The purpose of this paper is to create an awareness about policy-making process and pointing out loopholes of the mechanism, which may lead to greater inequalities in the society. Public policy-making process is a complex one, and for that the policy is an outcome of a trade off between society's competing interests and the government. Policy-making process includes public announcements made by the government regarding proposed policy measures, outlining the intent and expected goals.
Such proposals are usually referred to stakeholders in order to seek their feedback. Since the measures are known after announcement, hence the role of lobbyists gains importance (in our country trade bodies, chambers of commerce and business associations play a double role, ie, they may be stakeholders but simultaneously adopt the role of lobbyists too). The interaction at this stage between various players and stakeholders initiate a push and pull situation as principles of equity and equality are threatened.
Equality(1) is enshrined in our Constitution and guarantees an equal treatment, whereas equity both horizontal(2) and vertical(3) demand a fairness among the affected classes.
2) In an ideal society impact of public policy making may not result in negative economic externalities, but unfortunately in the developing countries, policy-making always brings with it greater risks of negative externalities.
Why externalities arise?: An externality(4) may arise due to neglect of ground realities. This may happen by not counting and considering relevant variables. For example, during the planning process unrealistic assumption considered by policy-makers, and such considerations may be unrealistic. Resultant regulations, thus at times, depict a wide gap between proposed policy and desired goals and may lead to unforeseen chaos. The decision so made may prove ineffective or defective.
The role of implementation: After policy-making, the role of implementation is important since outcome of implementation will determine success or failure of proposed policy. An effective implementation, is dependent on foresight and knowledge. Deficiencies in the policy may result for the defeat of purpose and expected goals. Here it will be important to understand the policy-making process. The process of policy making begins with the government's intention to intervene in the market. This step will pass through a number of stages, and the same are outlined below:
From the initiation of a policy proposal and right up to the actual formulation of a regulation, its outcome may be measured from the results and achievement of desired objectives. More close to the desired objectives a regulation be (one can run a regression to judge its impact),(5) more successful will be the policy.
What happens in practice?: Let us now examine the government's decision to introduce a VAT mode of sales tax in Pakistan in 1990.(6) Initially, a phenomenal growth was registered in tax revenue, but at the same time, the quantum of refund claims obtained through falsified documents increased manifold. Fraudulent claims and payment through them caused a negative externality - a direct outcome of flying invoices,(7) and thereby affecting the graph of equity and equality downwards giving impetus to rise of inequality.(8) In this way, the beneficiaries (sales tax employees and claimants) gained unearned money and that too at the coast of other members of the society.
Why it happened? (i) At policy-making level: disregarding the ground realities.
(ii) Failure to develop a control mechanism about the issuance and use of legal invoices.
Reasons: (a) The policy-makers succumbed to various pressure including the lobbyists and provided breathing space to the system breakers.
(b) The grant of sales tax exemptions to a large segment of the economy lead to development of various lope holes meant for misuse.
Result: The exemptions so granted created unhealthy competition. To plug the gap of unhealthy competition system breakers found the way to reclaim tax through flying invoices.
The faulty regulation allowed system breakers to exploit. The vacuum or an externality so provided was helpful in the creation of an unholy alliance between corrupt sales tax staff and system breakers. The lesson learnt is that at all levels of policy making, we require personal having sound professional knowledge and insight, otherwise the system breakers may invade the system, and the goals of state and hopes of people may stand doomed.
1. Article 25 of the Constitution of Pakistan 1973.
2. Horizontal equity is achieved when households in the same circumstances are treated equally.
3. Vertical equity is accomplished when the households in unequal circumstances are treated unequally but "appropriately".
4. Externalities occur when either the utility that a person derives form a given set of goods and services or a firm's real costs of production depend directly on the consumption or production decisions of other persons or firms. For example, the landscaping and care of one's home may effect the welfare of one's neighbours.
5. Regression is a statistical tool to define co relationship between object and its variables. The value of R2 determines relationship between object and its variables.
6. Sales Tax Act, 1990.
7. A flying invoice is a false receipt showing payment of sales tax on the basis of which a refund claim in respect of sales tax paid (actually not paid) is made
8. Inequalities in the distribution of income may also alienate large segments of the population and encourage behaviour inimical to social and political stability.
(The writer is an advocate and is currently working as an associate with Azim ud Din Law Associates Karachi)
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