Wednesday, 11 March 2015

Living off Daddy's Wealth

Lack of social mobility is very visible in Pakistan. Political power also seems to be coagulated as the chances of getting elected are tied into traditional wealth, land and family status. Power, privilege and wealth seem to remain in the family in Pakistan.

A few years ago a principal of an elite school told me that the students there were disinterested in serious studies as daddy’s wealth was certain, and their elite status was guaranteed in society through inheritances.

Discussing this with various members of our privileged class, it becomes immediately apparent that hard work is not an aspiration. Power and privilege is a right in our society, not something to be earned through hard work. An entitlement culture prevails not just in agriculture but also in business and politics.

Examine the elite and you find large cohorts who even if educated have never really used that education. Their lives largely have been of leisure made possible through inheritances and sources of rentier income. Such lack of social mobility and the preservation of privilege was the hallmark of feudal societies. For long periods this privilege preservation kept a large part of the population locked into the poverty trap. It took revolutions – some bloody – to break this system. Many of these revolutions involved land redistribution. It is not surprising then that most analysts think of rentier income as coming only from land and so ask for land reform.

However, we all know of industrial families that have done little to develop grandfather’s industry but enough state subsidies and a liberal tax regime have kept their lifestyles of privilege alive. Similarly for large real-estate holdings! In its heyday, capitalism broke feudal privilege and replaced it with market-based merit.

Through innovation, entrepreneurs established a new meritocracy and amassed large wealth. In the process jobs and a new middle class was created. The need for skills in the process of innovation development and management allowed the educated and the talented to participate in the wealth that was being created. Such capitalism escaped Pakistan because of license raj, SROs and the government-industry-land nexus. Here privilege reigns supreme!

Childish economics thinks that some form of taxation can do this. Of course it is difficult to design a tax system focused on privilege and power without it impacting the rising middle class more adversely. The rich can find loopholes through exemptions. As capitalism matures, the nexus of money and politics has raised the same issue in advanced economies. Money is able to buy laws and escape taxation. Along with the global crisis this money-politics nexus has raised a new debate on social mobility and welfare policy among serious economists.

Inheritance tax has recently been revived in Thomas Piketty’s new bestseller, ‘Capital in the Twenty-first Century’. He has shaken up the economics profession by raising the issue that it may be inherent in the structure of capitalism that the rich will get richer at the expense of the rest. There are no natural mechanisms for correction of inequality. Hence policy intervention is required. He recommends taxing capital or wealth in a progressive fashion. Accompanying this is a progressive inheritance tax.

An inheritance tax is a generational reset. As Warren Buffet said “a rich man should give his children enough money to do anything but not so much that they do nothing.” Taxing wealth in someone’s life is taxing savings and could be difficult. But when wealth passes from one generation to the next taxation can play a useful role. “It is a tax paid by the recipient of this income, the inheritor, the lucky winner in the sperm lottery.”

Research has shown that people work hard to satisfy their needs. In the process they create wealth for others as well as for society. Winners of lotteries, whether of birth or otherwise, rarely use their talent. Inheritance tax could be beneficial for many reasons.

·        First, it would set the generational incentives right. Children will be mindful of the generation reset and work hard to use their talents for developing a worthwhile life. Parents will make investments in their education and skills to make them competitive instead of handing them rental incomes.

·        Second, people wishing to escape such taxation can in their lifetimes put some of their wealth to work through gifts and endowments in much-needed social-sector activities like universities, hospitals arts etc. This will alleviate the pressure on government to provide for such activities alone.

·        Third, it will allow much-needed capital to come into the marketplace and flow to higher return activities instead of being locked away for generations into rentier incomes alone.

Counterarguments claim that the bequest motive is an important incentive for the entrepreneur to accumulate and must not be taxed. This must be balanced off by recognizing the adverse generational incentive effects that Bill Gates and Buffett have noted in saying that they don’t want their children to inherit so much as to become “do-nothings”. Moreover, society and government’s contribution to the amassment of large wealth must also be taken into account and does entitle it to some part of the inheritance.

What then should be the rate of the inheritance tax? Piketty has argued for as much as 50-60 percent tax rate for the upper end of the wealth distribution. A substantial rate especially for the upper end of the wealth distribution is required for a meaningful generational reset.

