Perfect storm?

Published March 17, 2023
The writer is a senior research fellow at the Institute of Development and Economic Alternatives, and an associate professor of economics at Lums.
The writer is a senior research fellow at the Institute of Development and Economic Alternatives, and an associate professor of economics at Lums.

SOME economists and other commentators have been arguing that the economic/financial crisis that we are facing, though serious, is relatively easy to fix. All we have to do is to a) implement and raise the right taxes and reduce the wrong ones, and b) reduce overall expenditure while raising expenditure targeted at the poor and development and cutting other expenditure by a lot.

The right taxes mentioned in this context are property tax and taxes on real estate, agricultural income tax, and taxes on the income of traders and other groups who are currently not in the tax net.

At the same time, there should be a reduction in indirect taxes like flat taxes on services, sales tax and taxes on imports. The idea, clearly, would be to increase direct taxes on those who are able to pay while reducing them for those who cannot, and therefore should not be paying taxes.

On the expenditure side, the idea would be of overall reduction in expenses by moving to more targeted subsides for the poor, the removal of subsidies, of which there are many for the rich, and the removal of inefficiencies on the expenditure side.

The overall thought is that if by doing the above the government can remove the fiscal deficit, over time, as we run surpluses, the problem of twin deficits (foreign currency and domestic fiscal deficit) will become more manageable.

The economic and political crises are not isolated events.

Sounds simple enough. But we have known all this for decades now. Economists and policymakers have been talking about agricultural income tax, taxes on real estate and property, and taxes for traders for at least 30-odd years.

And we have also been talking of making government efficient and re-prioritising expenditures for the poor, and for development in general and human development in particular for a long time as well. But all this has not happened. Clearly, it is not so easy to do it then.

The real question is why have we not been able to do what has been mentioned here? When we raise taxes, and we do it all the time, why is the focus on indirect taxes and usually in presumptive or advance mode? Why have we not been able to reduce subsidies for the rich?

Why do we have a large sugar industry when we have known for a long time that it is a waste of water and other resources and the land under sugarcane cultivation can be utilised better for other purposes? Why do we still end up protecting and subsidising the 50-odd richest families who have sugar mills? And it is the same story in a number of other areas as well. For instance, why has it been so hard to tax real estate?

We currently face a political crisis as well. Democracy is limping badly; the hybrid governance arrangements, once a stable equilibrium for the elite, have been destabilised due to the entrance of new players. It is not known what the new arrangement will be and when it will become clear, if at all.

I argue that the economic and political crises are not isolated events that have come at the same time by mere coincidence. The two are connected. At the root of it are factors of political economy that have been and are driving these dynamics. For long, our polity has been ‘rule of the few, by the few, for the few’.

Those ‘few’ have been called the ‘elite’ by Ishrat Husain, and are now being called ‘one per cent’ by Miftah Ismail. It is the rule of those who have had the resources and the power, supported and bolstered by aspirants to those resources and power. It includes the top tier of politicians, bureaucrats, the military and judiciary, business folk and the landed: resources and power.

The elites make sure that the rules are made to enrich them further and to confirm the entrenchment and continuation of their interests. This may sometimes be done through illegal means, but most of the time it is done using the law. Judges, bureaucrats and army officers get plots and land legally. The Toshakhana usage was legal. Subsidies and/or protective measures for the sugar or automobile industry have been legal.

At the same time, the structures have worked hard to control society and to undermine the development of all institutions and movements that have or could threaten their control. The education curriculum is controlled to ensure a certain narrative about religion and nationalism. Mass media and social media are used for this purpose as well.

The development of political parties, grassroots mobilisation, democracy, media and civil society have all been undermined again and again in our society. Student unions in most provinces are banned even today. This has made mobilisation and/or organisation of the masses a lot more difficult. It has also made the development of strong institutions that are needed to underwrite democratic development in a country that much harder as well.

Is it any wonder then that governance has broken down? And we have not been able to implement ‘simple’ solutions that could solve the economic problems we currently face? It is naïve to think that solutions and their implementation is ‘simple’.

The structures that have given rise to these problems cannot be the ones that provide us with the solutions as well. For change to take place, something has to give. It might happen, as the crises deepen, that the elites and the institutions that protect them start fighting amongst themselves for scarce resources. Maybe that will break down the current equilibrium.

The current economic and political crisis might be an early sign of the coming battle. Maybe this will bring about the change in structures that we need.

Many other countries have faced similar crises and some have resolved them successfully as well. But this does not mean that all can. It just shows that it can be done, though the solutions for each country tend to be context specific. We will have to forge our own path here. At the moment this looks like a hard climb.

The writer is a senior research fellow at the Institute of Development and Economic Alternatives, and an associate professor of economics at Lums.

Published in Dawn, March 17th, 2023

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