Jun 032008

Nadeem Ul Haque

My friend Abid Hasan, the former operations adviser to the World Bank, has given a dire warning (in his piece published on these pages on May 24) that unless pro-poor expenditures are increased, the country will fall apart. We would do well to heed that warning. He then listed a number of surcharges that should increase our taxation. The additional taxation is to be used for increasing pro-poor expenditures. A very nice well-meaning, ‘from the heart’ proposal. He wants a year of the poor and how can I disagree.

While I agree with him on making the policy pro-poor, I do not agree with the specifics of the proposal. Let me elaborate. His proposal calls for an increase in taxation in several areas. The proposal penalizes cell-phones. Poor kids who are sending SMSs are to be taxed. Why I thought our poor had only just got cell phones?

In 125 degree heat, switching on air conditioners are to be penalized. Savers who invest in the local stock market are to be penalized. Of course property and especially commercial property is to be penalized. It is another matter that commercial property also includes flats which should be for the poor. We are to be sent back into the 60s and 70s where all luxury goods are to be taxed. Of course the bureaucrat and the customs people know how to define luxury goods and they also know how to collect the taxes imposed on them. Pakistani economists from the early days have never liked retail. Not surprisingly then, in Abid’s scheme big retail is to be penalized while of course the traditional areas agriculture, industry and exports are to be subsidized.

Exports are to be given Rs15-20 billion for their promotion. Agriculture too should get Rs30 billion for food grain production. And retail has to be penalized by about Rs20 billion. Of course the additional revenue that he is supposedly raising through these suggestions will give rise to several expenditure initiatives for the poor. We will have cash-transfer schemes, more schools and health clinics for the poor. And we will have farm income maintenance programmes. The only part that where I agreed with Abid was on the PSDP (public sector development programme). Yes the planning commission has been a joke for a while and has been throwing money on useless projects. And yes many of these useless projects should be cut. We will discuss that issue on some other occasion.

When I woke up and had reflected on the proposal, I was left cold and forced to write against my friend’s proposal. What is wrong with it? Let me see how I can say this succinctly. The fact of the matter is that handing over money to our government even for the noblest of objectives leads only to waste. We have seen that our government has the ability to squander any increase in their resource envelope. We had an influx of aid in the eighties and in the post-9/11 period, we have seen remittance booms, we have seen increases in revenue collection in the last five years. Yet in each case the government quickly squandered the additional resource on the welfare of the bureaucracy and those in power – politicians as well as generals. Much of it was spent on VIP travel, prestige projects and on the establishment of new government agencies. The citizens especially the poor got nothing. So why how will my friends’s new proposals help the poor?

As it is, Pakistan has many poverty-reduction projects. There are many consultants and NGOs who become rich through these poverty-reduction projects and there are many project implementation units. Yet poverty does not decrease. The only thing that does increase is the number of poverty and rural works programmes and NGOs with plush offices, fat bosses, land cruisers and perks. Why would we want more of these?

We have taxed everything before. We have had years of no luxury goods, no ac’s no cars, no phones. What did it do for the poor? All that did was destroy the middle class.

We must remember the rich do not really live in Pakistan. They are much like our former prime minister, a friend of the international community, with a presence in Pakistan but only to benefit from it. Truly they live overseas. They have assets in dollar but their liabilities are all in rupees. They visit Dubai and London very frequently where they shop and enjoy themselves. Abid Hasan’s proposal will not hurt them. If anything, it will only hurt the emerging middle class.

As for subsidizing exports, I am at a failure to understand the rationale for that. There is a ministry of commerce which does nothing but export promotion. Commercial counsellors roam the world at taxpayer’s expense in the hope of increasing exports. The Trade Development Authority of Pakistan spends money like water on export promotion. There are subsidies for freight, patent purchase and even for research and development. In all we are spending billions on facilitating exports. And this does not include the frequent free trips that exporters as part of the prime minister and/or president’s entourage.

If exports are still not increasing as a result of all this should we not conclude that bureaucrats cannot be entrusted with the job of marketing our products and that maybe our exports are not marketable? Even more importantly we need to understand that merely spending more government money on promoting exports will not necessarily increase them. What we perhaps need are new exporters and a new breed of bureaucrats.

Now on to the question of taxing the retail sector. My response to that would be why hurt big retail? In most countries as well as Pakistan these are likely to be large employers –often larger than even industry. Yet we want to tax them excessively? Why? For years, I have been fighting with my fellow economists to stop thinking budget and planning – a recipe hanging over from the sixties. We do not need more taxation to increase the size of government. For years, government has absorbed increased revenue in the name of helping the poor by launching schemes like the social action programme, the poverty reduction programme and allocating loans for the health and education sectors. Yet the situation of the poor remains the same.

What should we conclude from this? That increased government spending is not going to help the poor. Perhaps the government is the wrong agent to help the poor. Perhaps if we increase taxation as my friend has suggested, all we will end up with is more money for the government agents – ministers and bureaucrats – to enjoy their plush offices, foreign trips, land cruisers and such like.

What would my programme for poverty reduction be then? I have often written about it. Let me repeat it in a few words here. Reduce the size of the government – get the government out of construction, real estate activity, agriculture, industry, exports, energy, communication, airlines, airports and retail. Reduce the power of the bureaucracy in particular get it out of development which it has no expertise in. Return it to magisterial work. Strengthen magistracy and pay them well.

Deregulate and let the market work. Allow the poor into our cities. Why do the poor not have recourse to small khokhas in city centers or where the rich live? We should kill the enclave mentality of the rich where the housing of the rich is protected from the commerce and life of the poor. The poor will help themselves as they always have. They do not need our charity. For charity is only meant to con them. In my programme retail would be given a level playing field. After all, it is the sector that employs mostly the poor. As I tried to advise the ministry of commerce, let us allow retail for the poor to also take off.

To conclude, I would amend Abid’s proposal somewhat. Yes, increasing poverty will certainly damage and perhaps even tear the country apart. But poverty has increased thanks to the bungling and continued waste of resources by the government. Let us not feed this monster any more through proposals like this. Poverty can only be reduced with increased access to the market by the poor. That means rather than thinking up ways to increase revenues, we should all find out mechanisms for reducing the size of government.

The writer is former vice chancellor of the Pakistan Institute of Development Economics. Email: nhaque_imf@ yahoo.com
Source: The News, 3/6/2008

 Posted by at 6:48 am

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