May Issue 2016
Economy: How the rich-poor divide has increased
By the By the end of the Ayub era, most of the country’s assets had been cornered by 22 industrial families of Pakistan, which increased the gap between the rich and the poor as well as between West and East Pakistan and between Pakistan’s rural and urban populations.
With the advent of the Bhutto era, a levelling phase was started, forcing the 22 families to flee the country with their loot. But this phase of levelling inequality was cut short quickly by General Zia and a new phase of cornering the wealth of the nation by a few hundred was launched.
Throughout the 1980s and part of the 1990s, one saw the dice heavily loaded against the majority as the nationalised banks were fleeced by opportunists in the name of development. The partial privatisation policy of offering 30 per cent equity in the nationalised banks was exploited to the hilt by these opportunists to rob the nation blind.
The bank’s 70 per cent equity would be used for importing machinery while the investor’s own 30 per cent equity would be made profitable by over-invoicing imports and by floating shares of an upcoming manufacturing unit at Rs. 10 a share and then buying them back after fixing the market to depress the share price to less than half of its original price. This is how these so-called entrepreneurs would make substantial profits even before the manufacturing unit was launched. And if it was an exportable goods producing unit, the investor would blatantly indulge in under invoicing his exports, making a killing in foreign exchange and stash this loot in a foreign bank.
Most major business groups in the country are completely family-owned as they distribute almost 99 per cent of the group’s shares among close family members as opposed to the international practice of keeping not more than 33 per cent within the family and investing the rest of the resources in other businesses to spread risk. However, since our entrepreneurs try to keep every penny of their investment within the family they are forced by self-created compulsions to reduce the risk to their profit margins by the vagaries of business cycles by maintaining more than two books of accounts while blatantly pilfering utilities like electricity, gas and water and stealing taxes by evading and avoiding their dues by bribing the collectors.
Some of these rent-seekers enter politics with their billions and buy power, which they use to make more money to buy more power and in the process end up buying the law itself. When caught with their hands in the kitty, they simply buy the judges. In fact some judges were known to be in the pay of some of these filthy rich political families.
Who does not know that some of these families own even the entire police force by recruiting on political grounds rather than on merit. A significant number of civil servants are also known to have willingly been bought in order to get lucrative postings and extended extensions in service well after retirement.
Big business has bought off most of the major political parties in the country by investing their dirty money in the election campaigns of their favourite contestants. These elections are out of the reach of even the upper middle classes — let alone the common man – because of the huge amounts that one requires to fight them, no matter which tier — national, provincial or local. It is only the filthy rich that succeed in buying their way to these assemblies and thus acquire the power to make laws that facilitate them to make more money at the cost of the nation.
Since most of them are tax evaders, they see to it while making the laws that they don’t adversely impact their profit margins. In fact, they try to design fiscal and monetary policies in such a way that they are ensured ever higher margins of profit with each passing day.
This violates the very concept of ‘no taxation without representation’ as no one but the rich of the country monopolise the economic and financial policy making in the country.
Under this system, even the middle classes in the country find it almost impossible to keep themselves from going bankrupt as the cost of education, health care, housing and transport has virtually gone out of their reach. Even the investment avenues that were available to them to protect their life’s savings and make reasonable profits from them, like the defence saving certificate and other such opportunities, have been rendered almost profit neutral perhaps to liberate even this small amount to satisfy the insatiable greed of the rich.
In Pakistan, the poor are subjected to heavy and harsh taxation to finance the luxuries of the elite, including the purchase of valuable state-owned plots in prime locations at throwaway prices. The way they waste and plunder taxpayers’ money is no secret. The country is surviving on bailouts from the IMF due to the perpetual failure of the ruling elite to tax the rich. Revenues worth trillions of rupees have been sacrificed by governments — civil and military alike — since 1977, extending unprecedented exemptions and concessions to the privileged classes. Prior to the 18th Constitutional Amendment in April 2010, the federal and thereafter the provincial governments have shown little interest in collecting progressive taxes e.g. Estate Duty, Gift Tax, Capital Gains Tax etc.
During Zia’s rule of 11 years and that of General Musharraf’s for nearly nine years, absentee landowners (including mighty generals who received state lands as gallantry awards) did not pay a single penny as agricultural income tax or wealth tax. Taxation of “agricultural income,” at present, is the sole prerogative of provincial governments under the 1973 Constitution of Pakistan. All the four provinces have laws to this effect, but total collection in 2013-2014 was less than Rs. 2 billion (share of agriculture in GDP was about 22%).
