Confidence Building Measures & Tax Reform

Link to Business Recorder Archive with my article

Confidence building and tax reforms

Dr. Asad Zaman

Pakistan’s tax potential is estimated at Rs4 trillion, according to Huzaima and Ikram*, when the actual realization is far less. Pitifully small amounts are spent on social welfare and long run development, which reflects in the country’s miserable performance in poverty alleviation, education, health, and other vital indices.

Our recent record is especially frustrating when compared with countries like India, China, Bangladesh and East Asia, which often had far less in the way of natural resources and other advantages.

However, cures are not easy, because the roots of our ailment are deep and complex, and not easily remedied. In this essay, I will deal with only one of these problems and suggest a possible solution.

The root cause of our problems is the continuation of colonial political, administrative and economic structures post independence. These hierarchical structures were single mindedly designed for efficient extraction of revenues from the colonies.

Efficient command and control from top down was built into them, but representation and participation of the public in the government was not (something which was the reason for the revolt of the American colonies in the 18^th century).

It is important to note that these structures were manned by personnel educated to be “Indian in blood and colour, but English in taste, in opinions, in morals, and in intellect” – indeed this was a crucial part of the governance structure of the colonies.

It would have been impossible for the 1,000 odd Englishmen in the Indian civil service to govern a country of India’s size without co-opting a sizable number of natives into sharing the burden of ruling and taxing the populace.

After a brief interlude of sincere leadership, reins of the newly partitioned nation fell into the hands of political parties who found themselves at the head of a functional and efficient machine for revenue extraction.

Our education system continues the colonial policies of creating love and affinity for the West, and contempt for both our heritage and the “Urdu-medium” native populace. Thus, the English educated elite class in power had no difficulty in continuing the colonial policies, and exploiting fellow countrymen for self-enrichment.

To this day, politics in Pakistan is more about sharing revenues amongst those who rule Pakistan, than about providing growth, development and social services to the populace. The idea of a government of the people, by the people and for the people remains a distant dream.

How can we act to bring this dream closer to realization? Several elements in the changing dynamics give us room for hope and potential for action.

As the power base has expanded beyond a narrow and tightly knit elite upper-class, many people with genuine love for their country and the desire and capability to make sacrifices for the benefit of the populace have also been inducted into the power structures.

The moral bankruptcy of world leadership, which is spending trillions of dollars on death and destruction at a time when the bottom billion of the world’s population are in desperate need, has become obvious for all to see. More and more among those in power are coming to see that their interests are common with the general public, and not tied to the fortunes of treacherous alien powers.

Foreign experts with no knowledge of local conditions try to distract us by stale and tired mantras of privatization, liberalization, free market reforms and fiscal austerity, which have been tried and found wanting all over the globe. If we decide to think for ourselves, we can easily see that the way forward lies in building coalitions, joining hearts and working together for a common purpose.

In every dimension, there is an urgent need for fresh, out of the box thinking. In the realm of taxation, good solutions can be found along the lines of ‘local public finance’. The idea is to fund public projects by raising revenue from those who will benefit from them, directly or indirectly.

With this localization, it may be possible to raise money, when it is seen to be going directly to the benefit of the public. This will also generate confidence that the government is interested in providing benefits to the public instead of carrying out foreign agendas to harm the public. I will illustrate the idea with one example; parallels can be found in many others.

Consider financing, or supplementing the finances, of a local police station by revenues generated from local taxes on the neighbourhood covered. At the very first stage, one needs to make a conceptual change, the equivalent of going from colonization to self-government.

Is the police station an agent of alien powers designed to enforce government authority over reluctant natives? Or is it a local institution designed to keep the neighbourhood secure, and to help solve local legal and criminal problems of people?

It is the former concept which is reinforced by the fortifications recently made to police stations. But it is only in the latter case that the public will be willing, even happy, to contribute to the upkeep of the station. It is the shift in conceptualization and attitude from the colonial model to the self-government model which is crucial to any efforts for change.

Since police stations are central to current power structures, sharing authority with citizens may be too radical to contemplate at an early stage. Confidence building needs to be done in small and simple steps, at least in the initial stages. One key is to devolve authority, as much as possible to small communities.

But devolution has been tried often, and failed just as often. The reason is that the concept of participatory government, and the accompanying feeling of empowerment, has been forgotten in the long period of colonial rule.

Habits of hierarchy, with arrogant and authoritarian leaders and subservient followers have become deeply ingrained. Channels for creating change by peaceful participatory means don’t exist; the only ones that remain are demonstrations, protests, strikes and violence.

To change this state of affairs requires work along the lines of the Orangi Pilot Project of Akhtar Hameed Khan. Build communities, empower them and enable them to take collective action, and facilitate this via government or non-government means.

The task facing us is difficult. The key to success is to take matters in our own hands. If we do what is possible for us to do, we can bring about great changes. The biggest obstacle in the way of change is the ‘spectator’ attitude widespread in society, where we watch and wait for good things to happen, without making any efforts to be part of the process for change.

Instead we must become the agents of change. I am reminded of an Urdu poem we learnt in grade school, regarding rain clouds and the dry earth. Each raindrop thought itself insignificant in face of the vast need and hesitated to sacrifice its all for only a miniscule impact. However, when a few courageous ones took the lead, the clouds proved adequate to provide amply for all the needs.

* Huzaima and Ikram - Business Recorder May 14^th, 2010)

The writer is a professor of economics at International Islamic University, Islamabad. He can be reached at asadzaman@alum.mit.edu