POLICY risk has emerged as the core issue in multiple challenges facing the economy because of stiff resistance to change. Contrary to conventional wisdom, even serious crises now do not make it easier to bring about ‘reforms’ as seen in the case of proposed general sales tax, designed to promote documentation. Thus failed or outdated polices prevail with undesirable consequences.
The policy change is made all the more difficult, often virtually impossible, when policymakers, puzzling though it may appear, prefer to work with failed ideas.
As eminent economist Paul Krugman says when historians look back at the Great Depression of 2008-2010 in the United States, they would discover, “the strange triumph of failed ideas.” He was referring to President Obama conceding to some of the Republican party policies.
Because of failed policies, opinions in Pakistan are divided on a wide range of major issues, requiring national consensus. Some of the issues are: should priority be accorded to macro-economic stability or economic growth and development? Is austerity or fiscal expansion needed to stimulate quick recovery? Is it the right time for the RGST and the only option for documentation of the economy? Is supply side or domestic demand the main cause for stubborn double-digit inflation? Is tight monetary policy the right solution for a sinking economy and rising bad debt in the banking system?
All these issues are being debated countrywide as many people do not see any light at the end of the tunnel while economic growth is slowing down and prices, unemployment and poverty are rising . The fundamentals of economy are weak and the country is increasingly relying on heavy external debts. Self-reliance is a distant dream while foreign investment and loans do not come easily. Sovereign risks are mounting. Investment is at a low ebb. And social tensions are accumulating while governance is not improving because the government is unable to reconcile domestic compulsions with strong external pressure.
But none of the problems are as serious and difficult to tackle as policy failures that have resulted in the multiple crises, hitting the economy and the country. Unfortunately, solutions are being sought in old ideas, models, systems and traditional approaches which have outlived their utility, even for those who have immensely benefited from them in the recent past. If right policies are not evolved to respond to the current situation, the consequences can be no different, if not worse.
No remedy can be found unless the malady is correctly diagnosed. Pakistan is stuck to the Anglo-Saxon financial model/system which has virtually collapsed, sucking in billions of dollars of tax payers money and in the process making governments in developed countries ‘virtually bankrupt’ Thus the market failure has put the governments in distress.. The cyclic crisis of boom and bust has also been compounded by the systemic global financial market failure while the developed economies suffer from exhaustion of aging process.
The root cause of all problems is market fundamentalism that fosters dogmatic thinking and serves as a barrier to adoption of new ideas, creativity and innovation. This has created a financial aristocracy which, combined with authoritarianism, tends to retard socio-economic progress when the time has come for a paradigm policy shift towards common good, doing away with glaring disparity between household and regional incomes.
Authority and resources cannot be monopolised by a few at the cost of many without creating social chaos. It should not be forgotten that recessions and depressions are precipitated by over-concentration of national wealth in few hands and when the agenda for income distribution is put on the back burner. While wealth creation is necessary for the future investment, income distribution is vital to make the market prosperous for produced goods and services to be sold. Concentration and disbursement of capital are the two inseparable wheels of socio-economic progress.
Now the more specific issues like resource mobilisation through taxation. Is RGST the right option when the economy is taking a downturn, inflation in double digit, unemployment rising, and the common man has been hit by floods and skyrocketing prices? Is RGST, a retrogressive tax., the only option to document the economy? If RGST lacks social sanction, the tax administration cannot deliver. The poor tax culture has its roots in the taxation policies of the successive governments. The IMF’s nine-month breather for introducing RGST has saved both the Fund and the federal government from what could possibly have ended into a fiasco because neither it is the time appropriate for RGST nor the Federal Board of Revenue fully prepared to launch the ‘reform’, even if one were to ignore the ground realities unsuitable for making it a success.
As it appears at this point of time, the RGST would be introduced from next fiscal year starting July 1 if a consensus is evolved on the pending bill in the parliament. It may help in some documentation as well but it would not improve the tax culture because the RGST is devoid of equity. In democracy, rights and responsibilities are widely shared. The rich seek rights but are unwilling to share responsibility.
Social sanction for any tax reforms will be forthcoming when the federal and provincial governments ensure that every rupee so collected is well spent and the people benefit from it.
Like the faulty approach to taxation, fiscal and monetary policies pursued over the past few decades have been counter-productive, with decision-makers more preoccupied with managing means/modes like interest and exchange rates, trade deficit, balance of payments etc rather than pursuing more vigorously an agenda for improving the peoples livelihood. We thus carry the legacy of a poor tax culture and are witnessing the organic failure of the crisis-hit financial and monetary system. If the financial system, a service sector, cannot help boost production and productivity, its utility for the economy and the society will be drastically reduced (as in the case of monetary policy in curbing inflation). The process is already underway.
There is no way to achieve durable macro-economic stability without boosting production (and productivity) of farms and factories, while giving top priority to processing and manufacturing of agricultural produce. Macro-economic stability is the product of sound economic strategy and development and cannot be achieved by inflow of foreign money, much of which is misspent.