Elite capture

EDITORIAL: In economic terms an elite is defined as external rent seekers comprising of an entity or a group who single-mindedly pursue material gain (wealth) without a commensurate contribution to the country’s Gross Domestic Product.

In Pakistan administration after administration has been led by elites who include representatives of business (manufacturing sectors most of whom have formed powerful associations to consolidate their influence over relevant policy and operate as oligarchs), feudal lords who have successfully resisted all attempts to impose income tax on the farm sector at the same rate as that payable by the salaried, wholesalers (aartis) and retailers who have successfully blocked attempts to bring them into the tax net as well as those belonging to powerful institutions.

What is disturbingly also evident and was pointed out by a commentary uploaded on the Stimson Centre website, a well-respected think tank, in an article titled The Crisis of Elite Capture in Pakistan and Sri Lanka is the fact that these disparate groups are bound together even though “they may seem confrontational, exclusionary and single-minded, inter alia, bargaining inevitably gives rise to elite-to-elite cooperation, inclusion and quid pro quos to retain the extractive functions of the state.”

This is patently evident in our budgets year after year with the percentage expenditure allocations remaining more or less the same and the revenue source continuing to exploit the existing tax payers.

In the current year’s budget, formulated at a time when the economy was acknowledged to be extremely fragile, current expenditure was inexplicably raised by 21 percent with civilian and military salaries raised by 20 to 25 percent - consisting of only 7 percent of the country’s workforce, while allocation for Benazir Income Support Programme, the only current expenditure component focused on providing assistance to the rising number of poor and vulnerable (alarmingly high at 41 percent of poverty levels), remained at roughly 3 percent though the actual increase compared to the year before, subject to the government’s bragging, was 27 percent.

Direct tax revenue, premised on the ability to pay principle, was cited as 42 percent of total FBR collections in the current year’s budget though 75 to 80 percent of this amount can be sourced to withholding taxes levied in the sales tax mode, which is an indirect tax whose incidence on the poor is greater than on the rich.

The Auditor General recommended that the FBR under the administrative control of the Ministry of Finance desists from misrepresenting this collection as a direct tax though clearly this advice continues to be ignored.

The rest of the collections are admittedly sourced to indirect taxes, which is one reason why the feel-good factor of a decline in inflation is not at the grass-root level.

Something clearly has changed as there are increasing calls to end the elite capture that are emanating not only from within the public but also from the lenders - multilateral as well as bilateral. Stimson Centre claims that “changes in the international system - and Pakistan’s place in it - have diminished the salience of Pakistan’s elite to operate on past laurels.

Elites should work to move away from prioritising external rent extraction to internal structural reform that explicitly targets elite capture.” This suggestion echoes the sentiments expressed in the documents uploaded on the International Monetary Fund website with respect to the ongoing 7 billion dollars Extended Fund Facility programme: (i) Tax Policy Reforms: These reforms will focus on simplifying revenue collection and broadening the tax base while ensuring the progressivity of the tax system.

Key measures include removing exemptions and preferential treatments to reduce distortions; (ii) long-standing government interventions in agricultural commodities have created distortions inhibiting the sector’s productivity and harming Pakistan’s medium-term potential.

Government price setting and procurement operations have made the agricultural sector unresponsive to changing consumer preferences, exacerbated price volatility and hoarding, undermined the incentives for innovation, misallocated resources, and placed a burden on fiscal sustainability; (iii) As resources were increasingly misallocated to low productivity activities, whose profitability was supported by the state, the demand for more support from vested interests only increased over time; and (iv) containing primary expenditure to 16,176 billion rupees (13.3 percent of GDP), while preserving space for priority social and development spending.

Copyright Business Recorder, 2024