Since childhood we have been listening to the mantra: "presently Pakistan is passing through a dangerous and the sensitive-most period of its history." This story never comes to an end and finds repetition more often than not. What has caused us constant trouble has always perplexed each coming generation.
Some believe in stereotyped justifications responsible for our problems, which we read in our text books; others found this material untenable for putting blame on some enemy, perceived or real. Besides this chant, there has always been a strong boast that we are second to none as a nation in the world, bestowed with huge natural resources and talented people, capable of 'conquering' the whole world. To some, it is the leadership that will make the difference. In quest of a true leader, we have born all breeds of leadership from 'civilian dictators' to 'military democrats' and from 'religious hypocrites' to so-called 'enlightened modernists'.
Nonetheless, the result remains the same: the downward spiral that is sucking us further down the whirlpool of destruction and decadence. All sorts of experts, foreign and local, have tried their luck to get us corrected but our fate seems to remain unmoved. What is inherently wrong with us needs to be identified before moving forward to find solutions to these intrinsic problems.
If we tabulate our chronic problems, two are the mother of all evils that have corroded our body politic and our state structure from day one and that are: a pathetically poor tax-collection and incessantly fragile security situation, initially externally and now internally. Conventional wisdom has not found us any solution for these two problems except to raise fancy slogans and failed ventures. We need some out-of-the-box thinking that furnishes us with practicable ways out and helps us channelize the environmental dynamics into a productive business model: one that is effective, economical, and practicable.
In this series of articles, we would discuss the economic model and the security model that we are running on and try to put forward a productive business model as a paradigm shift for economic empowerment and poverty eradication, enabling our state to attain the lofty ideals of prosperity and protection of its citizens. Extremism is a product of the neglected social sector over time, particularly education, which in turn is due to lack of resources available to the state, owing to poor tax collection. Recruits of terrorism come from the area where the state has abandoned its duty of educating its children, leaving them at the mercy of exploitation by extremists.
Soon after Independence in 1947, areas comprising Pakistan have undergone the most far-reaching changes as far as urbanisation is concerned. This change has not been an isolated or planned event, but a succession of millions of incidents, which have gradually transformed a seemingly immutable order. Pakistan's cities have ceased to be small familiar places and have become impersonal, heavily populated metropolises with new, unfamiliar neighbourhoods.
The city has conferred individuality on its inhabitants. New business classes have emerged. Upward mobility has increased. The patterns of consumption and the exclusive luxuries of the old urban society have been displaced by other, more widespread ones. In entertainment, for instance, folk festivals and fairs have lost their conventional glitter, and have been replaced over the years, by cricket, theatre, cinema, and most recently, a plethora of cable television channels being watched in every nook and corner of shops and houses.
Civilian interest in public matters has also begun to grow. Such issues as inflation, devaluation, and external debt are no longer mysteries to which certain members of the elite hold the key, but have become topics of discussion on which everyone has something to say. Governments must now submit their actions to public opinion and the public's acceptance or rejection is becoming a political force, which can affect the government's stability. With the phenomenal growth of cities, the services sector has also registered a remarkable growth.
Time has begun to assume its value. Access to justice has become the top pressing need. The luxury of prolonged litigation is no more affordable; services have tended to standardise themselves. This has culminated in a situation unparalleled in history. This also explains the force behind the restoration of the Chief Justice of Pakistan by the masses, in the wake of the long march. Cities are becoming engines of growth and harbingers of new order.
The historical predominance of the rural population is reversing in favour of the urban population; housing conditions have altered dramatically, and the transition is taking place from an agricultural to an urban civilisation at a fast pace.
This urbanisation has coincided with the rapid growth of the population throughout the country. The impact of the poor agricultural performance on migration can also be traced to the problem of property rights in the countryside. The traditional difficulties of acquiring agricultural land were compounded - and ultimately exacerbated - when, in the 1950s, and 1970s, there began what would prove to be a long, continuous, and unstable process of land reforms.
The fragmentation of land beyond economic holdings further complicated the problem. The Land Revenue Administration became the most fearsome entity owing to manipulation of record of rights by Patwaris, unbridled corruption and the awesome powers of revenue officials to inflict damage to the rights of landowners in the absence of any credible property registration system. Unable to own land or find work in the countryside, as opportunities in the rural economy began to dry up, many people chose to migrate to the cities.
