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Development Without Equity

Development Without Equity | Faisal Bari

I COULD not find a parking spot on the side road and saw that some cars were parked off the main road. So I tried parking there. A traffic warden came up to me and said I could not park my vehicle there. I asked him that since some cars were already parked there, why could I not do the same. He said that one car belonged to a lawyer, another to a journalist, the third to a bureaucrat and the fourth to an army man. “If you are from any of these categories you can park here, otherwise I will fine you,” he told me. I told him I was a teacher. He said: “Then you can certainly not park here.” I informed him I wrote columns for an English daily. He replied: “The angrezi press does not count.” So I ended up parking somewhere else.

Our society is built on lines of distinctions. Essentially, all distinctions are based on power though they might manifest themselves through wealth, income, connections with other powerful people, education, caste and even religion. In the end, your worth and what you can do or get away with are dependent on the power you wield or the power that you can convince the others you have. Societal rules, formal or informal, legal or moral, apply at different levels, depending on the power you have.

A retired general accused of treason, even murder, is allowed to travel abroad for ‘medical treatment’, but a friend, employed in a public-sector university, has been trying to get a no-objection certificate to proceed on a short vacation abroad for about a month. She has not had any success so far.

Ministers have recently been on television defending the first family and their offshore companies and holdings and telling us that nothing wrong has been done and no law has been broken. But if, as a citizen, I have to move more than $10,000 out of the country, through the formal system, it takes me days of hassles to be able to do that. And if I do it illegally and am caught, I can spend years in prison. An acquaintance, a Thai citizen, after working in Pakistan for some years, was going back to Thailand and was carrying $20,000 on her person. This amount constituted her life savings. She was caught at the airport and spent the next year in jail. It was only diplomatic intervention that got her out eventually. She lost all of her life savings as well.

We seem to be telling our people that if you can get away with it, you should.

Those who are employed, at senior levels in the formal sector, pay approximately 25pc in income tax on their salaries. They do not have a choice as they get salaries after income tax deductions from their employers. They pay an additional 16pc or so in sales tax on everything they purchase. In addition, there are other smaller ‘special’ taxes that are imposed on mobiles, petrol, cars, road usage and so on. On the whole, they end up paying something like 55pc to 60pc of their income in taxes. They do not have an option. They are in the tax net.

If you talk to traders and agriculturalists, most of them are not even in the tax net. Out of those who are, most end up paying 5pc to 15pc of their income in taxes. In one case, a factory owner and retailer who owned a two-kanal house in one of the best suburbs of a large city, had four luxury cars in his house, and relied on a diesel-run generator for electricity, was paying income tax that was one-tenth the amount that a mid-level management, salaried person pays. Where is the equity in this?

Some of the recent lessons from research in development economics have highlighted the importance of institutions in ensuring sustained development. Most notably, Why Nations Fail by Daron Acemoglu and James Robinson shows the importance of institutions. They argue, and very convincingly, that what explains the variation in development, across nations, and the ability of a nation to keep itself on a sustainable path of development is the ability of the nation to forge fair and equitable institutions that a) have legitimacy through acceptance and agreement of the governed, and b) ensure reasonable equality of opportunity for all citizens.

Developed countries have, in some places, 50pc marginal tax rates (for the rich). Some developing countries have tried the same as well. But in developed countries, there is more acceptance of these tax rates and there is better than reasonable compliance as well. In many developing countries, even authoritarian regimes, success has been rare.

Acemoglu and Robinson argue that other than issues of differing documentation rates across countries, the main explanation for success and acceptance in developed countries comes from the consent of the people at large and the expectation that higher tax rates for the rich will lead to better services for all, including the rich, but especially the poor. People will get better health and educational services, social security and other essential services. In developing countries, the connection to both equity and service delivery are weaker and the connection with ‘consent’ is almost never there.

We seem to be telling our people that if you can get away with it, you should. And laws only apply to those who cannot get away with flouting them. If institutions are based on arbitrariness, rules are applied selectively, consent of the governed is mocked and equity issues are ignored, our development process, despite all efforts, will remain non-consistent and we will keep experiencing spurts of growth that we will not be able to sustain.

Can the democratic set-up of the country make a break from the past? Currently, it seems that the democratic set-up, offshore and all, is just reinforcing the poor governance outcomes of the past.

The writer is a senior research fellow at the Institute of Development and Economic Alternatives and an associate professor of economics at Lums, Lahore.

Published in Dawn, April 8th, 2016

Source: http://www.dawn.com/news/1250662/development-without-equity

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