Dr Hussain has to his credit the setting up of various institutions, including the organisations mandated with poverty-reduction like Pakistan Poverty Alleviation Fund (PPAF) and Punjab Rural Support Programme (PRSP).
He has been an economic policy advisor to the current government and also chaired the 'Working Group on Poverty Reduction for Pakistan's Tenth Five Year Plan'. An MA from the University of Cambridge and a D.Phil. in Economics from Sussex University, Dr Akmal is currently the Distinguished Professor of Economics, Beaconhouse National University, and Senior Fellow, Pakistan Institute of Development Economics. Apart from publishing numerous papers and reports, Dr Hussain has authored three books on development policy and has co-authored 27 other books on issues of poverty, peace and development.
For Dr Akmal, the Distinguished Professor of Economics, Beaconhouse National University, Pakistan is a "high tax economy" that, by virtue of having 63 percent of taxes as indirect taxes, breeds inequality amongst the masses. "The differential impact of indirect taxes is that it falls more on the poor than on the rich. A study shows that the real income for the bottom 10 percent falls, and the real income of the top increases 10 percent as a result of indirect taxes; so the real distribution of income shifts in favour of the rich," Akmal points out.
According to him, levying withholding tax or sales tax will increase the price of the product as well as the manufacturers' profit margin (by passing more to the consumers). This will affect the poor with fixed income, as they will have to pay a higher price for the same good.
He points out that apart from formal taxes there are also 'informal taxes'. These fall on consumers but do not directly add to government revenues and appear as profits or rents earned by companies. An example of such an informal tax is the duty on imported cars.
"The same car that you could get for Rs 0.6 million in international market, here you get for Rs 1.2 million. This extra Rs 0.6 million that the consumer pays is a tax on the consumer and accrues as rents to the local car manufacturers," Akmal explains.
He also believes that the security guards some companies and households have to hire are essentially a tax on the people because it is a "fundamental obligation of the state to protect the lives of its citizens". Here again the 'tax' accrues in the form of profits of security companies, on which they may or may not pay income tax.
Further, the government's mismanagement of the fiscal situation and the consequent borrowing from the SBP is also an indiscriminate tax for people, according to Akmal, because it generates inflation. "When the West tells you about the tax-to-GDP ratio, tell them that you need to add in the other forms of taxes that exist here as well," Akmal says, critically adding that the officials of our Finance Ministry should access the knowledge base that the country has and ask how much extra tax is levied on the citizens."
FISCAL MESS
For loss-making SOEs, Akmal says the government is losing Rs 145 billion a year to finance the losses of "these corrupt and inefficient state-owned enterprises" and therefore the government should "just privatise them". "Hand these over to Nadeem-ul-Haque (of Planning Commission) and tell him to re-structure and sell them off," he suggests, while also highlighting the need for drastic reductions in government expenditures, such as closing down useless ministries.
He is optimistic that these steps will bring down the budget deficit to around 5 percent because of which there will be no borrowing from the SBP which in turn will control inflation. He adds that this would further reduce interest rate and will give a boost to the private sector. While Akmal advocates taxing the rich like many others, he caveats that merely this alone would not finance growth, "because the numbers do not add up, no matter what you do".
Therefore, Akmal stresses the importance of negotiating with the West for finances, especially since Pakistan is fighting this war against terrorism. "If the US can give $80 billion to rescue Citibank, they can certainly give $18 billion to Pakistan". He says that Pakistan will not have much choice but to "remain in a fiscal and economic crisis" unless the West gives some major investment package. "When it will be time to give back the $9 billion to IMF, you will either default, or negotiate a deal with them right now," he says.
DISCONTINUITY OF REGIMES
Akmal believes that despite the discontinuity of economic policies in Pakistan, many regimes have shared some common economic agendas, thanks to the IMF. Broadly, Akmal identifies four features, directly or indirectly linked with the IMF, that were common in the Nawaz Sharif, Benazir and Musharraf regimes which have not necessarily helped strengthen the economic situation.
