Prescription for reducing inequality

Inequality gap would continue to widen unless land reforms are introduced, all incomes are brought under tax net

A handful of Pakistanis have succeeded in cornering almost the entire national wealth, as well as the sources that generate it, thanks largely to the ‘neo-liberal’ economic policies that we have been forced to follow since the mid-1980s by the proponents of the infamous Washington Consensus. The most devastating side effect of these policies has been the emergence of an enormous inequality gap between the rich and poor. Meanwhile, this policy of minimal government interference and free market forces has reduced the state to a skeleton incapable of formulating a way out.

Eminent economists the world over seem to recognise the malaise but they are not yet willing to come out of their denial mode as most seem to have deluded themselves into believing that the ‘free market’ forces would eventually reduce inequality. However, a group of economists of international repute, which also includes some distinguished names from Pakistan, has started challenging this conventional wisdom. Those among this group, like Dr Hafiz Pasha, who have studied the ups and downs of this country’s economy from close quarters, seem to have come to the conclusion that the inequality gap would continue to widen unabated unless land reforms are introduced and concurrently all incomes, irrespective of their sources, are brought into the direct tax net.

Dr Pasha, in a recent research paper, “Progressive Fiscal Policy For inclusive Growth”, has identified the ownership of agricultural land, besides property and financial assets, to be the primary manifestation of inequality in Pakistan. Small farmers with less than five acres, constitute as much as 65 per cent of the farming population in Pakistan, but own only 19 per cent of farmland. There are about 26,000 farmers only (0.4 per cent of total), who own as much as 14 per cent of the land. Large landlords have preferential access to irrigation water and own tractors, tube wells and other agricultural equipment. And since they also wield enormous political power, they have frustrated all attempts to introduce land reforms and have also seen to it that their incomes continue to remain outside the tax net. Furthermore, the top 20 per cent of the population accounts for almost 52 per cent of property income, while the top one per cent of depositors account for 80 per cent of the deposits. Banks extend 77 per cent of the credit to the top one per cent of borrowers.

There are an estimated one million shareholders of publicly quoted companies. Market capitalisation of $70 million is part of the wealth of these one million individuals. Family ownership of companies still dominates the corporate world, making them too vulnerable to the vagaries of the market. These wholly family-owned corporate entities, in order to offset the effects of such risks to their incomes and assets, indulge in tax evasion and pilfer public utilities. Lobbyists of big business buy political influence to ensure governments keep making ‘business-friendly’ taxation policies.

Meanwhile, the incidence of poverty in the country is estimated to have reached 37 per cent. And due to continued under-investment in the people, the rate of improvement of Pakistan’s HDI is estimated to be slowing down considerably.

Dr Pasha has recommended the following six-step prescription for taking care of the immediate hurdles in the way of liberating the national economy from the clutches of ‘neo-liberal’ policies: i) tax policy must focus on more progressive direct taxation. The key areas of focus are agricultural income, property and unearned capital income from financial assets; ii) focus on regional disparities. It is an issue to be tackled by the NFC and the PFC (to be constituted after the establishment of local governments). The PFC will have to design an appropriate revenue-sharing formula to tackle intra-regional inequality; iii) development allocation to focus on maximum employment potential sectors, like agriculture, rural development, small-scale manufacturing and construction; iv) social protection policies, especially designed to help workers, women, youth and minorities; v) appropriate pricing of agricultural inputs, support prices for inputs and income supplement programmes; vi) a higher share of public expenditure will have to be devoted to social services, especially education and health.

Published in The Express Tribune, October 15^th, 2014.

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