'Pakistan needs to broaden the tax base,' Executive Director, International Growth Centre

Jonathan Leape is the Executive Director of the International Growth Centre (IGC) and an Associate Professor of Economics at the London School of Economics, UK. His research interests focus on public economics, with a particular emphasis on taxation and regulation, including congestion charging. He has a PhD in Economics from Harvard University and degrees from Oxford University and Harvard University.
On his first visit to Pakistan, on the occasion of the IGC's 3rd South Asia Growth Conference held in Lahore, Leape talks about the IGC's current structure, successful research projects and its future plans. Below is an edited transcript. BR Research: Can you tell us about your own history and the idea behind IGC's establishment?
Jonathan Leape: My interest in development economics dates back to 1980s when I was studying at Oxford and became friends with a number of South Africans who were very politically active. In South Africa at that time international pressure was increasing but political repression was still very strong so political debates were being expressed through the economic sphere--driving home for me the close connection between economics and politics.
Having joined the faculty at LSE, I was approached by the office of Australian Foreign Minister Gareth Evans in 1989 and asked if I would set up a research center that would look forward to South Africa's transition into the world community. It was clear that there would be a lot of economic challenges to be addressed. The research center was set up in January 1990 and our work took off much more quickly than expected when, a month later, Nelson Mandela was released from prison.
As an economist what struck me was that how challenging it is to make policy and how often there is a gap between what researchers focus on and what policy makers know and act on. As a result, I became interested in how to bring policy and research together. So, IGC was for me a great opportunity because it has pioneered a new model of knowledge exchange and knowledge creation, through collaboration between researchers and policy-makers.
The IGC model combines a global network of world-leading economists in growth and development with a long-term presence in 14 partner countries.
BRR: Can you share some crosscountry experiences that transferred into Pakistan, or key learning from Pakistan utilised somewhere else?
JL: A lot of projects undertaken in Pakistan have been high profile projects for us. One of these was a project working with the Federal Bureau of Revenue (FBR). Pakistan just two years ago had an income tax system in which, at certain points, the structure of tax rates actually discouraged people from earning more. Working with the FBR, IGC researchers Kleven and Waseem demonstrated that the impact of this was significant, with large numbers of taxpayers 'stuck' at these points.
What that signalled was a combination of two things a) people were affected by taxes in their real decisions, eg, how much should I work, should I work overtime or seek promotion, and b) people were arranging their income so as to keep their reported salary just under the tax rate threshold and have compensation in other forms. This research demonstrated, for the first time in a developing country context, how responsive tax payers are to the structure of the tax system and has influenced policy makers in other countries.
BRR: Can you identify cases of policy implications from research conducted at IGC that led policymakers to change their course of action?
JL: Well, one example is here in Pakistan, where the research I've just discussed helped to inform government thinking about the income tax and the decision in 2012 to reform the income tax, shifting to a new structure of tax rates that eliminated the sticking points described above.
Another example comes from IGC work in the important area of public service delivery. IGC work in this area starts with the recognition that governments at the end of the day are people. It is people who determine how efficiently government services are being delivered. If you want to deliver high quality public services you have to have skilled, motivated people. So the challenge in all countries is how to recruit and retain such people in the public sector.
IGC researchers worked with the Zambian ministry of health over the past four years on a project which was sparked by a decision in Zambia to extend the reach of their health system to poor rural areas by introducing a new cadre of health professionals called community health assistants. They realised from the outset that the success of the programme would rely on these community health assistants having high level of commitment in the local community which financial incentives would never be enough to generate. But there was still a question of what kinds of incentives would be most effective.
On one hand, it was clear you could appeal to community orientation; how strongly they feel about something back to their community. On the other hand, you might be able to appeal to peoples' desire to achieve career success by demonstrating their effectiveness in this particular role perhaps having the opportunity to move onto other roles. Professors Oriana Bandiera (LSE) and Nava Ashraf (Harvard) worked with Ministry of Zambia in the first roll-out of the programme in 48 districts of Zambia.
On their advice, the government divided these districts into two groups. In one group of 24 districts the role was advertised as 'a chance to give back to your community'. In the other 24 districts it was advertised as 'a chance to climb the ladder of success as a health professional'. Then the researchers tracked the quality of people that were hired on the job for 2 years. What they found was that, in recruitment, the strategy that appealed to skills and career ambitions attracted more skilled people.
They had better high school results and math results. They also found that they were more productive on the job. Moreover, in community orientation both ranked equally. On the basis of these findings, the ministry adopted that career-orientated strategy for recruitment as the programme was rolled out. This highlights how the IGC approach to research can make a huge difference.
BRR: What were the objectives of this growth conference?
JL: We have three international conferences each year. The focus of the conferences is very much the same, to share learning across the network by fostering interactions between researchers and policymakers. There are far too few occasions for policymakers and researchers together to network and to share what they learnt and exchange ideas.
One focus of these big conferences is to enable this kind of interaction to take place and what we see is that a number of research projects are launched in that way. For example, the soccer ball project on innovation in Punjab was launched in a previous growth conference as a result of a suggestion one of our country directors made to a researcher from Columbia University. So, one of our overarching objectives in these conferences is to stimulate the generation of new ideas by bringing researchers and policymakers together.
A second objective is to share and present the findings of research over past couple of years so that researchers and policymakers can learn from research across South Asia and Africa. The idea is to open horizons so that participants can reflect on new research perhaps on an issue that never crossed their radar screen and think about it in their own context.
BRR: What are your views on Pakistan's current taxation affairs and what do you think needs to be done in order to resurrect it?
JL: I have a particular interest in tax, especially the challenges of how to improve tax enforcement and tax compliance. How can we reduce levels of tax evasion and tax avoidance that are really crippling Pakistan economy? Pakistan to achieve sustained high rates of growth must shift to much higher revenue trajectory. Revenue less than 10 percent of GDP is simply not compatible with high rates of growth.
We have seen from the experience of developed economies that government need to be raising at least 20-30 percent of GDP in revenues in order to undertake the kind of investments in infrastructure and human capital that are preconditions of high rates of growth. So, tax is really the heart of the challenge facing Pakistan in terms of achieving sustained higher rates of growth.
What we know from IGC research on property taxation, working with the Excise and Taxation Department in Punjab is that well-structured incentives for tax-collectors can increase revenue and the same is true on the compliance side in terms of incentives for taxpayers. So these are the kinds of building blocks that over time will lead to higher rates of compliance and higher rates of revenue generation. The last thing Pakistan needs is a proliferation of new taxes. What Pakistan needs is to make existing taxes much more effective in generating revenue by broadening the base.
BRR: Besides taxation what are other areas of focus of the IGC?
JL: IGC research is also focusing on firm capabilities, urbanisation, and energy, each of which addresses particular policy challenges for economic growth. IGC research on improving the productivity of the garments sector has also gained policy momentum as the Government of Punjab, with the guidance of the Chief Minister, fully endorsed the findings and recommendations and has set up an implementation plan.
With regard to urbanization, with the uptick in large infrastructure developments in cities such as Lahore, IGC work will help to understand the implications of these mega projects on the economy. Our work will try to answer questions about the impact of rapid urbanisation on both rural and urban poverty. Lastly, looking forward, IGC Pakistan will engage with policymakers in tackling financially viable energy provision, and governance challenges to reduce energy wastage. Higher growth rates will require higher energy consumption so energy is really going to be critical to a sustainable transition to higher growth rates.