Governance deficit

Real estate has become the mother of all corruption; it has served as the safest haven for all tainted resources

After having attempted to regulate the real estate market through suitable legislation, the government, through another legislation has now embarked upon dealing a death blow to the practice of holding properties and bank accounts under fake names (benami). These two measures are expected to yield to the exchequer, billions by way of taxes and in the process, a good part of the informal economy is expected to be converted into a formal one.

Real estate has, over the years, become the mother of all corruption as it has served as the safest haven for all tainted resources and rents earned through corruption-like tax evasion and avoidance, bribery, kick-backs, smuggling, black marketing, human trafficking as well as drug and gun running. And in the last two decades or so the real estate market had become the safest source of terror financing as well.

Former civil servant Seed Ahmad Qureshi, in his book Governance Deficit — a case study of Pakistan, published on August 18, 2016, maintains that the processes that curtail governance space fall in four categories: a) inertia, b) ceding governance space, c) erosion of governance space and, d) surrender of governance space.

According to him, inertia is a situation in which the state allows things to drift, without considering the long-term implications.

“In the economic sphere, an important example is the growth of the informal economy”, observes Mr Qureshi, who should know what he is talking about since he has served the country as a secretary for economic affairs and secretary for general finance, as well as deputy chairman of the planning commission, with the rank of a federal minister.

Quoting from well-researched papers by reputable economists, Mr Qureshi has sketched in brief the gradual expansion of the informal economy in the country and its implications to governance:

“In Pakistan, the informal economy has been expanding over time. Social Policy and Development Centre (SPDC), Karachi, reported in 2000 that the informal economy was about 42 per cent of the national economy in 1980-81; that it grew to 46 per cent in 1998-99 and 50 per cent of the national economy in 2000.

“In 2000, in a paper for the Institute of Development Economics, Islamabad, Ali Kemal produced an estimate of the underground economy at 14.87 per cent of GDP in 1982, 13.40 per cent in 1990 and 27.11 per cent in 1998. Tax evasion was estimated at 2.11 per cent of GDP in 1982, 1.87 per cent in 1990 and 3.6 per cent in 1998. Pakistan’s tax to GDP ratio is below 10 per cent. Evasion at 3.7 per cent of GDP implies that tax revenue could go up by 37 per cent if tax compliance were 100 per cent. That would raise the tax to GDP ratio to 13.7 per cent

“Another study done in 2005 estimated that the underground economy was 54.6 per cent to 62.8 per cent of the GDP and expanding at the rate of nine per cent a year, significantly more than the formal economy. According to this report, the cost advantage informal businesses enjoy by sidestepping taxes and regulatory obligations, allows them to undercut prices of more productive competitors and thus continue in business, despite low productivity.

“In 2008, the informal economy was estimated by Ali Kemal and Ahmed Waqar to be between 74 per cent and 91 per cent. However, in the Conference of Pakistan Institute of Development Economics held on 15th November, 2012, Ali Kemal claimed that the informal economy was 91.4 per cent of the formal economy.

“The informal segment of the economy does not pay direct taxes, though it might be paying transaction-related indirect taxes, such as excise and sales tax. Its prevalence limits the impact of policies, weakens resource base of the state, reduces the reliability of economic data, and results in an understatement of size of GDP. It is outside the regulatory framework of the government. However, being a major source of employment, it cannot be dismissed out of hand.” (Pp212-214.)

According to Mr Qureshi, within the formal economy there have been numerous instances of ceding governance space in the fiscal regime, sacrificing long-term advantages for short term gains. An important example is the introduction of the bearer instruments in the mid-1980s and early 1990s. There have also been a number of tax amnesties in Pakistan. Each amnesty is declared to be the last, but the count keeps on growing. So far there have been seven amnesty schemes.

Published in The Express Tribune, August 20^th, 2016.

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