ON Saturday, February 15, six million people — in 600 cities across the globe, according to some newspaper accounts — poured out into the streets to protest against “Bush’s Iraq war.” At times the placards protesters carry can represent what the critic and essayist Roger Rosenblatt calls “the compression of wisdom.”

Watching these placards on television screens, one could begin to comprehend what the people believe is the real reason behind this rush to war. Or, more accurately, not one reason but several reasons, since a large assembly of people such as the one that materialized all over the globe could not possibly agree on one or two causes of the coming war.

What is propelling America towards another war against Iraq is an important question for Islamabad. By answering it, Pakistan’s policy makers should be able to craft their position in this developing situation and formulate their own response. Having been elected to the Security Council, Pakistan has an opportunity that it should fully exploit for its benefit.

Slogans on placards can be pithy and poetic; they cannot be analytical. They tell you what those who carry them believe in, not on how they have arrived at those conclusions. The placards on February 15 identified many reasons for the war. Among them: Israel, oil, imperial arrogance. They missed what may be the main motive: deep conviction on the part of an administration peoplled by those with Wilsonian ambitions for the country they lead and a profound belief on the part of the president that providence may have endowed him with the role of a saviour of a troubled people.

Today we will explore the concern for Israel’s security and the interest in the Iraqi oil as two possible reasons why America may be preparing for another war in the Middle East. Next week we will take up the other two reasons cited by people opposed to the war — superpower arrogance and the proselytizing zeal of the American leadership.

The charge that it is the support for Israel that is driving the rush to war is not coming only from the quarter from which it would be expected — those who are deeply committed to the cause of Palestine. It is also emanating, as one neo-conservative put it, “from the musty precincts of the Old Right.” Although the “right” now dominates American politics, there are two prominent ideologies that occupy this part of the political spectrum.

The “old right” has lost a lot of ground to neo-conservatism, the latter represented by people such as Paul Wolfowitz, Richard Perle, Eliot Cohen, William Kristol and possibly also Condoleeza Rice. They either occupy senior positions in the administration of President George W. Bush or are operating from the think-tanks that have considerable influence on policy-making in Washington. The old right has been left out in the cold, resentful of the power it has lost but which it once possessed in the days of Presidents Nixon and Reagan. Its most outspoken representative is Pat Buchanan who was a presidential candidate on many occasions.

What are the main differences between the views of the old right and the neo-conservatives? The old right is intensely focused on what it believes is good for America and the Americans. But when it talks about the Americans it means not all Americans but the original white settlers. This group of thinkers, therefore, is isolationist, anti-globalization, anti-immigration and, sometimes, white supremacist.

Neo-conservatives, on the other hand, are “inclusionists,” internationalists, and interventionists. They are prepared to welcome to their ranks all those who carry their convictions with the same amount of passion. Although they believe in the minimalist state, they also feel that the power of the state should be used to project their views.

As one exponent of this point of view said in a recent article written in defence of the neo-conservatives in the Bush administration, “Perle and Wolfowitz and their fellow Jewish neo-conservatives are surely hawks — but not merely on Iraq. Their expansive view of America’s overseas obligations has in the past led them to support interventions wherever America’s interests and ideals have been threatened: Grenada, Afghanistan, Nicaragua, Bosnia, Kosovo — in the last two cases for the explicit purpose of protecting Muslims.”

The old right does not buy this line. Pat Buchanan who now edits the magazine, The American Conservative, he founded not long ago, has welcomed to its pages the views of the people who view the war against Iraq motivated simply by the wish to protect Israel. One of its contributors, University of Illinois history professor Paul W. Schroeder, deems it self-evident that the plan for an invasion of Iraq “is being promoted in the interests of Israel. Certainly, it is being pushed very hard by a number of influential supporters of Israel of the hawkish neo-conservative stripe in and outside the administration, and one could easily make the case that a successful preventive war on Iraq would promote particular Israeli security interests more than general American ones.”

