Pakistan and the unequal distribution of income and wealth

After the global financial crisis and the Great Recession of 2007-08, egalitarian causes have moved to the centre stage of international economic discourse. Though views of different people contributing to this discourse differ sharply, they all question dominant policies and practices that tend to widen the gap between the rich and the poor.

Many of them are also in search of ways and means to provide the left-outs an equitable share in the fruits of economic development. As a result of this search, a lot of economic literature is being produced worldwide on why global wealth is distributed so unequally between rich and poor countries and how inequality between the rich and the poor is rising within almost every nation. What makes this discourse even more important is that these twin disparities have emerged in the wake of unprecedented expansion in a globalised market capitalism that, otherwise, has lifted millions of people out of poverty across the globe over the last three decades.

In Pakistan, too, winds of change in economic discourse are blowing with unmatched scope and unparalleled intensity. One can see a cultural shift in the debate over every facet of social and economic life. A strong message for meaningful change is ubiquitous though it has not yet resulted in any mechanisms that address the causes of inequality and give the disadvantaged and the vulnerable a say in policymaking.

In keeping with this general trend, Rich People, Poor Country offers yet another ‘theoretical’ contribution to literature being produced on the subject of income inequality. Hopefully, it will not just have bearings on the ongoing public debate but will also attract attention from policymakers.
The book is authored by Syed Shabbar Zaidi, a known and established name in public finance, accounting and other financial disciplines. A major argument that he makes is that “dominant economic philosophies” of the day were developed by the West after the Second World War in order to favour western economies over the rest of the world. These philosophies, according to Zaidi, have resulted in “universal guidelines” for fiscal policies that developing countries must follow in order to partake in the spoils of a Western-led economic system.

These guidelines, the author argues, have resulted in low corporate taxes, declining import duties and a smaller government role in running and regulating business, finance and economy in many countries including Pakistan. Coupled with protections offered by offshore tax havens, these policies helped shift wealth from the East to the West. This, says Zaidi, has had a predictable outcome: less than one per cent people have come to own 80 per cent of global wealth.

China, the author explains, is the sole exception. It has emerged as the world’s factory because its policies, in opposition to western theories, have been designed to protect its industry and domestic market from competition. But now that Chinese capital has crossed its national frontiers in search for markets worldwide, it is subjecting developing nations to the same western economic model it has shunned for itself. For instance, China’s prescription to address the huge imbalance that it has in its favour in its trade with Pakistan is the same as suggested by the West: seek a bailout from the International Monetary Fund (IMF).

Within this economic framework, Zaidi points out, consecutive governments in Pakistan have adopted some seriously disastrous policies. He strongly criticises misguided measures that led to the deregulation of the economy and the creation of a “free for all” foreign exchange regime in the post-1990 period. He is equally critical of the “abuse” of the Afghan-Pakistan Transit Trade Agreement that promoted smuggling at the expense of local manufacturers and added little to Pakistan’s tax revenues. Working in combination with some other factors such as corruption, these policies have helped many individual Pakistanis in accumulating huge amounts of untaxed wealth and then in transferring it abroad through questionable means. Consequently, the author says, Pakistan’s economy has suffered a large scale deindustrialisation and a massive flight of capital.

He sums up the story of Pakistan’s fiscal and foreign exchange policies quite succinctly. “In our society, we expect welfare of the masses without paying taxes” while, on the other hand, the existing “taxpayers are frustrated” that they are being squeezed further without expanding the tax net to those who somehow or the other have managed to stay out of it.

Rich People, Poor Country is a compilation of Zaidi’s articles, co-written by Asim Zulfiqar Ali, Zulfikar Akhtar, Asra Rauf and Shaheryar Khan, and published in daily Business Recorder over the last two years. It is his second book comprising of his newspaper articles. The first one, Panama Leaks - A Blessing in Disguise: Offshore assets of Pakistani citizens was published in 2016.

Rich People, Poor Country is premised on the contention that our national discourse “does not provide adequate knowledge and information to the public at large on policy issues”. Nor does it help professionals in providing practicable, independent and honest advice to policymakers. 

The title of the book emerged out of Zaidi’s conversations with various people in the wake of a recent tax amnesty scheme — Foreign Assets (Declaration and Repatriation) Act, 2018. His estimates, based on the amount of assets revealed under the scheme, suggest that a substantial number of Pakistanis – around 7-8 per cent of the country’s total population of 210 million – are very rich. These Pakistanis have individual incomes possibly exceeding even the highest average per capita incomes in the world. In sharp contrast, our government remains poor — being able to collect taxes that constitute only 10 per cent of the gross domestic product (GDP).

The book’s title, thus, aims at highlighting the disparity that exists between the fabulous private wealth and the dire situation of public finances. It also underscores the wealth enjoyed by a few and the poverty experienced by many. That these issues are being raised by a self-professed firm believer in market economy and not by someone who has a tilt towards Marxism or socialism means that these two disparities are not a matter of ideology but a result of flawed policies.

The strategic question the book raises is whether the disparities are sustainable. The author’s answer is no. Firstly, he argues, a government not able to tax the rich will never have the resources required to provide the poor with economic and social protection. Secondly, and this is linked to the first point, rising inequality is producing social tensions that could lead to widespread unrest and violence.  

What the book fails to mention is that, even while the government in Pakistan is cash-starved, a tiny minority of Pakistanis are super rich and a large portion of the population is extremely poor, there still exists a sizeable middle class in the country. The author also overlooks the fact that over 90 per cent of Pakistan’s economic growth is fuelled by domestic consumption and a significant portion of this consumption is supported by the earnings of overseas Pakistanis. Our country is also rich in natural resources. They are only awaiting to be exploited through right policies/actions and have the potential to offer work to a big part of the labour force that is getting a few million new entrants every year.

Even while talking about the rich, we must keep in mind that the rate of capital formation and accumulation of wealth in Pakistan is low even by regional standards. Our domestic private investors still lack the capital, experience and appetite to invest in public infrastructure projects and large-scale industrial ventures. They are mostly engaged in basic manufacturing which keeps them much less well off than their counterparts even in neighbouring India.

Also, while no one can deny that inequality in incomes and assets between the rich and the poor is turning into a critical issue, the book does not look into many of its causes. The fact that it has been made increasingly worse owing to social and economic exclusion caused by new technologies, poor governance and relentless market forces escapes the author’s attention.These omissions notwithstanding, the book makes a strong case for a change in the government’s economic and financial policies. Its timing could never have been better, coinciding as it does with the advent of a Pakistan Tehreek-e-Insaf (PTI) government that has come into power promising an agenda for change.

The writer is a special correspondent for Pakistan Observer and Bengali Daily Ittefaq.

This article was published in the Herald's November 2018 issue. To read more subscribe to the Herald in print.