In cities, the situation was found to be no better. Although many of migrants managed to sustain themselves financially by tapping opportunities in the diverse urban economy, yet there was absolutely no system of property registration at all, rendering the urban properties prone to fraud and unwanted exploitation on a scale unimaginable in the countryside. Unfortunately our legal institutions have been unable to adapt to this change and resultantly the situation further deteriorated for all those living in the cities. Let us now take a broader picture into consideration.
After the dawn of the knowledge-economy, a pre-order economic revolution has started to take roots in the highly competitive economies of the world. The latter will eliminate many middle businesses and stages on the same pattern on which the industrial revolution, electronic revolution and later on the knowledge revolution have had done in their respective ages. Like all these periods of reshaping and realigning of respective economies, the present one will also enhance the wealth base and diversify the means of wealth production. Interestingly, third world countries are not going through all these changes in a phased manner. The nature of the world as a global village has made change a transcendental phenomenon across borders. This has great potential opportunities for the future of the third world civilisation, ie the urban centre, the city.
In the next decade, the urban centers in the heavily populated third world countries will see a huge growth. They will completely transmute their respective national economies. Market forces will determine the nature and shape of the economy, which in turn will dictate the means of wealth production. Investment in the social sector will have a direct bearing on peaceful existence and more importantly wealth production, within these economies. Hence, we need to shape our monetary, financial and taxation architecture as per the needs of the future, which is no longer ahead of us but has already happened- as Philip Kotler expounds. We need a new business model for our economy to run on.
Ours is a distorted economic model; a poorly designed taxation regime and no clarity in the body politic for which purpose the state exists. To some the state exists because of religion, to some owing to security, still there are usurpers to whom this state is a means to achieve their parochial goals. That is why, it is not surprising that after more than six decades of independence, the debate is still going on to clarify the professed objective of the state of Pakistan.
The role of the state, knowingly or unwittingly, has been that of the regulator, the facilitator, and the tax collector. These three basic roles of the state assume different hues and expound themselves in various expressions. A state comes into being to give structure and stability to the existence of a nation. A set of people, arranged in a social milieu or a collection of one, when they assume the proportion of a nation and get a state of their own, require a set of institutes to cement their achievements, to perpetuate them, to standardise and stabilise the business environment and to materialise expression of their popular will. The principal instrument to carry out all this, in the simplest sense, is called the government. Whether in a modern nation-state or in the conventional meaning, the three basic roles of the government, just mentioned above, remain the same. In the conventional set-up of a state, these roles were concentrated in the person of the ruler himself. With the passage of time, the institutes started to take up these roles. It may be noted that after the demise of the Holy Prophet (PBUH), the first Muslim Caliph Hazrat Abu Bakr Siddique asserted his authority on the issue of tax collection. In fact, throughout history the authority of tax collection has always determined the legitimacy of a ruler. In the Islamic 'sharia', only a legitimate ruler can claim tax.
In British India, land revenue used to be a major source of state revenues. The Land Revenue Administration was so designed to be used as a facilitator for the optimal productive use of land. Thus, the Collector, by virtue of his post, had also been a District Magistrate to create a conducive environment for the same. The use of this dual responsibility conferred on the District Collector/District Magistrate the honour of 'mai bap' (mother and father) in public perception. Many canal districts and settlements were introduced. Regulations were so shaped to facilitate maximum production from land use. However, in the absence of urban markets that aimed at agriculture only, there had been the non-existence or very poor existence of regulations, regarding the urban dimension of land markets. Thus, overlapping of various departments took place in response to rapid growth of urban land markets after independence, which was not harmonious and thus inefficient.
The issue of titling has never been addressed throughout this period up-till now. That is why no titling registration system exists in the country or even in the whole of South Asia. Property records are meant for fiscal purpose only; the very purpose has also been degenerated over time, rendering the system rudderless, embroiled in total chaos and confusion.
