A problem for every solution

June 24, 2019

Why did Ghalib drink alcohol on credit when he knew that his habit would land him in prison? We are about to explore this question, even when Ghalib is sitting among creditors, drinking even more...

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Why did Ghalib drink alcohol on credit when he knew that his habit would land him in prison? We are about to explore this question, even when Ghalib is sitting among creditors, drinking even more expensive wine – and in larger quantities.

The prime minister has found another Kekra well to keep his core sufficiently engaged and angry and to keep his political opponents in perpetual fear and awe. Exploring Pakistan’s addiction to loans (once called aid, now termed package) is important because loans are a major symptom of the two chronic diseases (fiscal and current account deficits) our economy has suffered from for decades. Though not terribly high in GDP terms, these loans are fast becoming unsustainable, again due to the two diseases they are rooted in.

Exploring the question of loans can help us understand our morbid political economy. It can expose the fault lines of an elitist economy that works very well for special interests but badly fails the poor majority. A panel of top national and international economists and social-sector experts would have been most suitable for such an investigation. Their recommendations might have provided us with the milestones for a new national economic policy built on solid evidence and national consensus – a Charter of Economy.

We have hit rock bottom, to borrow the words of Pervez Musharraf. Unfortunately, whenever we hit rock bottom, our ruling elite reaches for a drill to dig a hole. The PTI is one party which has a problem for every solution and this problem is, of course, corruption. Why is the party making a commission when it already knows that everything in Pakistan happened due to corruption and corruption happened due to politicians who refused to join the PTI?

Now that corruption is over, the twin diseases of fiscal deficit and current account deficit still persist, forcing the government to seek more and more loans or Zamzam packages. These diseases can be temporarily solved with the IMF’s help, as has always been the case but they will return soon if we do not change the very structure of our economy. This will not happen through the simplistic narrative of corruption. Had NAB been a solution to our economic problems, we would be a Holland already, even if the prime minister did not feel inclined to ride a bicycle from Bani Gala to Constitution Avenue.

The prime minister is telling his core that former governments took large amounts of loans and now he is trying to pay those loans back by taking more loans. He is again being generous with the truth. His government is borrowing a lot more than the loans it is paying back to foreign creditors. He is carrying the same begging bowl and for the very same reasons – because his government is running huge fiscal and current account deficits. The reasons for the two deficits are also the same – low taxation and low export base.

This year, the budget deficit can reach the historic figures of Rs2800 billion. Alongside various expenses, the main reason lies in the failure of the government to increase taxation. The government may face more than Rs450 billion revenue shortfall, which amounts to 1.3 percent of GDP.

In the next financial year, Pakistan’s federal government has targeted fiscal deficit of Rs3500 billion, again due to the low taxation base. Pakistan is one of the least taxed countries in the world. Even in our less developed region, most countries collect 18-20 percent of GDP in taxes while Pakistan collects less than 11 percent. Last year was one of the worst in our history in terms of collection of taxes. In fact, tax receipts went down by one percent of GDP.

So the real question for the economists and everyone to ask is: Why have successive governments failed to collect taxes and chosen to fill the gap through loans? One simple answer is: because they could. For a good part of our history, cheap loans and grants were available and our governments had no hesitation in seeking them. We have reached a point where such luxury is not available, unless something dramatic happens in the region and opens the door to the cave of wonders for us once again.

There is an underlying cause for this behaviour. Taxes are unpopular and they result in citizens making governments accountable. In Pakistan, an unwritten social contract has existed between the ruling elite and the rich. By rich, I mean all people who fall in the direct taxpaying category. They are all rich in the Pakistani context. The rich (including the middle class) don’t pay their taxes, sometime not even their utility bills, and in return they don’t make governments accountable.

Take one simple example. Pervez Musharraf, who was showered with loans and grants by the West, was so uninterested in collecting taxes that he abolished the wealth tax in 2003. The wealth tax is good source of revenue and redistribution, used by most developed countries.

In fact, successive Pakistani governments have used aid ie loans (Zamzam packages), just the way some oil-rich countries use oil to avoid accountability. This is how Stewart Patrick explains this situation in his book, ‘Weak Links: Fragile States, Global Threats, and International Security’:

“Most obviously, easy resource revenues eliminate a critical link of accountability between government and citizens, by reducing incentives to tax other productive activity and use the revenue to deliver social services effectively. The same revenues also generate staggering wealth that facilitates corruption and patronage networks. Together, they consolidate the power of entrenched elites and regime supporters, sharpening income inequality and stifling political reform.”

However, we must remind ourselves that not all loans were misused. For decades, our social sector was mostly reliant on foreign aid. Without foreign aid, perhaps our ruling elite would have kept us even more illiterate and unhealthy. More recently, we have built infrastructure and power houses through CPEC loans that can be a great foundation for economic development.

Then there is another, bigger, problem. We also borrow because of our huge current account deficits, mainly created due to imbalance between imports and exports. A good part of the deficit is covered by our poor workers, mainly based in the Gulf, whose families back home fail to get much from the state.

Why have we failed to grow exports? After all, most developing countries grew their economies on the back of the textile sector. Being a major cotton producer, we were most suitable to use this great vehicle of upward mobility.

There are two simple reasons for this. The export sector requires productive, skilled workers and entrepreneurs. Both skilled workforce and entrepreneurship require investment in human development. This is what Mahbubul Haq and Amarya Sen have argued in their work and showed how the East Asian Tiger became an economic miracle by investing in human development. Amartya Sen argues that the difference between development in China and India also lies in China’s high human development. Pakistan, I need not tell you, lies at the bottom of the heap in terms of human development.

The second reason is linked to our political economy. Instead of entrepreneurship, we have promoted crony capitalism. Crony capitalism feeds on state patronage, exploits primary producers and makes easy money without getting into the trouble of innovation or hard work.

We mainly export cheap sootar (yarn) and grey cloth because our textile sector can make loads of money just by exploiting farmers and getting subsidies, tax exemptions and cheaper utilities from the government. Why would these elites get sycophantic with international importers and burn the midnight oil when they can make money even after attracting dumping duties?

Born and bred in the house of protection, our industry will takes years or even decades to become competitive once it is weaned off from the blood of the poor and taxpayers money. Our current problems can only be solved through Foreign Direct investment (FDI) in the export sector that can link our production into the international value chain.

Unfortunately, foreign investors, including the Chinese, are a jittery lot. We are joining the game too late, at a time when investors are flying away from emerging markets and we need to work very hard to attract them. To attract them, we must have political stability. Kaptaan can either bring in FDI or keep his core sufficiently angry and his opposition sufficiently scared.

The writer is an anthropologist and development professional.

Email: zaighamkhanyahoo.com

Twitter: zaighamkhan


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