Many complain of the spoilt nature of our elite children in this land of free bequests. The phenomenon has been celebrated in songs like ‘Waderay Ka Beta’. Perhaps it is time to consider reintroducing this most important tax. It will also improve social mobility and establish greater competition in the marketplace as well as in politics. It is probably more efficient and doable than land reforms which some people still demand.

Tuesday, 10 March 2015

Advocacy—the New Missionaries

Inept leadership, perpetually looking for shortcuts has been begging for aid for most of our history. The result: problems and debt both pile up while donors do all manner of experiment here and leave a mess behind.

Our leaders run to Saudi Arabia on a quarterly basis, begging for oil and aid, seldom getting any. Meanwhile Saudi funds have free rein to ‘advocate’ radical Islam in Pakistan.

Other donors have also learnt to experiment with policy in a country where leadership is asleep and ready to sign anything for a few million dollars. Photographs appear in papers on a daily basis of our leaders sitting in some ceremony with junior aid officials. In a subtle manner the donor establishment says that our officialdom including ministers is at par with junior employees of donors.  What do we expect when begging is our only policy?

Used to be a time when money was given for building a Mangla or a Tarbela.  Now donors have learnt that their money can buy much more when governments and societies have been dumbed down and aid addiction has set in. They have policies! They have ideas! More importantly they have now developed bureaucracies with mind and a career motive. Why should these bureaucracies not run countries? 

Armed with oodles of money and stature and faced by an inept government machinery, these donor bureaucrats, petty officials with no real prospects of alternative employment are now excitedly running Pakistan. They can experiment with no regret. All mistakes belong to Pakistan all credit goes to them.  For example, IPP policy was initiated by such donor officials who even privately profited from it. Pakistan continues to pays the price to date while the World Bank is never questioned for poor policy design.

Similarly World Bank is not held responsible for the public sector reform program that sent DMG officials on a sojourn in Boston at huge cost to Pakistan. Nor are they held accountable for the Tax Administration reform program that wasted 10 years and about a 150 million dollars. DFID too does not take any responsibility as it throws in money to back the TARP of the World Bank. 

DFID has funded the SBP to get into development issues such as housing and Small and medium enterprise development even as IMF counsels an independent SBP focused on inflation. But who will question them?

USAID’s arrogance knows no bounds. Their officials visit Pakistan on ‘tours’ of 6 months to a year and refuse to come out of their bullet proof posh houses. They interact with nothing Pakistani. Even their water and toilet paper is imported from USA. But they also do nothing. They give huge contracts—100s of million dollars-- to so called contractors--firms of friends and retired aid officials. A graveyard of these projects exists somewhere yet several ex EAD secretaries do not even know the names of these firms. After all in retirement these contractors could employ them.

With so much failure around them, donors are quick to reinvent their narrative. Of course the blame is all on the locals who are seen as corrupt, inept and stupid.

Now the donors have prescriptions in back pockets and have no need to understand society or local conditions. They merely need to ‘advocate’ (just like the Wahabis) their policies in newspapers, television, and events to convince us that they have the truth.  . 

Advocacy! Does that remind you of something? History repeats itself! 19th century, the missionaries where here to convert us to Christianity because of course the natives needed enlightenment. So with missionary zeal they advocated conversion. The early missionaries, more dedicated, did educate us in the bargain.

Gone are those days of dedicated missionaries. We live in the age of private sector and outsourcing. So instead of missionaries we have consulting firms and contractors made up of cronies of aid establishment—friends and old colleagues. At huge cost they run these programs. Here is a sampling of a few of these.

Awaz 35 million pounds Managed by DAI—consulting group out of Washington.

Voice and Accountability Fund 5 million pound Managed by DAI—consulting group out of Washington.

Transforming Education in Pakistan 20 million pound Managed by DAI—consulting group out of Washington.

Research and Advocacy Fund 18 million pound Managed by British Council

Poverty and Growth—5 million pound Adam Smith International consulting firm out of UK.

There are a lot more of these missionary programs. No one at any economic ministry has any idea of how many there are and how they are run or why they are there. Yet millions of dollars are being wasted here while our universities, schools and hospitals starve for funds. There is money for advocacy but not for fixing them. 

The advocacy movement run purely by donors, faces no pushback from anyone in the country as all thinkers researchers are employed by donors or have the potential to be employed by them.