The repercussions are many. Since modern economies run on many representative systems; money is one of them. These representative systems are the expression of value of something precious, which makes tradable so many things through these systems. Money simply represents that value. In modern economies of the world, property is just like money that represents value, and that may be used for raising the capital, which in turn is used for wealth generation. The situation is quite the opposite in the developing and underdeveloped countries: here property is merely a dead end. In the former's case this value of the property is reflected on a piece of paper called the title. No such thing exists in the latter's case. This situation dramatically reduces the chances of wealth production in underdeveloped economies as a major chunk of wealth produced becomes locked in property. In less-developed economies, like all third world countries, people have limited opportunities to invest their savings or to invest in the future. They invest in real estate, as an only viable option, which is a dead investment by default in the absence of a functional titling system. Poverty thus perpetuates. The so-called 'trickle down effect' also does not work due to the same reason in underdeveloped economies, even when the economy is at the optimal output.
There is another aspect of this situation: the pathetically low tax-to-GDP ratio, a highly disproportionate mix of direct and indirect taxes and an extremely narrow tax base. Why is so? No credible documentation of economy, particularly at the micro level, is there. There is a pretty large spread of the informal economy. History suggests that administrative measures cannot improve the situation of the documentation of the informal economy; it is the business model that makes the difference. The business model that engenders the informal economy by default hampers the documentation process. What is the way out? Change in the business model will help solve the problem. If the business model is so designed to offer tangible benefits that outweigh the cost of documentation for the informal sector of the economy, the informal economy will tend to document itself without any prodding from the tax authorities. A viable titling registration system will help ease the situation and unleash the potential wealth locked in the landed property. It would provide a mechanism of capital raising, and thus wealth generation through which the means to produce wealth will tremendously be increased; it means that the wealth produced in say years after the proposed system, would have been put in place a mechanism to raise capital from the landed property, which would be equal to the wealth produced in say decades as compared to the present conventional economic model. It would enable a person having title to a landed property to instantly raise capital as per value reposed in his/her property.
The informal sector of economy has two distinct hallmarks: one, its enormous potential to grow, which it fails to attain owing to inaccessibility to the productive capital, and second its exclusion from the tax net, resigning the state to a perpetually low grid of tax collection, and the people permanently on the brink of poverty. This is despite the fact that they are equally enterprising and hardworking as their counterparts in the developed economies.
When governments move forward to redress the socio-economic malaise of poverty and underdevelopment owing to above-mentioned causes, they end up nowhere as the resources earmarked for the underprivileged segments of society simply fail to empower them, rendering them lurking in the vicious cycle of poverty and underdevelopment. Moreover, the vicious cycle described above acts as a black hole, sucking the governments' efforts and diverting their attention away from the structural distortions of the economic model; this is different from macroeconomic distortions in the economy for which we negotiate with the IMF. Hence, the economic empowerment of people is a prerequisite to break the vicious cycle of poverty and underdevelopment. This is one area that may explain the reasons of the hitherto high tolerance of undemocratic adventures in feudal societies like ours.
A paradigm shift is needed for economic empowerment and poverty eradication. The time is ripe for this. We have to make each and every person in possession of a single inch of land, some of them may be holding extra legally, empowered to raise capital against his/her assets, with as much ease as we can draw money from an Automated Teller Machine. This will solve many of our chronic problems, some of which even have cast us in the category of a failed state. The issue, in fact, is not of failure but dysfunctionality. It would eliminate the spectre of inflation when huge money supply will be generated in the banking system due to capital raising demand on landed assets, as the same will be simply in lieu of something of value that is already there. In developed economies this phenomenon operates on two planes: the gold reserve against the value of which a government prints currency, which is a mere reflection of the value of that gold reserve within the state kitty. Second is the semi-private, demi-official arrangement in the form of a politico-legal and socio-economic contract in which the value of landed property, expressed in terms, having certainty, like titles with insurance cover etc, may be used to raise capital that in turn, is represented and traded through currency, which is issued by the government. Hence, in this situation, the value of currency is not simply a reflection of the value of gold reserves, but the value of human toil that has been accumulated in the landed property over time in the form of its potential to produce wealth. Why is gold so precious and taken as a standard of value throughout human history? There is certainty that it would last forever without compromising its elemental integrity. The value of human labour has discovered a equally certain element to guarantee its potential promise of wealth production from the land, ie the title, which can be used to raise capital to produce wealth, as much as without having resorted to that particular piece of gold (reserve) represented by a given currency note in the present conventional system. Such facility is enjoyed in developing countries, too. But that is limited to the small elite only. Therefore, it is not comparable to one found in developed countries.
