MALCOLM Gladwell mentions the concept of The Broken Window theory in his best seller ‘The Tipping Point.’ The theory states that if a window is broken and left unrepaired, passers-by will conclude that no one cares; soon vandals will break more windows and cause further disruption.
While this concept initially relates to criminology, the idea of how little things can make a big difference can be applied to a vast array of situations. It stresses the fact that focusing on a few key points can give unexpected results.
If one pictures Pakistan’s economy as a building with windows, there may be a strong chance that some of its windows have, over time, got damaged.
If one pictures Pakistan’s economy as a building with windows, there may be a strong chance that some of its windows have, over time, got damaged
Going by the broken window theory, to prevent further damage to our building our first task will be to fix the damaged areas by creating a ‘context’ that is conducive to growth and progress. Doing so leads us to three neglected areas of the economy: lack of research and development (R&D), abysmally low tax base, and high energy costs.
While from afar each may look to be an independent factor, a closer look highlights how intricately linked the identified areas are.
Efficient energy will contribute towards a lower cost of doing business, increase investment potential and add to more jobs. This wider job base, with a proper taxation system, will boost the tax base which will in-turn help the government to increase its sources of revenue, lessen fiscal deficit and, to some extent, aid in reducing the need for debt financing.
Currently the cost of energy is amongst the greatest expenditures of any company, especially since Pakistan’s energy mix continues to be a victim of myopic policy making and indifference to global.
Thermal power constitutes 64 per cent of the country’s energy mix followed by Hydro and Nuclear at 27pc and 7pc respectively. Our share of Solar power, meanwhile, remains negligible while China, in 2016, installed solar plants the size of a football ground every hour, putting the country on track to meet its 2020 renewable goals according to Greenpeace’s Energydesk.
To increase the county’s revenue, it’s tax structure must be explored. With less than 0.61pc paying taxes in 2016 — in a population of around 207 million — the percentage of tax payers is embarrassingly low. The tax to GDP ratio is also negligible at around 13pc.
Getting people into the tax net will not only increase revenue but also reduce the size of the informal economy. Tax evasion is as much as an economic problem as a moral dilemma as it encourages other illegal activities.
Political will is the key to any administrative reform, including taxation. India, which has recently increased the number of tax filers from 6.2 million people to 10.1m, is a good example to follow.
As of 2017 Pakistan is one of the least innovative countries in the world according to the Global Innovation Index. Meanwhile neighbouring India has climbed up 6 spots.
The absence or indifference to research is evident in a sector that’s also a major contributor to the economy: textiles. Barring a few companies, most of the sector is riddled with inefficient management practices, old machinery and designs. This increases the cost of doing business.
“If we take a look at the top 10 companies of the world vis-à-vis market capitalisation, we will find that most of them are tech giants, companies whose mainstay is continuous research and development of new products.
“In Pakistani organisations the lack of R&D is conspicuous by our habit of blindly imitating global companies which results in a dearth of innovation and creative thinking. The country needs both for the creation of new products and services that will in-turn help boost the economy”, one of the practicing managers in the field of strategy, HR and engineering in private sector said.
R&D also relates directly with job creation, which is one of Pakistan’s biggest ‘broken windows’. Even if major sectors of the country suddenly experience sky-rocketing growth, the lack of good jobs will continue until or unless a commensurate focus on diversification is also undertaken.
R&D does just that. With people teeming with new ideas and platforms in place to help them realise their innovations, there will be tremendous opportunities for our youth — the largest population of young people ever recorded in our history — to contribute abundantly in economic progress and prevent brain drain. A similar investment in R&D helped establish economic behemoths like Japanese, German, Chinese and the United States.
Published in Dawn, The Business and Finance Weekly, June 4th, 2018