On the face of it these advocacy programs seem innocuous, often addressing ‘motherhood and apple pie’ topics. So why complain? Well 2 reasons. First such top down approaches based on altruism of donors and their consultants are flawed in their conception. Second, our immediate problem is that the state machinery has eroded to a point it is failing to deliver on all fronts. The priority now is to rebuild the state not advocate to the broken assuming that it is not broken.

Advocacy merely assumes that the nothing is wrong with the state and preaching alone will make good things happen.


Monday, 9 March 2015

Who protects our ‘thought’ Industry?

3 decades ago, Ghari Baqir returned with a PhD from Harvard. Keen to use his newfound skills to contribute to policy and thought he started teaching at university as it allowed him time to research, write books and perhaps at some stage advise the government. He had ideas and was willing to work hard.

Soon he realized that professors were at the bottom of the barrel. In a society where power and wealth is everything, he had neither. His counterparts in the bureaucracy had nuisance value, generous perks and plots whereas all he had was a measly salary, no power, no perks. His tiny filthy office did not even have a phone in that era before cellphones.

Luckily, donors offered paid consulting opportunities. Eventually he made enough money to buy his own house. In the process sadly dreams of independent research, those bright ideas, those books he wanted to write got buried. Donor consulting was working on others’ agenda. He wrote long, lengthy and often meaningless reports on poorly thought out projects. He reported to junior donor officials as well as their contractors who controlled money with little originality. The terms were very clear: Ghari could only dance to their tune.   

Worse, he was also discriminated against. Paid at ‘domestic’ rates, usually half (or less) that of international consultants who often were much less qualified than him.

He often says “discriminated against in my own country but who do I turn to? So hungry is the MOF and EAD for donor money, that they never question donor practices, quality or agendas. EAD has no care for exploited domestic ‘thought industry’ or donor controlling policy agendas, only their EAD foreign tours and perks.”

But the game had to be played. He often thinks of writing his book to tell about this iniquitous situation.

10 years later, his growing business led him to make a consulting firm in Islamabad where he would be close to his paymasters. The firm has grown. He is now very close to 2 of the biggest donors as well as has strong relationships with 2 of the biggest beltway bandits being their steady subcontractor in Pakistan. Yes money is coming in.

However, he knows that he has peaked and that the firm can grow no more. Donors will never allow him to compete with their own consulting firms--his senior partners. He knows them well and he knows he can do a better job. But fine print in the rules prevents him from competing. So relegated to be being a junior partner, he is often merely a logistics supplier. In other words, a bag carrier.

So ACME Consulting of Washington DC got a 100 million USD contract out of which his firm got only 3 million. Ghari’s firm did most of the work. But ACME consultants came there at huge rates lived in 5 star hotels and gave instructions.

He thought about expanding overseas but he could not compete with the ACMEs who had huge support from the ‘cartel’ of donors. So when last we met he told me that there would never be a Pakistani consulting firm of international stature given this structure of the international thought industry. 

Well we have protected cars exorbitantly for 50 years, I told him. In order to make an engineering goods industry, we have the Engineering Development Board which with SROS mothers a stunted Engineering Industry.  

In addition we have the National Tariff Commission (NTC) to guard all industry in Pakistan from dumping practices. There website shows ongoing investigations into Polythene, Soda Ash and garments for allegations of dumping. They have successfully investigated many such allegations in the past.

We also have the Competition Commission in Pakistan (CCP) to look into anticompetitive practices and it has taken stands in sugar and cement industries.

Why don’t you appeal to the NTC and the CCP?

Ghari is a serious, well-meaning sort of fellow. He marched off to all these agencies to plead his case. He had a hard time explaining what an ‘intellectual industry’ was. They see and need cars but not thought.

Ghari had come full circle—starting out as a professor in a society where education and research had no value to becoming a sort of ‘thought’ entrepreneur in an environment where intellectual work has no respect and is routinely subject to dumping by donors.

Even his original ideas do not belong to him. Consultants and donor agencies get the citation. The sit at the policy table. Ghari is merely the ghost in the machine.

And Ghari concludes with a sigh “History and country experience has abundantly illustrated that development is direct product of better ideas arising from thought and research. Yet in Pakistan, EAD and MOF unintendedly facilitate dumping on our ‘thought’ industry. Do they really understand development or are they ‘marching to the tune of defunct economists’?”