There is reason why poor countries are poor. They, academically known as low-income countries, are plagued with institutional weakness, distrust of the government, and a greater share of the informal economy. These factors inhibit any real effort towards an economic turnaround simply because institutional weakness breeds policy uncertainty. Distrust towards the government disincentivizes people and makes them resistant to any real enforcement of revenue-related compliances; meanwhile, the informal economy helps people stay under the radar to avoid any real declaration of income.
While Pakistan is plagued by all of the aforementioned shortcomings, no sincere effort has been made by the policymakers of the country to structurally reform the country’s economic policies. One of the additional reasons for Pakistan’s inability to generate additional revenues is regressive taxation policies aimed at taxing the already taxed while under-resourced tax machinery is unable to broaden the tax base. It is no secret that research has shown that the widening of the tax base is directly proportional to the economic progress of the country. The more a country progresses economically, the wider its tax net would be. Commenting on this phenomenon, Timothy Besley and Torsten Persson remark that one of the reasons for such a finding is that when people feel economically secure, they tend to trust the government more with their money simply because the economic policies bear fruit for the taxpayers.
This is a cycle: positive economic policies lead to economically secure people which in turn leads to the generation of trust between the subject and the state. One cannot exist without the other. Without creating an environment favourable to economic progress, no government on this earth can expect its citizens to submit to taxation laws. Time and again in the history of Pakistan, the policymakers of the country have opted for knee-jerk reactions and band-aid policies that create a breathing space for a short period. Such stop-gap measures work for 3-4 years before coming apart, leading to the re-invention of the wheel once again.
The reform policy adopted by China clearly shows that Pakistan also needs to delegate the economic sources and the means to the local governments to not only increase the efficiency of the administration but to increase the democratic credentials of the country as well.
The absence of long-lasting reforms in taxation policies is also indicative of elite capture at the policy level in Pakistan. The elites of the system have institutional mechanisms that are designed to protect their interests. These mechanisms included hereditary succession to power as well as elite control of political power. With such a clique in charge, any economic policy would benefit those with higher-than-median incomes while making no difference in the lives of those with lower-than-median incomes. It is no secret that wholesale changes are required to the very fabric of this state if an economic turnaround is desired. If history is our guide, we can see the example of China as the country that experienced fast growth as a direct result of such a policy. In 1994, the Chinese government rolled out Tax-Sharing Reform, which demarcated the tax collection and expenditures between the central and local governments. Before the promulgation of this reform plan, China had been facing a budget deficit since the 1980s. The premise of the plan was built on three main pillars: first, decentralization of authority, where central government became responsible for national-level expenditures like military, communication, etc., and local government became responsible for public administration, security, and local infrastructure investment, etc.
The second pillar of this scheme was tax policy reform by which powers were granted to the local bodies to levy taxes. The taxes were levied by the local governments which then ensured complete compliance with the laws.
And the third pillar of this scheme was the support of the overall tax reform by the central government. To show its earnestness, the central government hugely slashed its expenditures, cut down the size of bureaucracy and adjusted the spending of development funds between developing and developed regions of the country in a way that progress in the developed regions was not hampered.
The tax reform which percolated at the local government level produced instant results. With the involvement of the local governments, the era of policies designed specifically for elites ended, creating space for the local governments to work for the betterment of their respective areas. Furthermore, it freed up space for the central government to focus on macro-management as it delegated powers of administration to the local governments. Such was the impact of this policy reform that one year after the reform saw growth of government revenue increase by 203%.
The reform policy adopted by China clearly shows that Pakistan also needs to delegate the economic sources and the means to the local governments to not only increase the efficiency of the administration but to increase the democratic credentials of the country as well. When local governments get involved in decision-making, the elite capture plaguing Pakistan would also weaken its hold. But the question remains who will bell the cat?
The writer is a freelance columnist.