The belief that it is neo-conservatives’ interest in ensuring Israeli security — perhaps also its expansionist policies — does not only preoccupy the old right. It is also shared by Arab nationalists. Edward Said, the most articulate spokesman for this group, recently wrote an article for an Arab paper in which he attacked by name a number of Washington policy-makers, contending that these members of the Bush administration were pushing America towards war to serve the interests of Israel.

That there may be some substance in this charge was acknowledged by Yosir Alpher, formerly director of the Jaffe Centre for Strategic Studies at Tel Aviv University. “Israel stands to gain from an allied attack on Iraq,” he wrote in an article contributed to the Financial Times. “The Iraqi dimension of the two most pressing strategic threats — non-conventional attack and financial incentives for Palestine suicide terrorism — will be dealt with by means far more effective than Israel could muster on its own.”

It is not only the old right and the Arabists that are intensely suspicious that concern for Israel’s long-term security may be the force behind the rush to war with Iraq. According to Zbigniew Brzezinski, National Security Adviser to President Jimmy Carter and a prominent member of the group of foreign policy realists that once dominated policy-making in Washington, many in Europe also believe that Israel is the real reason for President Bush’s approach towards Iraq.

“Matters have not been helped by the evident, if unstated, endorsement by President Bush of Israeli Prime Minister Ariel Sharon’s notion of how to deal with both the Palestinians and the region as a whole. The European press has commented more widely than the US press on the striking similarity between current US policies in the Middle East and the recommendations prepared in 1996 by several admirers of Israel’s Likud Party for the then prime minister, Binyamin Netanyahu.”

Popular as this view is among several quarters opposed to the war, we don’t believe that is the main reason for America’s interest in launching another war against Iraq. If that is the case, could oil be the reason for the Bush administration’s Iraq policy? If the slogans on the placards on February 15 are any guide — “no blood for oil” was a popular one — a large number of people believe that to be the reason. Numbers make a good case for President Bush’s interest in Iraq’s oil and the country’s enormous reserves.

As long as the US imports more than 11 million barrels a day — 55 per cent of the country’s total consumption, anything from a strike in Venezuela to a hostile event in the Middle East would have an extremely negative impact on the American economy. In this calculation Iraq becomes important. Iraq, along with Saudi Arabia, has the spare capacity to meet not only the growing world demand for oil. By regulating its output, it can also help stabilize the price of this important source of energy.

Although the advance in technology continues to expand the estimate of available reserves, the countries of the Middle East remain by far the cheapest producers. There are now about one trillion barrels of proved reserves and estimates of potential reserves keep rising from two trillion barrels in the early 1980s to more than three trillion barrels today. But some of the reserves — in the Atlantic Basin, Canada, the Caribbean, Brazil and the entire western coast of Africa — are hard to reach. Some of them are two miles deep. They can only be accessed if the price of oil goes well beyond $25 to $28 barrels at which the OPEC has maintained it for more than a couple of years.

This calculus makes the physical control of Iraq’s large reserves very attractive and may figure prominently in the thinking of those who are planning to launch another war in that country. “The re-emergence of Iraq will be of historic significance because of the scale of resources and because of the realignment it may portend among the major oil exporters” says Daniel Yergin whose book, “The Prize” is a seminal work on the links between oil, money and political power.

Even if the US was to control the Iraqi oil, it would be difficult for it to derive immediate economic benefit. The fields are now in considerable disrepair. To keep them in operation will need a great deal of investment which the US companies may not be prepared — or be financially able — to do. To substantially increase the output of the Iraqi fields will need even more investment.

If both Israel and oil are to be discounted as the real causes of the coming war against Iraq, what is it that is driving Washington towards that confrontation?

IN contrast with the frequently repeated statements of government spokesmen that Pakistan is a low-taxed country — with a tax to GDP ratio of 13 per cent that is significantly lower than the average of 20 per cent in the case of similarly placed countries — even Islamabad’s mentor, the IMF, accepts that Pakistan’s revenue performance is not out of line with the experience of other countries with similar per capita GDPs.