No one has calculated how much tax loss Pakistan has suffered since 1977 on account of non-taxation of agricultural income alone. If we add total loss of revenue through various exemptions, non-taxation of benefits given to State Oligarchy and through Statutory Regulatory Orders (SROs) issued during the last four decades, the number comes to over Rs. 100 trillion – this explains how unprecedented concessions to the rich has made the state poorer. We would not have required any borrowing at all if these tax losses had been avoided.
Today, the rich enjoy wide-ranging exemptions and concessions, low effective tax rates and can engage in tax evasion with a degree of impunity, frequently in connivance with the corrupt tax administration. The consequence is a low direct tax-to-GDP ratio, which has kept the overall tax-to-GDP ratio at extremely low levels in relation to other countries in the region.
“We as a nation have rejected poverty and the Indian nation seems to have embraced it.” This was how the late economic genius of Pakistan, Dr. Mahbubul Haq explained it to a group of visiting Indian journalists in the mid-1980s who wanted to know why, as opposed to a seemingly ‘shining’ Pakistan, India looked so ‘drab.’
That Dr. Haq was trying to conceal the actual reason for Pakistan’s skin-deep prosperity of the 1980s with a rhetorical assertion did not fool many even as he uttered it. The ‘shine’ was indeed a reflection of the first Afghan war-related flood of dollar in-flows. By the time this war had come to an end, our shallow show of opulence had consumed more than 50 billion unencumbered dollars that had flowed into the ‘front-line state’ between 1982-87 from the so-called ‘free world,’ including the oil-rich Middle East. But as the war neared its end there was nothing to show on the ground where all the billions had disappeared. Dr. Haq, finance minister of the interim government of President Ghulam Ishaq Khan, had to rush to the IMF for an emergency band aid.
This entire scenario was repeated to the letter in the first decade of the current century as the second Afghan war-related dollar inflows created another skin-deep prosperity in the country, only to disappear by 2008 in the blink of of an eye. As in the closing years of the 1980s, by the close of 2007 the country started suffering from massive load shedding. During both periods, precious foreign assistance was wasted on consumption instead of using the fiscal space for introducing much-needed structural reforms to enhance national income.
The economic predicament that Pakistan has been facing since 2008 is similar to the one we had faced in the 1990s. And like then, the present crises too is the direct result of the mismanagement of the economy during the preceding regime. And like the elected regimes of the 1990s, this time around as well, the elected governments, both the previous one of Asif Ali Zardari and the current one of Nawaz Sharif, seem to have continued with the policies formulated during the regime that had preceded them. That is why our economy is continuing to crumble. And that is why our dependence on borrowed resources continues to grow.
It is time to do some candid appraisal of the ground realities. We don’t have our own sources of energy; we do not own enough capital to provide even two square meals daily to our galloping population and, being too far behind in world ranking in education, our capacity to acquire knowledge-based technologies is too limited. Much of our so-called natural wealth, like huge coal deposits in Sindh and rich minerals in Balochistan including the Reko Diq gold and copper mines, are buried under mounds of earth. We don’t have either the capital or the technology to exploit these on our own.
One way of overcoming these shortcomings is to go around the world with hat in hand. This, we have been doing since independence but have done nothing with the aid received other than let the rich pocket part of it and the other part going into buying costly arms. More of the same is not going to make us behave differently. The only way of extricating ourselves from this impossible situation is to emulate the economic models that were adopted by countries like the so-called Asian tigers, China or even India to come out of their appalling poverty. This would need a lot of belt tightening and that too for at least a quarter of a century. And at the same time the rich rent seekers would need to share their loot with the exchequer. But mind you, we are a nation that has rejected poverty — to enrich a few!
Indeed, in order to attain a modicum of economic sovereignty we must ensure that all citizens have access to education, health care and credit and be able to start an enterprise. If citizens face discrimination due to their gender or religion, the state has an active role to play in removing these obstacles. By providing full capabilities for all, a society unleashes the full potential of all its citizens. The provision of public goods by the state not only strengthens consumption demand, but also increases labour productivity by improving the qualification and health of the workforce. Tapping into the innovative genius, creativity, entrepreneurial energy and talent of all people unleashes the full inclusive growth potential of a society. n