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The state of the Pakistani economy —Ishtiaq Ahmed

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The landowning class must pay tax on the income they derive from the land. A value-added tax should be imposed on all items sold in the market, especially at the retail levels

The Lahore-based Institute of Public Policy (IPP), Beaconhouse National University, was established in 2008 as a think tank to monitor economic, social, political and foreign policy issues pertaining to Pakistan and recommend public policy measures needed to ‘improve the welfare of the citizens’. Its Executive Council consists of distinguished Pakistani economists, educationists and social scientists. The chairperson is the former finance minister and World Bank vice president Shahid Javed Burki. The main policy thrust of the IPP is that institutions matter and Pakistan should strengthen the institutional bases of a modern, pluralist-democratic polity. Such a polity should facilitate free trade to flourish alongside equitable distribution of national wealth, so that all-round development takes place and peace within and without Pakistan consolidated.

In the Third Annual Report being released today, June 1, there is an upbeat tempo with regard to developments on the constitutional and political fronts. It is noted that the 18th constitutional amendment will strengthen parliament and the federal structure. In particular, under the new constitutional regime, the provinces will be able to significantly increase their financial resources, enabling them to carry out the additional functions that have been transferred to them through the 18th Amendment. The report also expresses satisfaction over the military operations against extremism in Swat and South Waziristan.

With regard to the economy, however, there is very little to cheer. “Of prime concern is the near total breakdown in the delivery of basic public services like power, gas and water,” it is noted (page 3). Indeed a visit to Pakistan in the summer can be quite a punishment. With the mercury rising to 40 plus Celsius already in May, and sleeping on rooftops no longer possible because of the perennial threat posed by robbers and dacoits, one is dependent on privately-owned generators to go through the summer months. How many people can afford them? Well, as will be shown later, they are likely to be those who are not willing to pay taxes to enable the state to undertake the modernisation and development of public services. In recent times, the public has been agitating over the lack of such basic public services, and if nothing is done to alleviate their suffering, the result can be violent protest. We already have our hands full with jihadi violence. Does it make sense to have another brand of violence called ‘citizens’ violence for the provision of basic services’?

We learn from the report that inflation has combined with rising levels of unemployment to produce stagflation. As a result, households are experiencing declining real incomes. One does not have to be an economist to deduce from such reasoning that the incidence and level of poverty is increasing in Pakistan. Now if we remember that jihadi terrorism strikes terror in the hearts of not only the real and imagined enemies of Islam and Pakistan but also all those who may want to invest their money in Pakistan to generate jobs and wealth, the connection between violence, terrorism and negative economic growth becomes quite clear. We are told that there has been a big fall in domestic and foreign private investment in Pakistan. The only redeeming fact in the otherwise very gloomy economic situation is that, because our banks are not integrated in any big way in the international banking system, the current financial crisis which has hit much of the Western world has not inflicted any major punishment on us. In short, the IPP 2010 Report calls for a range of remedial measures to rectify an economic situation that is patently bad.

Among those measures the most important deal with our obligations as citizens. The theory of citizenship is that there is a contractual relationship between the rights we can claim in a state on the basis that we are bona fide citizens and our obligations to the political community that we live in. Alongside democratic development, which extended the right of vote to all citizens, the concomitant economic growth resulted in all categories of the population becoming citizens and the state imposing a tax on all individuals who earned income, no matter what was its source.

The IPP 2010 Report draws attention to the wholly unacceptable levels of taxation that prevail in Pakistan. Although there is no standard rate of taxation that is followed worldwide, economists have agreed that it should be at least 20 percent of the Gross Domestic Product (GDP). GDP is a measure of a country’s overall economic output. In other words, it is the market value of all final goods and services within the borders of a country in a year. In Pakistan, the state is able to collect a mere nine percent of GDP in the shape of taxes, i.e., about one half of what is needed. Therefore, the following measures are imperative to correct the current situation:

1. The landowning class must pay tax on the income it derives from the land. At present it does not since its political clout remains considerable. Such parasitism must be abolished and all landowners should be taxed on the basis of the income they derive from their land.

2. A value-added tax should be imposed on all items sold in the market, especially at the retail levels. Pakistani shopkeepers pay no such duty and that makes no sense at all.

3. All political leaders and members of the national and legislative assemblies must declare annually the tax they have paid. Some of the tax statements are sick jokes. The reason is that some of the most powerful figures in Pakistani politics own huge properties outside Pakistan and those they hold in Pakistan are concealed with the help of clever lawyers.

4. Beside these recommendations, I can add another concern that many of us have: the budget allocations to the military needs to be discussed in parliament. Recently, it was announced that there will be a 31 percent increase in the military budget. To many of us, this makes no sense. An open discussion on it can help us understand why the white elephant needs to be fattened all the time.

Ishtiaq Ahmed is a Visiting Research Professor at the Institute of South Asian Studies (ISAS) and the South Asian Studies Programme at the National University of Singapore and Professor Emeritus of Political Science at Stockholm University. He is currently working on a book, Is Pakistan a Garrison State? He can be reached at

Article published in DT, reproduced by permission of Daily Times;

Daily Times

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