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The answer to Pakistan’s dilemma must rely almost exclusively on the intrinsic resources and the people of Pakistan. The government needs to get out of the way — cut spending, rationalise taxes, deregulate the economy, reduce trade barriers, privatise state-owned enterprises, and establish a sound money.

The government should then be in the business of “undoing things” not “doing things.” The government has become the problem, not the solution. Pakistan is suffocating.

Free markets are most needed when a country is in crisis. And yet, crisis almost always elicits massive government intervention. Free markets activate a country’s economic immune system which is so desperately needed to get out of the crisis.

Unreasonably high tax rates, quixotic tax enforcement, corrupt implementation of rules and regulations, and self-serving trade interventions incentivize expensive tax-sheltering policies and counter-productive behavior for individuals and businesses.

The solution

What’s missing in Pakistan is a simple, straight-forward set of supply-side economic policies. Pakistan needs:

i. A total rationalization of its tax system from A to Z. There should be few taxes, where those taxes that are chosen to remain have low tax rates on broad tax bases. Exemptions, deductions, exclusions, credits, and write offs should be kept to a bare minimum. Low tax rates provide the least incentive for people and businesses to evade, avoid, or otherwise not report taxable income.

A broad tax base removes as many ways as possible for people to hide their income to avoid paying taxes. With enough love for one’s country and an abundance of political will, such a tax reform is relatively easy to achieve. But the relatively effortless implementation shouldn’t fool you. It will have massive beneficial consequences.

ii. A major repositioning of companies and businesses that are owned and operated by the government. This group may also include businesses that are so heavily regulated that they effectively are owned by the government—for example, privately operated public utilities.

A comprehensive plan for wholesale privatization of these businesses needs to be developed and implemented as soon as possible. The revenues from the privatization sales will go a long way to help Pakistan’s fiscal quandary, but even more so the removal of these businesses from Pakistan’s ownership ledgers removes a huge net drain on Pakistan’s fiscal solvency as well as on the limited high-talent personnel who have been diverted from proper government needs to oversee the operations of these state-owned entities. This proposal to privatize too will have a life-changing impact on Pakistan’s prospects for prosperity.

iii. Much freer trade than it currently has. The revenues from tariffs and fees on imports, exports, and other cross-border transactions pale in comparison to the economic dislocations those trade impediments engender and the culture of corruption that results.

The absolute pandemonium created by border-control bureaucracies disrupts what could be enormous gains from trade for the Pakistani economy. There are production gains from trade, consumption gains from trade, and dynamic economic growth gains from trade—each of which has been short-changed due to officially sanctioned border bureaucracies including domestic export subsidies, import taxes, and burdensome regulations. Free trade for Pakistan would by itself add enormously to the country’s prosperity. Again, this type of reform could be implemented fairly quickly and would start yielding returns almost immediately.

iv. Sound money! I can think of nothing that has a more pervasive, insidious impact on prosperity than Pakistan’s unstable, weak currency. People and businesses rely on the Pakistani rupee for any number of transactions, both for present market transactions and future contracts.

Without a widely accepted stable numéraire, markets as we know them dissolve, and wildly inefficient barter ensues. The rupee’s volatility and depreciation, as shown in any number of indicators, indices, and measures, is a direct assault on market efficiency and economic progress. The effect inflation has on business, households, and government budgets is extraordinarily impactful and damaging. How can anyone plan when no one knows the future values of the currency? They can’t.

V. A government budgetary process that doesn’t always lead to excessive spending.

Spending other people’s money rarely leads to financial parsimony, economic efficiency, or economic growth. Excessive government spending, however, does lead to underperformance at federal and local levels. Insider dealings replace markets and corruption undermines trust in government. Both political and personal goals are enhanced by the power of the purse.

As such, there are substantial incentives for the political budgetary process to lead to excess spending. This is especially true when “buying” votes and dispensing of personal favors are in play. I know of no simple answer to the over-spending issue, save for direct irrevocable spending limits placed on government. Pakistan government spending is way too large and needs to be brought down to a manageable size.

As Prime Minister Margaret Thatcher is reported to have said, “Government will run out of money long before politicians run out of great ideas to fund.” As is the case with families, government needs to adhere to strict budget limits. Also as with families’ spending programs, there needs to be a specific date when each government program automatically ends. Well-designed budgeting will produce ever-increasing benefits throughout the entire fabric of Pakistan’s society. This is where enlightened leadership plays its most important role. Pakistan has that leadership. And lastly —

vi. A thorough review of regulations, restrictions, requirements, and directives to make sure each one is justified on a strict cost/benefit basis.

Rules need to be framed to rationalize and coordinate public behaviour. People can’t be allowed to choose which side of the road they drive on. That’s obvious. But the danger here is that these rules and regulations individually and collectively will extend way beyond their specific task at hand and result in excessive collateral damage to the economy. We all know of any number of examples where policies and rules adopted with the best of intentions actually cause enormous damage.

Once put in place, government regulations are next to impossible to remove. An ounce of prevention here really is worth a pound of cure. Regulations, rules, restrictions, and requirements should be carefully and objectively reviewed and evaluated on a continuous basis to ensure economic efficiency as well as social cohesion. Sunset provisions here, as with government spending programs, need to be precisely defined ex-ante.

Copyright Business Recorder, 2022

Arthur B Laffer, PhD

The writer is the founder and chairman of Laffer Associates, an economic research firm that has provided global investment-research services since 1979. His economic acumen and influence in triggering a worldwide tax-cutting movement in the 1980s have earned him the distinction in many publications as “The Father of Supply-Side Economics”


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