IN a recent World Bank report, Pakistan has been rated as one of the top 10 reformer countries in the world. While this sure is flattering, one is curious to know what all have we reformed that has earned us this recognition.
And, by knowing that we would also remind ourselves about what is yet to be reformed to complete the reform process to be eventually rated as the top most reformer country of the world.
To further ascertain our position on refiorms, another score is used according to which Pakistan is ranked 60th out of 155 countries for business attractiveness. So, the “reform” that has been effected is market reform, liberalization and opening up the economy for the private sector.
Its success is gauged by FDI inflows and rapid GDP growth rate. Since Pakistan attracted over $1.5 billion in FDI during the last fiscal year and the GDP growth rate was record high, the reform process is considered to be successful and commendable.
Important questions, therefore, are whether liberalization is all there is to market reform, whether market reform is all there is to reform that the country needs, and whether the indicators of FDI and GDP growth rate are valid enough indicators to measure the success of reform effort? I will address these three questions together due to their interrelatedness.
First, liberalization and encouragement of private sector is not all there is to market reform. Market reform is to set the market structures right so that interplay of forces of supply and demand influence the decisions to buy, produce, and sell. The idea is to set the prices right and let the price system do resource allocation.
Prices are determined by market forces and not by considerations of profiteering through collusion, hoarding, and price hikes for quick gains.
Openness should essentially lead to competition in which environment producers seek to gain through efficiency enhancement, cost reduction, and entering into a win-win relationship with stakeholders. If the outcome is to the contrary as we routinely observe through reduction in consumer surplus, liberalization and openness may well have happened but if the above results are not achieved, then markets are not reformed enough yet.
For, market reform is essentially a reform of the behaviour of various actors that should conform to the socially acceptable rules by which one must play in the marketplace for the benefit of all and not just for self. Unless this happens, one cannot really boast of successful market reform. Unacceptable behaviour in this realm spills over into other spheres also which then boomerangs on the market system too.
Since by market reform, we generally understand personal gain maximization regardless, our already low tax-to-GDP ratio has decreased instead of increasing. According to the CBR quarterly review report, our tax-to-GDP ratio fell to nine per cent during FY2004-05. Agriculture with a share of over 23 per cent in the GDP (FY04-05) contributed only 1.2 per cent to total tax revenues. Communications with 13.8 per cent share in GDP in the same year contributed only 4.5 per cent of tax revenues. Trade with 16.9 per cent share in GDP contributed only 2.8 per cent of tax revenues.
And, manufacturing with 17.1 per cent share in GDP contributed 62.2 per cent of tax revenues in FY2004-05. Their high share in tax collection notwithstanding, tax compliance within this segment is low too.
According to a CBR report, there are 45,373 companies registered with the SECP but those registered with the CBR (NTN holders) is only 23,090. And, out of the income tax returns received, many show nil income. Out of 1.23 million returns filed in tax year 2004, around 30,000 showed no income.
So, the issue is not just of narrow tax base, it is also of low tax compliance due to which, according to a CBR member, the existing base too is not effective. Tax payment record is pathetic to say the least, only 1.5 per cent of 150 million people in Pakistan pay income taxes compared to 2.7 per cent in India, 14.5 per cent in Argentina, 58 per cent in France, and 86.4 per cent in Canada. Of course, the tax GDP ratio is also linked to the level of prosperity.
Tax culture in Pakistan has still not spread. Even sales tax collection is not in proportion to GDP growth. A whole big area of reform is tax reform. And, tax reform is not just about the reform of collectors but also of the attitude of those liable to pay taxes. So, while tax reform is certainly institutional reform, it is also and very importantly a reform of mindsets and attitudes to turnaround that decadent value system that is the biggest hindrance to tax payment.
Unless tax payment is believed to be a virtue and not a vice, even the favourite market reform will remain incomplete as, due to government’s paucity of resources, that infrastructure too will fail to come up that makes private sector investment feasible and attractive. FDI, we will then seek in agriculture that is endowed with plenty of resources that our mindsets cannot see and utilize. Agriculture too requires reform of its own if the market reform process is to be a successful one eventually.
With bulk of population concentrated in the countryside, that is where the domestic market for goods and services is which if developed will drive demand for industrial goods in a sustainable manner. In the absence of rural development and land reforms, reliance is on credit-financed demand for even those consumer durables that one should be able to buy from one’s savings in this country.
So, land reform, decreasing poverty, and increasing rural incomes should be determining demand for consumer durables and other industrial products which demand if spurred would further feed into the development of market structures and thereby further market reform. For, a market system needs markets to begin with and to have domestic markets we must have land reforms.
Market players will then have to rely less on deviant practices to make money as the forces of demand will also emanate from the countryside thus enlarging the size of the market into which all will be able to tap and get a bigger slice of the pie. Market reform process will thus be provided fillip. Otherwise, a market confined to urban areas will not be big enough for everybody to benefit from thus generating the pathologies as above that will boomerang on none other than the much desired market system itself.
And, when expectations exceed the means available, deviant practices are resorted to exacerbating the already high levels of corruption prevailing in the country. So, all round reform is needed to rid the country of corruption which issue will remain debilitating irrespective of the direction in which corruption moves on some international index. Since corruption pervades the entire social fabric, it not only leads to leakages that affect the output and productivity, it also deters FDI on which score all want to gain regardless of performance on other indicators.
As for other indicators such as poverty, a high level of poverty reflects on the level of underdevelopment even if it is made to look good somewhat by changing the yardstick with which it is measured and irrespective of the rate at which the GDP may have grown in a year.
For, GDP and/or per capita income growth neither capture equity in distribution nor the extent of misery experienced by over 60 per cent of the population with some 35 per cent being below the poverty line and another about 25 per cent around it. For, the goal ought not to be to merely lift people out of poverty but to induct them in the economic mainstream through equitable sharing of national income which effect is certainly not captured by per capita income alone.
Even though per capita income is as inadequate as it is to gauge the levels of living of the people, it is a variable used to gauge the ‘human development index’ (HDI) thus rendering even HDI as not too reliable an indicator for measuring human development. Any favourable movement on this index too may therefore be viewed with extreme caution. HDI is based on three means of development. These are “longevity” as measured by life expectancy at birth, “knowledge” as measured by a weighted average of adult literacy (two-thirds) and mean years of schooling (one-third), and “standard of living” as measured by real per capita income adjusted for purchasing power parity.
Pakistan’s upward slide from 142nd position on HDI to 135th position as reported in UNDP ‘human development report’ (HDR) for 2005 may, therefore, have been contributed, inter alia, by per capita income growth too during 2004-05 when it grew at almost 16 per cent compared to almost 12 per cent during the previous year.
Higher rate of per capita growth notwithstanding, it does not reflect improved standard of living for all but for a few in a country where asset distribution remains highly skewed and thereby feeds into iniquitous distribution of national income too. Nonetheless, since it is factored into HDI calculation, any improvement in HDI may not necessarily be reflecting improved human development. We should, therefore, not be sanguine about a marginal improvement in HDI rank even if literacy levels may be going up on paper than substantively for as long as the gauge to measure literacy, education, and health also remain of questionable validity.
With a whole bunch of reform areas as discussed earlier and many more that could not be encapsulated due to paucity of space, suffice it to say that mere opening up of our economic frontiers for foreign goods is not reform enough unless the current grave issues are addressed on a priority basis.
IN a recent World Bank report, Pakistan has been rated as one of the top 10 reformer countries in the world. While this sure is flattering, one is curious to know what all have we reformed that has earned us this recognition.