An IMF cross-country comparison shows that: a) none of the countries with per capita GDP below Pakistan’s raise as much revenue as Pakistan does; b) revenue from the three main tax instruments (customs duties, income tax and sales tax) is higher than that raised from similar taxes by comparatively rich countries like Egypt, Mexico and Sri Lanka; and c) the efficiency of Pakistan’s customs duty collection is higher than that of richer countries like Philippines, Morocco and even South Korea.

Countries with tax-to-GDP ratios of 20 per cent and above, unlike Pakistan, run and manage social welfare systems for their populations. Also, compared to tax rates worldwide, our tax rates are higher. Although at 35 per cent the present highest rate of income tax does not compare unfavourably with rates in other countries (that range from 30 to 35 per cent in most developing countries and in excess of 45 per cent in European countries), the mismatch is stark in the visible returns that developed societies and citizens get from the state on the taxes they pay. The fact that we have too many taxes in the country, if we include all provincial and local taxes (although in totality they generate only a small fraction of nation’s revenues), adds to the inconvenience of the taxpayers and raises the ‘cost of doing business’ in Pakistan. This is another matter that needs to be dealt with separately which I propose to do some other time.

Having debunked official claims on the subject, let us move on to review the conceptual framework of the tax reforms that have been or are in the process of being implemented in Pakistan since the early 1990s.

The generally accepted principles of taxation are efficiency (explained by the reduction in distortions in the allocation of resources), equity (requiring those more able to bear the burden of paying higher tax rates) and effectiveness of the administrative machinery.

Although some rationalization and simplification of taxes has been undertaken in recent years, much remains to be done to broaden the tax base by minimizing exemptions, removing distortions and anomalies, improving the horizontal and vertical equity in the system through the taxation of incomes from all sources and by increasing the progressiveness of the effective tax rate, reducing the discretionary powers of officials and thereby the ‘cost of compliance’ (including payments of ‘speed money’), and enhancing the transparency of the taxation system.

The experience of several countries has shown that tax-to-GDP ratios can be enhanced by the broadening of the tax base and by improving tax administration, without resorting to any increase in tax rates. Moreover, one department of government that is responsible for revenues cannot be reformed whilst the rest of government continues to malfunction. It is simply amazing how our decision makers entertain the fond thought that revenue collecting agencies can be reformed in isolation, in exclusion of issues of general governance that continue to remain unaddressed.

The effort to reform such agencies was initiated 12 years ago under the watchful eye of the donors. The success achieved to date is not exactly a state secret. We have, obviously, failed to get this simple message that governance-related reforms can only be implemented at the over-arching macro level in the government as a whole.

Therefore, learning from the experience of other countries, to begin with, tax structures should be cleared of the cobwebs of exemptions accumulated over the years and the element of discretion that is distorting investment decisions should be reduced, if not eliminated. There are several examples of a distorted set of incentives. One is that the present savings instruments with similar maturity, and, at times, similar risks are liable to different tax rates, giving rise to different yields. Another example is provided by the location-based tax exemptions. These have largely failed to stimulate industrialization in such areas. All that these incentives have achieved is the abuse of the exemptions in the form of ‘border hopping’ (enterprises being located on the geographical borders that divide areas granted the exemptions and those not entitled to claim the concessions.

Although the opposition to the withdrawal of tax exemptions of perquisites in the last two years has come largely from the middle class and the print media with a bias in favour of the salariates the government has lost much of the moral high ground for simplifying the system because of the continuing weakness of the strategy to secure majority support, given its failure to understand the imperatives of the political economy of tax reform.

This problem can best be illustrated by the recent decision to lower interest rats on different instruments floated by the National Savings Schemes (a perfectly sensible and long overdue decision) without simultaneously announcing a scheme that addresses the concerns of pensioners and simply promising to devise one soon. A mistake as elementary as this has been a costly public relations failure. It may even force a partial roll-back or dilution of this or some other equally important agenda item in the reform programme.

