Pakistan does not need any foreign aid at all!

Farah Zia: interview of S. Akbar Zaidi

What is the relevance of the budget exercise in Pakistan’s context where defence and debt servicing take away a huge chunk?

S. Akbar Zaidi: It does not matter what the distribution of expenditure is, a budget is an annual statement of the government’s revenues and expenditures and its policy objectives for the next financial year. Whether it is a democratic government or a military government, a socialist one or an Islamic one, a budget needs to be presented every year to make public the accounts of the government and of the country. The distribution of resources and spending is unrelated to the question of the need for a budget. A government can even decide to spend its entire revenue on social uplift or military expenditure, but it still needs an annual budget.

Among the non-development expenditures, a lot of hue is raised about the size of the government. How much can actually be saved out of that head?

Effectively, a great deal. Pakistan’s governments, especially under elected governments, are patronage driven ‘jobs for the boys’. Government is bloated as being ineffective. While civil servants play a key role in running bureaucracies, it is the extended list of ministers, advisors, special assistants, etc, who bloat the size of government. A smaller, better-focused and more committed government is what is required, not one which lives only on patronage. Also, it is criminal at a time when there is a large fiscal deficit, for government freebies such as the recent (and earlier) trips of the Prime Minister or other officials abroad. We don’t need scores of people to make a state visit. We see huge delegations being taken with some leader or the other at public expense. This is plain bribery.

What about the biggest non-development expenditure i.e. defence. Can that be slashed without affecting the firepower of our military and under what heads?

The military has shown itself to be ineffective on many occasions in the last twelve months or so and incapable of defending itself or the Pakistani people. The defence budget must be reduced, not just to allow resources for development, but to cut the strength and misuse of public money by the military. It is not just politicians and ministers who take excessive liberty with public money, but also the military. Moreover, the military owns huge assets, particularly urban land, which it uses to supplement its salaries. Some years ago, defence expenditure was twice that spent on health and education combined. This is criminal. If Pakistan prioritised social development rather than defence, we would be far better off and probably have fewer military coups and interventions and better democracy.

Ideally speaking, for a country like ours, what should be the proportion reserved for the development expenditure viz. education, health, poverty etc.? Can you give us a break-up?

There is no ideal type. It depends on where we are in the development hierarchy. Pakistan has very low social development not simply because we spend too little on social development, but also because of the quality of services we provide. Increasing social spending is not simply the solution. We need better quality of expenditure as well. Even if we doubled our social expenditure, we would still not achieve effective social outcomes.

We seem to have always used foreign aid to balance our books. This time too, we are relying on the Coalition Support Fund. Some economists argue that foreign assistance should not be used for budgetary support but for building economic assets so that we are able to repay the loans. What do you think?

Pakistan does not need any foreign aid at all. We have been dependent on aid for decades and much of that aid has gone into supporting military dictatorships under one pretext or the other. Pakistan needs reforms, not aid. We have enough resources to be able to fulfil the investment gap. Foreign aid is an addition and is the easy option. We need to be able to tax the rich in Pakistan. Without changing the tax system and tax structure, if we just collect tax more efficiently and honestly, we shall not have any deficit and shall not need loans or aid, which is always politically tied. Moreover, aid is a subsidy to the rich in Pakistan and allows the rich to continue to avoid paying taxes. The tax payers of other countries are subsidising Pakistan’s elite.

The finance minister has hinted that this is going to be a growth-oriented budget. There is a view that Pakistan should invest in physical and human infrastructure for a few years even if it entails low growth rates. Which model would you prefer?

I think investment in physical infrastructure will lead to high growth. If the power sector worked better and there were no outages, growth would increase by 2-3 percent of GDP. Physical infrastructure is essential for development. Research which closely examined 13 cases of sustained high growth — those economies that had achieved seven percent or more for 25 or so years, found that there was a critical role to play for infrastructure in high growth economies. Physical infrastructure can be a motor of growth in a country like Pakistan. Pakistan’s Planning Commission is a major impediment to developing infrastructure projects. Human capital is equally important, and it is not an either-or question. One needs both.

The government needs to spend money on such initiatives and investments rather than waste its resources. The PSDP is down to 1.1 percent of GDP. This is not acceptable at all.

T<strong>axation and circular debt with reference to energy crisis are two important challenges for the government in the forthcoming budget. Can you briefly hint at the solutions to these two issues?

The tax problem is the mother of all evils in Pakistan. Shahid Kardar, the former governor of State Bank, has argued that there is rampant tax evasion in Pakistan and that while 3.1 million people have been issued a National Tax Number, only 1.2 million filed their returns. With the tax-GDP ratio around 8.5 percent, this ratio is lower than Afghanistan’s, and fewer people in Pakistan — a country with a population of 180 million — pay their taxes than do the people in Guatemala, which has a population of 15 million.

Tax is probably the biggest scandal in Pakistan’s economy. It is an extremely unfair mechanism that the very rich avoid paying taxes and the middle income group are forced to bear the burden of the fiscal crisis. We would not have such high electricity tariffs or high prices, or aid dependence, if taxes could be collected.

The only way the tax-GDP ratio can be raised is through political mobilisation and consensus. Military dictators have tried and failed and weak coalitions are not going to succeed either, unless there is political agreement and consensus for the need for taxes. If the 18th Amendment can be introduced, the NFC Award agreed to, all by consensus, some mechanism to raise taxes must also be made. However, I don’t see this happening. We will continue to stumble along the way we have.

How important will be the provincial budgets after the 18th Amendment, in terms of raising revenues for the irrespective province?

Provincial budgets should have received more emphasis and recognition and importance, but have not. After the 18th Amendment, with numerous departments and ministries handed over to the provincial governments, they need to be more responsible about how to raise and spend money. Provincial governments have access to a large amount of federal funding, but they need not depend on the federal government. There is sufficient devolution and decentralisation in the ability to raise their own revenue, and the provincial governments have to be more responsible rather than profligate.

Final comment: This government is going to announce a people-friendly budget which is going to have serious consequences for the country and the economy in the near-to-distant future. We might get some ‘relief’, but the absence of leadership, vision and effort will compromise the situation of the economy and only make matters worse. The economic team running Pakistan is intellectually bankrupt and short-sighted.

S. Akbar Zaidi is renowned economist and Farah is Editor of TNS

Source: http://jang.com.pk/thenews/may2012-weekly/nos-27-05-2012/spr.htm#2