ON at least two occasions in the past few months, I have written on the need for a quick return to running the state as other responsible nations do: collecting taxes, spending wisely and dispensing justice – i.e. subjecting everyone, individual or powerful group or institution to the rule of law.
In ‘Speaking Greek’ (Nov 2011), I dubbed this a “back to basics” approach. Two weeks ago, in ‘Voodoo economics’, I characterised the package of needed economic reform as “IMF policies”. In doing so, I made a branding error – painting fundamental economic reform, which no one can disagree with, with an IMF brush and hence inviting scepticism and cynicism about the efficacy of those policies.
Truth be told, the set of economic reforms and specific policies that will turn the economy around structurally — as opposed to cyclically — are the same whether under IMF prescriptions or under any sensible home-grown plan.
The logical question then is, if so many people in Pakistan have known for so long what we should be doing, why are we sliding towards the abyss? To put this in perspective, and to disabuse those who still think Pakistan is not in secular decline (in the economic sense), consider: each and every international comparison of indicators of economic progress over the past ten years or so places Pakistan in the vicinity of the bottom 20 per cent of the class. This is reinforced by surveys and indices of global comparison on a broad range of measures, be it the UNDP’s Human Development Index, Legatum Institute’s Prosperity Index, the World Bank’s Governance Indicators, or Foreign Policy’s Failed States Index.
One way of looking at this is that “we are doing okay, it’s just that others have done better”. While partly true — and still a cause for concern — the fact is that Pakistan has not done as badly in any period since independence 65 years ago than it has in the recent past.
Why has the situation deteriorated, rather than improved? A large part of the answer lies in the fact that the constituency for genuine, wide-ranging reform of the state is limited. The millions of Pakistanis who suffer on a daily basis the humiliation of a wretched existence, and would be amongst the biggest beneficiaries of reform, are marginalised and disenfranchised.
On the other extreme, a large part of the educated middle-class, so often an agent of change in human history, has been co-opted by ‘the system’. Hence, the potential impediments to change are not just politicians, feudals, generals, bureaucrats and judges. This anti-change, pro-status quo constituency includes industrialists, traders, self-employed professionals (doctors, lawyers, consultants, tax professionals, accountants, architects, interior decorators etc), journalists, media owners, small businesses and farmers, amongst others — in short, a broad spectrum of society.
The starting point for any assessment of the size of the patronage system — and how we are all benefiting from it — is of course the tax collection statistics. Beyond the fact that around 3 million people are tax-registered in a country of 180 million, around half of that number are actually paying any tax — and only a fraction of these are paying their dues in full. Hence, excluding salaried taxpayers, roughly 600,000 Pakistanis (0.3 per cent of the population) file an income tax return voluntarily.
Another way of looking at it is that Pakistan’s tax to GDP ratio should be around 15 per cent. It is actually around 10 per cent (adjusted for FBR’s “bakhsheesh”). Hence, non-salaried Pakistanis above the tax threshold are evading around five per cent of GDP (or Rs1,000bn) a year in tax dues.
A second area where many Pakistanis, including those lamenting the country’s condition, are unprepared to pay their dues is in the case of utilities. According to official figures, outright theft of electricity amounts to close to Rs100bn a year. Gas theft, much of it by industrial concerns and CNG stations, amounts to another approximately Rs100bn a year.
Four other areas where the undue benefits accumulated by rigging the system are huge, are public sector procurement, loan write-offs, illegal property allotments and ensuring spending allocations in the budget favouring specific constituencies. The beneficiaries in each of these areas are not the general public but “special interest groups”. Nonetheless, the size of this ‘cake’ is another Rs1tr or so, by a rough estimate.
Put all these mind-boggling numbers together and one begins to get a sense of how comfortable many Pakistanis are with the status quo where people enrich themselves at the expense of the state. It also gives a sense of why we have a problem no less Herculean than that of Greece on our hands if we are to fix Pakistan.
Like our comfortable Pakistanis, most Greeks have had it quite good, especially after joining the Eurozone — till the bubble burst recently, almost certainly for ever. An egregious example of Greece’s excesses is provided by their version of Pakistan’s exporters — the shipping magnates. Raking in profits equal to nearly seven per cent of GDP, the sector is exempt from paying tax. Not surprisingly, some of the wealthiest billionaires with the most opulent lifestyles on the planet have been the Greek shipping tycoons. But it doesn’t stop there. Reportedly, another sacred cow in Greece — quite literally — is the Orthodox Church, enjoying state privileges and perks. Then there is the public sector worker who enjoyed, before the crisis, an average salary three times that of an equivalent worker in Britain’s private sector. While all these constituencies rejected reform for decades, ultimately it has descended upon them like the Mongol hordes sweeping Europe centuries ago.
That is the real lesson of Greece for all of us: reject reform and live the good life for a few decades — but leave an impoverished nation for the next few generations.
The writer is a former economic advisor to government, and currently heads a macroeconomic consultancy based in Islamabad.