Through taxation the state reduces the spending capacity of its citizens. Therefore, any effort to raise tax revenues evokes criticism and protest, even resistance. What is less important is the inherent merit of any proposal. It is its voter, and media, acceptability which carries more weight, since tax reform cannot benefit all citizens. The more vocal the losers the less likely that a proposal will be accepted, unless the overall package distributes the burden fairly and equitably. Therefore, the then decision to raise the threshold of incomes exempt from taxation to Rs. 60,000 should have been followed by a decision to withdraw the bulk of the exemptions for perquisites to salary earners.

The resulting higher taxation of salaries of professionals was criticized in the press as a measure that could evoke an exodus of high quality human capital, although what attracts people to migrate to the West is not low levels of taxation, but more opportunities of earning higher incomes. In any case, the events of September 11 put paid to any such possibility occurring.

The other mistake was to continue to treat government employees as a special group. The tax exemption on their allowances that they continued to enjoy resulted in the loss of moral legitimacy of the underlying conceptual framework to correct the distortions and the potential for abuse (their perquisites were perhaps exempted from tax on the plea that their salaries were not market-driven). This matter should either have been treated separately or the decision not to tax the perquisites of government employees should have been explained in a more convincing manner.

Since the rules for allowing tax deductions for certain expenses are much more stringent when it comes to salary incomes than for incomes from other sources, especially with regard to verification issues, a better alternative is to raise the standard/threshold income to be exempted from taxation. There is also a desperate need for bringing some conceptual clarity between the deductions or exemptions that would be allowed for reasons of horizontal equity or would be treated as critical components of an incentive framework. The example of the latter case would be the deduction for medical insurance or medical treatment. These contributions should continue to be allowed since it is a cost of being healthy and fit so as to be able to earn — that is, a cost to earn or to maintain human capital. Medical expenses are permitted up to certain specified limits in Italy, Japan, the Netherlands, the US and Malaysia.

To sum up, the existing tax structure should be replaced with the one that has lower rates but with very few exceptions (to check discretion), remembering that the principle of horizontal equity is violated through both exemptions and defective definitions of ‘taxable income’. To this end, therefore, the personal income tax structure can be further simplified by having just a handful of rates (ideally just two as proposed by the Kelkar Commission in India) to minimize the impact of ‘bracket creep’ as taxpayers enter higher marginal tax brackets because of the inflationary increase in incomes (unless the tax slabs are also indexed).

The structure should link the progression in tax rates with the standard exemption limit of income, which should be fixed at a level that would ensure a balance being struck between revenue considerations and the capability of the administrative machinery to exploit the full potential of the revenue base. Personal income tax should, therefore, be built around three rates at most (compared with the five rates today) with a higher exemption threshold of Rs. 100,000, while ensuring that all realized capital gains and receipts as wages and salaries, benefits in kind (perquisites), interests, dividends, income from agricultural activities and rent earned on property form part of the base to be taxed.

Equity warrants that dividends be taxed in the hands of the recipient, instead of the present position of a 10% withholding tax being treated as a full and final settlement of the tax liability of dividend incomes. However, to mitigate any discriminatory taxation of dividends as a result of this income being fully taxed, an imputation system would have to be introduced — through the provision of a tax credit to shareholders on a portion of the tax, say, 20 per cent out of the corporate tax rate ranging from 35 to 43 per cent. Ideally, however, incomes derived from savings should be exempted from taxation. Taxing them creates a bias against saving because of the double taxation of savings — first as part of the income after taxation from which it has been saved and later as an investment on the return from the instrument in which this income has been saved. This bias can be removed by either deducting the savings from the taxable income or by exempting the return from tax. Another way of removing the bias against savings could be to give relief on income earned from long-term saving instruments.

There is no such thing as voluntary compliance. Only effective enforcement can serve as a good deterrent to evasion. In our case tax administration weaknesses with regard to enforcement arise because of an ineffective legal system and the lack of effective accountability of government employees.

