Towards an inclusive economy



M. Ziauddin

We do need a bipartisan economic policy blueprint to make the most of indigenous comparative advantages for enabling the national economy to come out its dependence on dole while at the same time developing into an essential clog of the interdependent world.
According to Thomas Piketty (Capital in the Twenty-First Century — Pp. 491), the development of a fiscal and social state is intimately related to the process of state-building as such, “Hence the history of economic development is also a matter of political and cultural development, and each country must find its distinctive path and cope with its own internal divisions.” So, it is imperative that Pakistan should try to find its own distinctive path to progress. But no matter how distinctive the path is, unless both the national incomes and tax collections rise to a reasonable level, the economy of developing countries like Pakistan would either continue to remain dole-dependent or trapped into a stagnant mode going south.
In sub-Sahara and South Asia the average tax bite was slightly below 15 per cent in 1970 and early 1980 but fell to a little over 10 per cent in 1990. Piketty partly blames rich countries and international organizations for this state of affairs in poor countries. “The initial situation was not very promising. The process of decolonization was marked by a number of chaotic episodes in the period 1950-70: wars of independence with the former colonial powers, somewhat arbitrary borders, military tensions linked to the Cold War, abortive experiments with socialism, and sometimes a little of all three. After 1980, moreover, the new ultraliberal wave emanating from the developed countries forced the poor countries to cut their public sectors and lower the priority of developing a tax system suitable to fostering economic development. Recent research has shown that the decline in government receipts in the poorest countries in 1980-1990 was largely due to a decline in customs duties which had brought in revenues equivalent to about five per cent of national income in 1970. Trade liberalization is not necessarily a bad thing, but only if it is not peremptorily imposed, and only if lost revenue can gradually be replaced by a strong tax authority capable of collecting new taxes and other substitute sources of income. Today’s developed countries reduced their tariffs over the course of the 19th and 20th centuries at a pace they judged to be reasonable and with clear alternatives in mind. This illustrates a more general phenomenon: the tendency of the rich countries to use the less developed world as a field of experimentation, without really seeking to capitalize on the lessons of their own historical experience.
Meanwhile, the real estate sector in countries like Pakistan started eating into resources generated by domestic economic activity. To combat this challenge the government tried to regulate the real estate market through suitable legislation. Next it tried to deal with the practice of holding properties and bank accounts under fake names (benami).
Real estate has, over the years, become the mother of all corruption as it has served as the safest haven for all tainted resources and rents earned through corruption-like tax evasion and avoidance, bribery, kick-backs, smuggling, black marketing, human trafficking as well as drug and gun running. And in the last two decades or so the real estate market had become the safest source of terror financing as well.
Former civil servant Saeed Ahmad Qureshi, in his book Governance Deficit — a case study of Pakistan, published on August 18, 2016, maintains that the processes that curtail governance space fall in four categories: a) inertia, b) ceding governance space, c) erosion of governance space and, d) surrender of governance space.
Quoting from well-researched papers by reputable economists, Mr. Qureshi has sketched in brief the gradual expansion of the informal economy in the country and its implications to governance:
“In Pakistan, the informal economy has been expanding over time. Social Policy and Development Centre (SPDC), Karachi, reported in 2000 that the informal economy was about 42 per cent of the national economy in 1980-81; that it grew to 46 per cent in 1998-99 and 50 per cent of the national economy in 2000.
“In 2008, the informal economy was estimated by Ali Kemal and Ahmed Waqar to be between 74 per cent and 91 per cent. However, in the Conference of Pakistan Institute of Development Economics held on 15th November, 2012, Ali Kemal claimed that the informal economy was 91.4 per cent of the formal economy.
“The informal segment of the economy does not pay direct taxes, though it might be paying transaction-related indirect taxes, such as excise and sales tax. Its prevalence limits the impact of policies, weakens resource base of the state, reduces the reliability of economic data, and results in an understatement of size of GDP. It is outside the regulatory framework of the government. However, being a major source of employment, it cannot be dismissed out of hand.” (Pp.212-214.)
According to Mr. Qureshi, within the formal economy there have been numerous instances of ceding governance space in the fiscal regime, sacrificing long-term advantages for short term gains. An important example is the introduction of the bearer instruments in the mid-1980s and early 1990s. There have also been a number of tax amnesties in Pakistan. Each amnesty is declared to be the last, but the count keeps on growing. So far there have been seven amnesty schemes.
While there is continuous boom in Pakistan’s real estate the country suffers from a backlog of about ten million housing units of which around 3.5 to 4 million are said to be in the urban region and most for low-income groups. However, since only 300,000 housing units are being built annually, the backlog continues to bulge. That is perhaps why 68 per cent of Pakistan’s population has only one per cent of total housing stocks, whereas 56 per cent of housing stock is meant for 12 per cent of the upper income segments.
Katchi abadis and shanty towns are said to have sprouted all over our cities to serve those who fail to find an affordable shelter in the cities and towns as the demand for housing continues to expand while the supply remains too far behind. Indeed, there is said to be a huge untapped market and unmet demand for affordable housing units in the urban areas particularly for the low and lower-middle income segments.
Despite huge demand for housing, the overall contribution of housing finance is very low — less than one percent of the GDP. The stakeholders argue that multiple risks impact the performance of the housing finance sector. Lack of transparency in property markets is said to be a key constraint. Despite the ample potential of business and social need of housing, the highly challenging business environment usually prevents international investors, local businessmen and even ordinary people to save and invest in housing enterprises.
The market has been unable to meet the growing demand to supply housing stock at affordable prices. An individual earning between Rs20,000 to 25,000 per month (working in the public/private sector or self-employed) and responsible for maintaining his/her nuclear family as well as members of the extended family would save (after all expenses relating to rent, food, utilities, transportation and miscellaneous are deducted) no more than Rs1,500. With the average person saving Rs1, 500 and the average 80 square yard plot costing Rs700, 000, it would take nearly 40 years before one could afford such a plot. The result is the current housing crisis Pakistan is faced with.
As a start the government could reform the House Building Finance Corporation (HBFC) to provide a mechanism allowing potential purchasers who have an income to save for and eventually purchase a housing unit. The HBFC could also include a subsidized savings program linked to a retirement account, subsidized mortgage rates and price discounts.
At the same time the government could also launch a Public-Private Partnership scheme for development of public properties and identified green technologies and materials suitable for lower-income households. The Government of Pakistan can also consider the following for establishing the enabling environment for making affordable housing a reality: a) Changes to the law to allow banks to hold Consumer Housing Assets on their books; b) Changes to the laws to allow Consortium Financing for large-scale Residential Compounds on State released land at provincial level; c) Issuance of Housing Sukuk, with participation by owners of houses of large-scale housing projects financed under Islamic Banking; d) Introduction of new construction technologies on duty-free import basis and; e) Involving Microfinance & SME Banks to provide funding to low-income borrowers, by releasing targeted funding through the State Bank.
Also, the government could document all land available in the public and private sectors, digitize the documentation rendering ownership beyond an iota of doubt thus making it bankable so that land owners using the house-to-be-built as a collateral borrow from the HBFC at concessional rates repayable over 40 years in easy installments.