It may be deduced that any war between India and Pakistan will inherently bring economic uncertainty with it. This uncertainty will inhibit the capabilities of the federal and provincial tax collection agencies such as the Federal Board of Revenue (FBR) and the provincial tax collection authorities. This suggests that uncertainty and insecurity needs to be avoided as a long term economic strategy by putting best efforts to prevent violent conflict with the hostile neighbor India.
This approach may further be investigated from various case studies of the countries that experienced violent conflict or war. Edison and Murshed analyzed the fiscal dimension of ten selected countries facing conflict and war. Violent conflict in Congo (Brazzaville), for example, resulted in enhanced military spending and a steep dip in non-oil revenues resulting in the budget deficit ballooning at 7.5 percent of GDP in 1997. In the 1998 reconstruction efforts, the country had to refocus on strengthening its tax and customs administration for reviving the economy. Due to violent conflict, the problems of tax fraud and budgetary mismanagement became chronic in the Ivory Coast as well. The conflict resulted in the steep fall of value-added tax and customs revenues, thus increasing the domestic payments arrears and jeopardising the entire tax management system. Owing to the 1997 war, the Democratic Republic of Congo also experienced a contracted tax base and feeble tax institutions due to negative impacts of high inflation on tax revenues. The East Timor conflict also caused similar fiscal repercussions and the country had to focus on re-registration of taxpayers along with devising a new tax system.
The negative impacts of war on the fiscal and economic system will not just be confined to Pakistan. They will equally affect India as well
The Eritrea independence war with Ethiopia also had serious fiscal impacts for both the countries. Out of the total revenues, Eritrea spent 13.8 percent on financing war in 1999. Due to war, Ethiopia had to impose an additional 10 percent import tariff, thus weakening the entire tax system and trade liberalisation. The violent conflict in Guatemala resulted in 50 percent increase in tax rate by the year 2000. It witnessed further empowerment of higher income groups as the agricultural and commercial tax became deductible from income tax, thus weakening the tax management system as well. During the Guinea Bissau conflict, the budgetary and tax institutions were completely paralyzed, witnessing a steep dip in the tax base. Owing to the war in Liberia, the fiscal system remained highly chaotic witnessing non-transparent tax regulations. A long war in Sierra Leone completely collapsed the fiscal base of the country, shrinking the real GDP by 17.6 percent in 1997, and further contracting it by 8 percent in 1999. Similarly, the conflict in Zimbabwe resulted in steep loss of tax revenue, sharp economic contraction alongside a fiscal deficit of 25 percent in 2000.
These case studies clearly establish a negative relationship between war and the working of an effective fiscal management system. The negative impacts of war on the fiscal and economic system will not just be confined to Pakistan. They will equally affect India as well. If a Pakistan-India war takes place, the fiscal management will surely be jeopardized in both countries. Pakistan’s federal and provincial tax collection system are moderately advanced as compared with other countries of the world. At the federal level, the FBR is monitoring and collecting taxes through various automated systems. The expertise gained by its workforce has taken decades to come to this advanced level. The Director General of Inter-Services Public Relations Major General Asif Ghafoor, as per media reports, has rightly reiterated the theme ‘talks, not war’. It may just be remembered that economic power is supreme as it provides a base for other forms of power. Avoiding war with India at this stage may indeed be treated as a strategy to further strengthen the country’s economic and fiscal management system, that has evolved to this level after hard efforts of the tax collection agencies. Let’s be mindful that it is actually the rationality-power interplay that determines the strength of an otherwise innocuous economic power. It is an established fact, as per the literature, that rationality is always subservient to naked power but the power of rationality is more than power itself. That means economic power is more powerful than the political and military power. The same principle needs to be applied in strategically planning and protecting Pakistan’s long term economic and fiscal power against the antagonistic designs of India .
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 28th 2019.