Greater publicity should be given to cases of tax evasion (only those upheld by courts or conceded to by taxpayers) in the hope that public shame would serve as one of the deterrents to tax evasion. Good governance in a structure of transparent taxation cannot be achieved with the same ease as computerization of the taxation system through purchase of equipment and supporting software. These essentials will continue to elude us as long as the governing political system nurtured and supported by the elite is financed by black money through institutionalized instruments and mechanisms for evading taxes. How does one overhaul such a system through the transformation of the political structure is a million-dollar question that defies easy answers as to the need for tax reform built around transparent and simpler systems of taxation.

However, the reality is that there are no quick fixes. Exercises to simplify tax laws and to ensure effective enforcement can take several years, as the experience of even developed countries shows - for instance, it took Canada 10 years to implement the proposals of the Carter Commission.

GST is a subject that I propose to take up separately in a later column. For the moment, however, it would suffice to say that its structure requires a re-think and that this revised structure and its ambit should be extended to the services sector which, although the largest sector of the economy, is only partially inside its net.

Moving on to the fourth major revenue instrument, the customs/import tariff, its structure remains complex and unwieldy even after several efforts to reform it since 1991. In almost every chapter there are multiple rates, several exemptions and several conditions and lists spread over hundred of pages of the book on tariff code/customs valuation. Then there are sector-specific or use-based exemptions availing of which necessitates queries of appraisers for literature and certificates, thereby not just providing an opportunity for exercising discretion but also slowing down the clearance of goods.

On the face of it the division of all goods into three categories (raw materials, intermediates and finished goods) for import tariff purposes looks good in theory. It is, however, difficult to implement in practice. The concept that raw materials should be liable for a lower rate is impossible to implement practically since a large proportion of goods, e.g., chemicals, are both finished goods and as raw materials.

A similar problem arises when it comes to identifying intermediate goods that supposedly attract a lower rate than finished goods. In addition to the problem of dual use, it is also difficult to draw a line between the final, finished, consumer good and its sub-assemblies. A better alternative would be one rate that would address considerations of revenue, the need for giving adequate protection to domestic industry and the need for simplification. A few easily identifiable consumer goods such as TV sets, air conditioners, motor cars, tobacco and liquor, generally viewed as goods for conspicuous consumption, could also be identified separately and made liable to a higher rate.

The import duty exemptions should be phased out quickly. Unless these are withdrawn, it will be difficult to achieve the objective of simplification and speedy clearance of imports. Only life-saving goods, goods of strategic interest and security or those for charitable purposes or those satisfying international obligations should be exempt from import duties. Otherwise, relief should be granted as a support through a budgetary allocation. This will have the added advantage of being transparent, open and subject to parliamentary and public scrutiny. However, a free flow of goods should be permitted, with focus on intelligence gathering and valuation checks to deter import duty evasion.

Finally, lest we forget, a computerized system of customs valuation can be user-friendly only when the tariff is computer-friendly. Automation alone cannot improve matters unless the tariff structures are decongested of numerous exemptions, conditions and lists.

The writer is former finance minister of Punjab.

GEORGE BUSH had something of a hell-raising youth, but he was probably a bit too old for the release of the first Ramones album in the summer of 1976. Pity. Line one, track one on this seminal punk album goes: “Hey ho, let’s go” and has the appropriate title of Blitzkrieg Bop.

A Blitzkrieg Bop is what the markets are banking on. A lightning strike, a week-long conflict, the ousting of Saddam Hussein and seizure of the oil fields will be just what the global economy needs to lift it out of torpor. If the campaign goes according to the plan, there may have to be a remix of the Edwin Starr classic, which goes: “War! Huh, what is it good for?” It’s good for oil prices.

Like the three-minute single, the “war as catharsis” argument has a compelling simplicity but lacks depth. Stage one is for the war to be over in double-quick time. Stage two is for the price of crude to come down to US dollars 20 a barrel. Stage three is for share prices to leap and consumer confidence to recover. Stage four is full-scale global recovery.

Stage five is the arrival of the economic nirvana that the proponents of the new world order have been promising since — well, since the last Gulf war, as it happens.