Now, a business model has been conceived in which it is more cost-effective and beneficial for the informal sector of the economy - ours is several times the formal one - to tend to document itself. The diffusion of ICT technologies in Pakistan is remarkable so is the recent practice of omni-banking. Hence, it is not so difficult for the government to gradually shift from indirect to direct taxation as the documentation of the informal economy progresses in the result of the proposed system and the new economic business model.
This would give the government tremendous leverage to reduce the tax rate as the tax base expands, thus fuelling consumption further and generating more revenues. This is, in fact, is creating a 'good cycle' as opposed to the vicious one we discussed in the foregoing analysis. In my opinion, after having fully established the proposed economic model, the government will be able to raise Rs 5,600 billion in tax revenues (Net revenue receipts for 2010-11 federal budget have been estimated at Rs 1,377 billion).
The incidence of tax will be on the chain of wealth production and not merely on consumption; thus it would spread across the value of a thing produced and not exclusively on its price. This is simply a revolution in the making! What we always wanted to achieve through land reforms in the wildest of our dreams is a fraction of what is possible through this business model. Besides a windfall of tax collection, our economy will be producing quantum of wealth in years that it otherwise with the present system would be producing in decades and that would be on a mass scale by the masses and not by some exclusive miniscule elite.
'Dead capital', expounds Hernando de Soto in his marvellous book "The Mystery of Capital", lines the streets of every developing country. The value of untitled real estate in Philippines is $133 billion, four times the capitalisation of 216 domestic companies listed on the Philippines' Stock Exchange, seven times the total deposits in the country's commercial banks, nine times the total capital of state-owned enterprises, and fourteen times the value of all foreign direct investment. Similarly the value of Egypt's dead capital in real estate is some $240 billion.
This is thirty times the value of all the shares on the Cairo Stock Exchange, and 55 times the value of all foreign investment in Egypt. In every third world country that has been examined, the entrepreneurial ingenuity of the poor has created wealth on a vast scale - wealth that also constitutes by far, the largest source of potential capital for development.
These assets not only far exceed the total holding of governments, the local stock exchanges and foreign direct investment; they are many times greater than all the aid from advanced nations and all the loans extended by the World Bank. According to de Soto, about 85 percent of the urban parcels in the developing and former communist countries, and between 40 per cent to 53 per cent of rural parcels are held in such a way that they cannot be used to create capital.
By a conservative estimate, the total value of such assets in the third world is around $9.3 trillion, ie twice as much as the total US circulating money supply in the beginning of 21st century, and nearly as much as the total value of all the companies listed on the main stock exchanges of the world's 20 most developed countries: New York, Tokyo, London, Frankfurt, Toronto, Paris, Milan, the NASDAQ and a dozen others.
It is more than twenty times the total direct foreign investment into all the Third World in the decade of the 90's, 46 times as much as all the World Bank loans of the last three decades of the 20th century and 93 times as much as all development assistance from all the advanced countries to the Third World in the same period.
Owing to their underdeveloped property systems, the poor in the Third World, despite having such colossal assets permanently live in a bell-jar, denying them all benefits of wealth production, and rendering them into perpetual poverty. What more is required to lift our bell-jar than to take initiative? We, in Pakistan, need a credible titling registration system, which is capable to replace existing inefficient and corrupt Patwari system and capable enough to create a business model in which informal sector of our economy find access to productive capital.
We require the potential wealth locked in the land to be unleashed and tapped by our economy to produce more wealth so that the shackles of poverty and underdevelopment can be broken. We need economic empowerment of our masses for democracy to flourish and the state of Pakistan to become able to focus on welfare of its citizens, which is possible only when we have sufficient to invest in the social sector.
Without addressing these deep-rooted structural and functional problems, we cannot uproot extremism, terrorism, and move forward on the path of self-reliance, which is the need of the hour, to assert our sovereignty. In the next articles we will see how that is possible, what course of action should we take to materialise that and its impact on the current security situation we are facing?
(The writer is a civil servant and views presented in the article are personal views of the writer)
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