The soaring tension over the Pulwama attack, according to media reports, may trigger a full scale war between Pakistan and India. The ongoing military stand-off between the two countries is reflective of new heightened levels of uncertainty and insecurity in the South Asian region. A sense of insecurity can adversely affect, and even occlude, the economic activities of a country because of rising capital flight, increasing transport costs and frequent investment postponements. Due to the prevailing uncertainty and fear, these factors directly affect the fiscal and monetary dimensions of an economy. The fiscal repercussions of inter-state wars leave deep ripple effects in terms of the destruction of fiscal institutions and lowering of tax bases resulting in a steep fall in the overall quantum of revenue. The sales tax base, in particular, gets very narrow during conflicts and inter-state wars. In a book published in 2002 titled From conflict to reconstruction in Africa, authors Kovsted and Tarp analyze the post-war recovery process in public spending, arguing that in the wake of war, the budget becomes more dependent on foreign aid than before the war. As the threats of war from irascible India are imminent, these factors merit the attention of the government before it takes any critical decisions on armed conflict with our war-mongering neighbour. An anatomy of the fiscal factors at macro and micro levels is, therefore, necessary to winnow the fiscal conditions during and after the war.
Before analysing the various factors affecting fiscal performance during an inter-state war, if it takes place between Pakistan and India, it is paramount to briefly revisit the economic and fiscal dimension of power. Power roughly refers to influence or outright exertion of force. There are multiple dimensions of this force on political, economic, social, administrative, spatial, and cultural fronts. The economic side of power is the most docile but forceful dimension, because all other types of power are primarily dependent on it. Rising economies, like Pakistan, need to be extremely shrewd and mentally smart to protect the economic dimension of power that is witnessing a de novo revival after the Chinese and Saudi investments coupled with a possible discovery of hydrocarbons near Karachi. China, for example, appears to successfully follow this strategy by not indulging in any major violent conflict with its rivals, such as the US and India, thus making no compromise on her economic power. Pakistan may also consider following this power framework by putting its best efforts to avoid violent conflict with intransigent India treating it as a war strategy for gaining more economic power in the region.
As economic power is the basis for all other types of power, the economic chaos focusing on short term gains destroys political institutions, thus weakening the entire law enforcement mechanism. As a result, the areas of human capital development focusing on long term gains, such as education and health, are neglected
The rudimentary base of economic power rests on a robust financial management system capable of collecting due taxes in a progressive economy characterised by innovation and entrepreneurship. Since the times of the philosopher Thomas Hobbes, power is considered a causal phenomenon. This suggests that hostile countries, like India, may attempt to exercise their influence over Pakistan with a view to changing the economic dynamics of power stasis. Such change generally brings surprises with it because the affected countries are not prepared for it mentally and administratively. It is because the areas of ‘non-decision making’ and ‘non-issues’, as reflected in Bachrach and Baratz’s 1963 research paper Decisions and non-decisions: An analytical framework, remain highly neglected in the strategic economic planning for wars. These areas primarily focus on administratively preparing for the surprises or the events with the least probability to occur. It may be remembered that wars can be full of lugubrious surprises with tremendous economic repercussions because of the occurrence of unforeseeable events far from practical rationality. This suggests that Pakistan must not compromise on its renewed economic power that naturally rests on the tax collection expertise gained by the country after very hard efforts.
Against this backdrop, it may be highlighted that war increases uncertainty exponentially thus weakening the economic power of a country with massive impacts on its tax collection ability. In a 2001 paper titled The fiscal dimensions of conflict and reconstruction, Edison and Murshed argue that uncertainty due to wars increases because of policy reversals or policy chaos. Uncertainty is the most fundamental determinant that can retard economic growth of war-torn countries by promoting pusillanimous business practices. It is because the economic forces such as general public, entrepreneurs, investors, banks, tax collecting agencies, industrialists, taxpayers, and financial institutions start focusing on short term gains. This kind of economic trend inherently discourages the revenue gains accruing from otherwise robust financial management systems.
As economic power is the basis for all other types of power, the economic chaos focusing on short term gains destroys political institutions, thus weakening the entire law enforcement mechanism. As a result, the areas of human capital development focusing on long term gains, such as education and health, are neglected. Furthermore, the property rights may also be seriously threatened, depending on the gravity and longevity of war. In a 2006 report titled The cost of violence: Estimating the economic impact of conflict, Mueller and Tobias note that countries may get trapped in repeated cycles of violence during wars badly affecting their economic development. This argument is in close consonance with Prime Minister Imran Khan’s observation that it is easy to start a war but difficult to finish.
(To be continued)
The writer is Additional Commissioner, FBR, holding PhD in Economic Planning from Massey University, New Zealand. The views expressed are his own.
Published in Daily Times, February 27th 2019.