There are three big holes in this thesis. The first is that an easy victory is taken for granted, and while that may be understandable, the risks are that the war will be longer, bloodier and costlier than the markets are confidently predicting.

The second drawback with “war is good for business” is that the problems of the global economy predate the Iraqi crisis and will still be there whatever happens over the next few months. It is entirely possible that even if the military strategy works to the letter, there will be a short term rally followed by the realisation that the problems of financial fragility, deflation, excessive indebtedness and weak corporate profitability have not been washed away.

Finally, it is worth taking the predictions of the new world order people with a large pinch of salt. These are the people who told us that the demise of communism would lead to a golden age of peace and prosperity in which a more efficient market allocation of resources would lead to higher investment, growth and living standards for all. This is the world as seen by a tiny elite of policymakers, academics and entrepreneurs, not the one that actually exists.

A classic example of this genre is Philip Bobbitt’s tome, The Shield of Achilles, which argues that in the age of globalisation the nation state has been supplanted by the market state. This process has been lubricated by what Bobbitt calls the final victory of liberal democracy in the long war conducted first against fascism and then against communism.

The market state, he says, depends on the international capital markets and the modern multinational business network to create stability in the world economy, in preference to management by national or transnational political bodies. “Whereas the nation state justified itself as an instrument to serve the welfare of the people, the market state exists to maximise the opportunities enjoyed by all members of society ... for the nation state, full employment is an important and often paramount goal, whereas for the market state, the actual number of persons employed is but one more variable in the production of economic opportunity and has no overriding intrinsic significance.

“If it is more efficient to have large bodies of persons unemployed because it would cost more to the society to train them and put them to work at tasks for which the market has little demand, then the society will simply have to accept large unemployment figures.”

Bobbitt may be right when he says we have witnessed the triumph of the market state over the past decade, but there is scant evidence, if any, to suggest that the market state is better at delivering the goods than the nation state. Living standards have grown less — not more — quickly; financial deregulation has led to an explosion in speculation rather than more productive investment; the past decade has been beset by financial crises and a ratcheting up of insecurity and inequality.

Governments have found that all those policies that were considered judicious during the cold war — generous welfare provision, job protection, final salary pension schemes — are seen as no longer affordable. The demolition of the iron curtain may have been good news for the countries of eastern Europe but a mixed blessing for workers in the West.

The technocracy that runs the new world order is blind to these trends — it faces few of the pressures encountered by most people. Final salary pensions may have been phased out for new entrants into the labour market but they are still there in the boardroom. Would-be policymakers move from think-tanks to governments and back again, dreaming up plans for an “opportunity society” that involves making labour markets more flexible — the sack — and making welfare systems more affordable — cutting your pension.

One upshot of all this is decay in the political process. It has led in Britain to a Conservative party that has lost the ability to conserve and a Labour party where there is the possibility of a fight to the death between those led by the prime minister who want a market state and those led by the chancellor of the exchequer [finance minister] who believe a modern nation state can deliver on traditional promises.

The believers in a market state face an uphill struggle. And this is not just because the world that was supposed to be safe for all of us to get rich in has proved economically unstable, riven by inequality and culturally barren.

It is also because the failings of the new world order have resulted in ideology making a comeback. Ideology has always been the bane of the technocrats; it threatens the smooth running of the machine — ideology is bad, capital B.

It’s true that there are plenty of examples of ideology being bad. But we are also seeing a stirring of interest in green, social democratic and Marxist interpretations of the global economy. That’s what happens when the economy doesn’t deliver and policymakers don’t listen. It’s the clash of the market state and democracy in a mass media age.

Bobbitt may be right. Market states may be all that’s on offer. But if governments can no longer deliver what their electorates expect, big trouble is on the horizon. The message from the new world order brigade is that people had better wise up to the realities of what the system can deliver. But there is an argument for changing the system to one that more of us prefer, even if that means rolling back the “gains” from market liberalisation.

Otherwise the first decade of the new world order could turn out to be the equivalent of the years running up to 1914. The calm before the storm.