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Corporate power

January 04, 2013

ECONOMIC inequalities within countries have increased significantly in most states that have seen decent growth over the last few decades. But this is usually seen by policymakers as an unavoidable by-product of the growth process.

As the economy grows, the fruits of growth accumulate in certain sectors and among certain classes of people. It is only if and when the growth process becomes more entrenched and is sustained for a longer period that other groups get a chance to ‘catch up’. When this happens the benefits of growth are more widely shared.

The problem with this is, and we have had empirical confirmation, that the imbalance can continue for fairly long periods, and more importantly, imbalanced growth carries within it the seeds of discord that can cause the growth process, for political and economic reasons, to be disrupted.

Some of the political fallout of the high-growth period of the early and middle 1960s was clearly seen in the political movements of the late 1960s in Pakistan. And though it has not been documented as yet, could one reason for urban and middle-class involvement in the ‘movement for restoration of the judiciary’ have been disillusionment with the results of the economic growth achieved in the early to middle 2000s?

The acceptance of the increased inequality narrative has been accompanied by the acceptance of the increase in corporate power. It is not a separate story, but a part of the same ideological package where growth takes place through the economic activity of corporations and hence corporate welfare acquires a much higher degree of importance in the economic well-being of a country. The corporations’ influence on policy also reflects their acknowledged importance.

Even if one goes with the narrative that growth is, by definition, imbalanced, it does not imply that policymakers do not have ways of ensuring that the fruits of growth are shared by a larger number of people through various redistributive and other policy instruments.

Again, historically, we have seen countries with a large spread of growth and inequality trade-offs. But managing this process is not easy. It requires the government to balance the claims of growth against redistribution, the interest of the rich against the poor, and the economic power of the corporations against the claims of the citizen.

Over the last few decades, and in many countries, the economic ideology of growth and private accumulation has allowed the balance to tilt in favour of the rich and corporations, against the citizens.

Leaving aside the reductionist element of the narrative, and allowing for the fact that the story of every country and government will be a lot more complicated, the narrative still has some explanatory power.

The finance minister, a few weeks ago, had acknowledged that the government had granted tax exemptions and waivers of over Rs650bn over the last four years. Most of these waivers were for custom duty and income and sales tax claims. A lot of them were through the many SROs issued by the Federal Board of Revenue (FBR). Though some of the waivers might be for equipment being imported by an NGO for a hospital or a project for the poor, or by a government department for a public works project, the bulk was for corporations which would largely benefit the rich and connected.

And since a lot of the exemptions go through SROs issued by the FBR, the level of public scrutiny is also very low. We would know a lot more about who the beneficiaries were and the reasons for the exemptions if each class of exemptions, or individual exemption above a minimum level, had to go through a process of open scrutiny in a parliamentary committee or another such body.

These exemptions have been given over a period when we have been trying to widen the tax net and increase tax revenues. In fact, our inability to raise additional taxes has been one reason for our difficulties in securing more loans and aid from multilateral and bilateral sources. Yet the government has been unable to limit the exemptions/waivers that it has given over the last four to five years.

The dominant narrative regarding the high level of protection that we give to the automobile industry in Pakistan, and have been doing for many decades now, has included the many thousands of jobs that the industry provides directly as well as indirectly, through the vendor industry, to the people. But the bulk of protection goes as profit to the few industrial groups who own the car industry locally and their Japanese partners. Here it is not just the power of these few local groups that matters, but the influence of the Japanese government too: the aid that it provides to the federal government can be an important lever.

If development of the vendor industry is a good justification for subsidising the automobile industry, could we not tailor protection better by focusing on the vendor industry more directly? And if the current policy had been a success, would we not have much larger exports of either automobiles or of parts? We have neither.

Corporate power and influence of the rich in political affairs and policymaking have increased in almost all countries across the globe. In countries where political institutions are weaker and political processes are less entrenched it is harder to counter these policies effectively and to even provide a counter-narrative.

Where in some jurisdictions we have seen the rise of left-leaning parties through elections, and other organised local responses, it is not clear how a response can be articulated in countries like Pakistan where election winners feel more beholden to powerful interests than to the people and local and/or people-based responses are not well-articulated. Will repeated cycles of elections be of help? We will have more information after the results of the upcoming elections.

The writer is senior adviser, Pakistan, at Open Society Foundations, associate professor of economics, LUMS, and a visiting fellow at IDEAS, Lahore.