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Social agenda with new federalism

March 25, 2013

THE three political parties leading in the opinion polls have promised to dramatically increase spending on education to nearly double, or even slightly more, than the current level of around 2.1 per cent of the GDP.

Pakistan Muslim League (PML-N) claims to have a vision to transform Pakistan’s education system to be ‘among the world’s best’. The Pakistan Peoples Party promises to treat universal and quality education as a national emergency while Pakistan Tehreek-e-Insaf (PTI) makes a case for ‘one education system’ for all, which caters to every citizen and removes poverty as a barrier for children to realise their potential.

These declarations are welcome notwithstanding the country’s history of broken election promises and poor record of military and civil governments to treat education as a national priority. If implemented, expenditure on education may exceed defence spending. That would be nothing short of a revolution. That aside, there is a minor problem.

After the passage of the 18th Constitutional Amendment in 2010, the ministry of education was abolished at the federal level. In fact, Pakistan became the only country in the world, besides Canada, without a federal education ministry because 17 ministries including that of education, food, agriculture, and health were abolished at the federal level as the responsibility was transferred to the provinces in 2011 as a result of the amendment.

Thus the promises made in the party manifestos, targeting education or health spending as percentage of the country GDP, are no longer so meaningful in the post 18th amendment period unless one party is able to form governments at both federal and provincial levels; a highly unlikely scenario.

The 18th amendment curtailed the powers of the presidency and aimed to remove the weaknesses of a centralised and ineffective system by empowering the provinces through transfer of federal-level resources and responsibilities to provincial governments. It intended to bring education, health, and such other basic services closer to the people and help develop areas that were historically ignored by the rulers and mandarins in Islamabad. These changes met some of the long standing demands of the federating units for greater autonomy and received wide political support.

The efforts to empower the provinces after 2008 elections also led to a consensus 7th National Finance Commission (NFC) Award in 2009, effective from July , 2010 to June 30, 2015. The NFC constituted every five years in accordance with Article 160 of the constitution reviews the formula for distribution of funds, taxes and other monetary assets among the Centre and the federating units. In the past, three NFCs constituted in 1979, 1984 and 2000- all during the tenure of the military regimes- failed to reach consensus and ended in a deadlock.

Under the current NFC Award, the provincial share of the federal divisible pool was increased from 46 per cent to 56 per cent in the first year of NFC (2010–2011) and 57.5 per cent in the remaining years of the award. However, the federal government remains responsible for over 90 per cent of the revenue collection. In effect, a greater share of the total spending is moving from being centralised at the federal level to being centralised at the provincial level.

Taken together, the constitutional reforms and NFC award, though not without some flaws, represent steps in the right direction with major political implications and potential benefits but also run serious risks of creating more complications and dysfunctions- such as contradictory provincial laws, irresponsible borrowing, proliferation of drug, food, consumer products safety regulations - depending on how these well or poorly changes are implemented in a coordinated manner or otherwise without compromising the underlying philosophy.

The federal government has so far failed to realign its organisational structure with the reduced mandate with no signs of a serious effort toward rightsizing the huge federal government bureaucracy despite the devolution of significant powers to the provinces. On the contrary, federal budgeted current expenditure (excluding defence) rose from Rs1,819 billion in 2011-12 to Rs2,066 billion in 2012-13 although 17 ministries with a total budgetary allocation of Rs44 billion in 2011 were abolished. In addition, outlays for public order and safety are rising although the center continues to shrug off much responsibility for a poor and deteriorating law and order situation by maintaining that it is a provincial subject.

In tax areas, by reinforcing the powers of the provinces to tax agricultural income, capital gains, and services, the amendment may have unintentionally created more obstacles to reform to create an egalitarian and progressive tax system. The subject has been in a limbo and has become a convenient excuse to avoid any discussion or attempt to seriously tax income from agriculture.

Another potential area of concern in this emerging structure is the risk of an adversarial, potentially destabilising and counter-productive relationship of the kind witnessed during 2008-2013 between the PPP-led federal government and PML-N’s in Punjab. While the Punjab government blamed the federal government for many of its problems, it made no meaningful attempt to raise the provincial revenue base.

Therefore it’s not unlikely that the provincial governments without any responsibility or capacity to raise revenues may continue to indulge in pork-barrel politics and show-case projects populism witnessed before at the federal level, without undertaking serious reforms and making appropriate investments.

Hence, while there is broad agreement over the decentralisation of powers to spend, moving responsibility for delivery of services, and making the provincial governments directly accountable, the 18th amendment may still fail to achieve the underlying objectives. In the worst case scenario the balance of spending power could shift from the centre to the provinces or from central predatory elites to the provincial predatory elites without bringing any significant real change for the masses.

Empowering provinces without proper mechanisms in place for implementation and conflict resolution, and without strengthening revenue raising capability at the provincial level can result in greater duplication of bureaucratic structures and processes at central and provincial levels, leading to more wasteful spending and higher budget deficits.

One such example is India. Pakistan’s fiscal deficits (excluding grants) of 6.5 to 8.5 per cent of the GDP in the past four years are still lower compared to India’s consolidated (centre and states combined) fiscal deficits that have ranged between seven to 10 per cent of its GDP. Consequently, both India and Pakistan have experienced persistently high inflation rates compared to most of Asia.

In Western Europe, the United States and in Asian countries such as Korea and China, local government spending accounts for 11 to 16 per cent of the GDP and plays a key role in the delivery of services such as education, health, and local infrastructure. The initial growth in China at the beginning of the economic reforms in fact is largely attributed to the pivotal role of local governments.

In contrast, local governments in India tend to have much smaller role, account for a much smaller share (around five per cent) of national expenditures, and have struggled to deliver as the power is concentrated in the state chief minister’s office. There are many variations or models of federalism practised around the world. Pakistan seems to be following the Indian model.

If power is to be truly exercised by the people and make a tangible difference to their lives, Pakistan will have to move toward a model where fiscal functions are devolved through a multi-tiered system of decentralised and representative governance comprising of centre, provinces, metropolitan areas, districts, and union councils because it is one of the most populous and difficult to govern countries in the world, which faces a near breakdown of local administrative infrastructure and delivery of basic services largely because the political and fiscal powers have been controlled for too long by predatory military and civil elites through a centralised model of governance.