

The direct tax-to-GDP ratio is 3.2 per cent. The figure for the same is 11 per cent in Malaysia, eight per cent in Thailand and six per cent in Turkey, India and Indonesia. Pakistan's share of direct taxes in total tax revenues is 33 per cent, as compared to between 45-60 per cent in many Asian countries.

Dr Pasha's study has revealed that only about one-third of the 60,000 companies in operation file returns and among those, less than half declare taxable profits. Also, it is estimated that about three million people in Pakistan earn more than the exempted income of Rs 400, 000 annually - but only one-fourth actually file returns. In effect, one in 260 people file a return in the country as compared to one in 40 in India.

The tax base for corporate income tax, according to Dr Pasha, is eroded by almost to its half due to exemptions, deductions against labor and charitable contributions, and lower (presumptive) taxation of exports, etc. While many of these are in the nature of fiscal incentives, they have an implied revenue loss of almost Rs 160 billion.

Dr Pasha maintains that the root cause of failure of the taxation system of Pakistan is the very limited taxation of the rich and powerful. In addition, there are over 1,900 statutory regulatory orders (SROs) which create many holes in taxes like GST, customs and excise duties. The SROs largely benefit strong pressure groups and lobbies.

Two recent books, one by Joseph Stiglitz (The Price of Inequality, 2012) and the other by Thomas Piketty (Capital in the Twenty-First Century, 2014) have discussed in great detail the kind of inequality that Pakistanis are suffering from and offered their respective solutions to avert it.

In his book, Stiglitz shows how, left to their own devices, markets are neither efficient nor stable and tend to accumulate money in the hands of the few rather than engender competition, producing a slower growth and a lower GDP.

Piketty argues that the rate of capital return is persistently greater than the rate of economic growth, and that this will cause wealth inequality to increase in the future. He shows that inequality is not an accident but rather a feature of capitalism that can be reversed only through state intervention. He argues that unless capitalism is reformed, the very democratic order will be threatened.

Reformed capitalism, it is believed, would ensure continual expansion of middle income population while at the same time marginalizing the populations of the rich and the poor. This model falls somewhere around equidistant from the model based on crass capitalism and the one underpinned by socialist ideology. And this in-between model is called the social market economy. It is a form of market capitalism combined with social policy. It refrains from attempts to plan and guide production, the workforce, or sales, but it does support planned efforts to influence the economy through the organic means of a comprehensive economic policy coupled with flexible adaptation to the market. This type of economic policy, it is believed, creates an economy that serves the welfare and the needs of the entire population.

Over the years, Pakistan has become more and more dependent on foreign dole and less and less on domestic revenues.

Copyright Business Recorder, 2015