Monday, 13 February 2017

Take policy back from the ‘Economic Hit-men’

Everyone is familiar with “Economic Hitmen” and what they do to poor countries. Many Pakistani TV commentators and columnists have been referring to “Economic Hitmen” but mainly in the context of debt. However, Hitmen have evolved beyond the book and operate much more subtly now. Now they control of policy through a monopoly on thought and research. 

They also have huge advocacy funds (20-500 million dollars) where they can buy local intellectuals and media space. Through such activities, they define poor societies for all including the country’s citizenry. Inundated with this advocacy, local talking heads and groups start repeating advocacy mantras. NGOs are set up to run campaigns to project visions and characterizations of poor countries that they want. 

One such important advocacy campaign is run by Adam Smith International a firm that is under scrutiny by UK parliament. It is a campaign to tell us that we are all tax cheats and that there is a need to tax us more.  You can see donors and their consultants united in an analysis suggesting that the only way forward is more taxes regardless of bad policy or poor expenditure management.

Meanwhile, poor Pakistan suffers probably the most messed up tax policy anywhere is the world. (To see how bad our policy is see writings of Huzaima and Ikram ul Haq). Instead of fixing the policy, every few months, consultants give the government a new list of arbitrary taxes to add to the mess. Almost all are paying income tax through withholding taxes on mobile calls, electricity and many other services.

Strangely enough our leaders, bureaucrats, intelligentsia, never challenge this disparaging of our people; instead they feed it. TV shows, newspaper columns repeatedly suggest that low ta/GDP ratio is the most fundamental economic problem.

All sensible debate on this issue is ruled out by advocacy funds which have been charged to tell us that we are bad and that we do not pay taxes.

They never respond to questions such as “what should I pay more for?” or “are government expenditures currently used wisely?” Or “why should a government that spends on whimsical projects and refuses to use its assets (railways, city real estate, PIA etc) wisely be given more?” 

They also don’t want us to see how overburdened the economy is with bad policy pushed by ‘advocacy.’

Government can also tax people through several methods other than taxation. For example, banning activities operates like a tax. Think about it, for decades, private sector media activity was not allowed. Several high paying occupations (eg., journalists, actors, commentators, producers and directors) have opened now. It is easy to see that the ban imposed a huge tax burden on society. Even today policy continues to restrain activities such as large construction, development of inner city commercial and leisure activities. One can only wonder at the cost to society. 

Government can tax us by operating inefficient government owned companies and giving these companies taxpayer funds as well as favorable treatment to prevent competitive private sector activity that would provide better cheaper service. Glaring examples are government owned construction companies (eg., NLC) which are given non-competitive awards for large projects such as road and bridge construction. Airline, airport, gas development distribution, agricultural procurement are other areas where the government either monopolizes or heavily distorts competition.

Policy also gives protection to cars and engineering goods. It also gives exemptions to chosen activities or industries (eg electrical goods). In both cases prices of goods in domestic markets are forced above international markets. In both cases people are forced to buy goods of lesser quality than available internationally. This is a tax for consumers which beneficiary industries (not government) collect in the form of profits. The cost of these polices to the government revenues is about 3 to 4 % of GDP. The important point to note is that consumers have paid this tax. Change these policies and increase revenue by 3 to 4% of GDP and stop calling people cheats. Consumers lose much more than what they pay as they get substandard cars and goods.

Government perks and privileges also tax burden. Take for example the large amount of tax-free compensation that government servants receive in the form of perks (houses, cars, servants, utility bills, plots). If these were monetized revenue collection would increase. Prime real estate for the providing housing and leisure activities to officials could be released for development. A Planning Commission study showed in 2012 that such a reform limited only Islamabad could increase investment potential by trillions of rupees. Capital thus created would expand the tax base. GDP growth would grow by about 2 % per annum. 

The perks culture has also held real estate development hostage for decades as officials seek to reward themselves through plots. Private real estate development is held hostage to the plot culture as government sponsored real estate developers DHA and Coop societies dominate the market.

Merely changing government policies in these few areas would allow the economy to grow as well as increase tax/GDP ratio way more than donor-advocated policies of taxing milk school fees and mobile phone calls. And there are many more that we can and should discuss.

We need to take back our policy from the ‘hitmen’ and their advocacy funds. “Donor-advocacy” suggests that good policy is to leave expenditures and the structure of the economy alone and rely on imposing arbitrary taxes on milk, SMSs. This is bad policy! Besides why would you want to give wasteful setup more money without reforming it. 


Advocacy is mindlessly taxing an already overburdened economy, laboring under the yoke of inefficient regulation, excessive and poor quality PSE intervention, an incentive structure of officials that precludes economic activity.