Those four features are: Firstly, liberalisation by reducing tariffs and deregulating the industry, done to different extents by the three leaders: Nawaz Sharif to a greater extent, Benazir a little less and Musharraf, much more. Secondly, there were attempts to privatise state-owned enterprises -- and that too to varying extents, with most of it undertaken in the Musharraf regime.
Thirdly, were the attempts to depreciate the exchange rate to increase exports, again to a varying extent under pressure from the IMF. Fourthly, attempts were made at reducing subsidies, which were unfortunately or fortunately, never achieved. These policies associated with IMF conditionalities, while they slowed down GDP growth, and increased poverty did not succeed in reducing the budget deficit simply because revenues declined along with GDP growth.
INSTITUTIONAL WEAKNESSES AND SOCIAL INEQUITY Akmal argues that within the existing institutional structure growth has historically been unsustainable. "We grow in spurts: When large capital inflows are available in the form of aid, there is growth, and when aid stops, the GDP growth collapses," he explains.
He attributes this to a low savings rate, which necessitates supplementary foreign aids. He also highlights the balance of payments problem which occurs "whenever we generate high growth - (and) our foreign exchange earnings cannot keep up with the import requirements of high growth".
He agrees with economists who point out the problem of a low savings rate and the problem of a textile industry being unable to export enough due to lack of international competitiveness in the high value added textile goods. "Technically, at a proximate level both points are correct. We are unable to finance import expenditures through exports while domestic savings are insufficient to finance the required investment for high GDP growth. This results in a savings gap and a foreign exchange gap, both of which have to be funded through foreign aid," says Akmal.
However, he is quick to explain that these are symptoms and not the disease. "The question is: Why is the savings rate low? Why are we unable to diversify our exports and accelerate export earnings? Both these problems are located in Pakistan's limited access social order - an institutional framework which excludes most people from entering into the process of investment and competition in the economy," he argues.
"The institutional structure, within which the economy has functioned, is designed to exclude the majority of the people from the process of economic growth. It is precisely on the basis of this exclusion, by restricting competition to the elite, by restricting the process of investment to the elite, by restricting high wage employment to the elite, that rents are generated for the elite, which is unearned income", he says. He associates such rents with corruption. "Corruption though immoral is also a part of the same phenomenon of giving unearned income to the elite," Akmal argues.
He emphasises the importance of social equity, saying that it is important for sustaining democracy as well. "You cannot run a political democracy where the economy is by the elite and for the elite," he claims, asserting that unjust economic arrangements breed terrorism. "If you want to fight terrorism in the long run, then the elite must open up the economy."
For that, Akmal suggests "opening up markets for capital to the poor and middle class, giving them access to productive assets, investible resources and high quality education and health so that they can engage in investment and high wage employment," he says, adding if you open up the economy to the middle class and the poor you will have a larger number of people who will save and invest, thereby generating a higher, more self reliant and sustainable growth.
"As it stands, if you restrict your institutional structure and the economic players, then you will have lower savings, lower investment, less competition and greater inefficiency. If you are getting subsidies from the government and making large profits inspite of being inefficient, why should you become internationally competitive, take risks or try to diversify industry and develop new products? There is no incentive," says Akmal, while criticising the subsidy culture of the economy.
"Again, the institutional structure excludes people from competition; its inherent incentive structure goes against competition; it goes against efficiency and creates disincentives for productivity increase, innovation, risk taking and hard work," he explains.
He further highlights the grave scenario of unemployment in the country exclaiming, "There are 90 million people who are young and looking for jobs! Right now, you do not even have the capacity to generate 7 million jobs in the next five years. China and India have five year plans, but Pakistan has decided to do away with five year plans!"
About Pakistan's political culture where most individuals seek political power for personal enrichment, "we have a patron-client model of governance, in which state resources are used by politicians to transfer to their dependants or to themselves or to other government officials." says Akmal, pointing out that this is the reverse of Aristotle's saying "when you enter the public domain you leave your personal interests behind".
Interview by Ali Khizar
An interview with Dr AKMAL HUSSAIN
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