The importance of the 18th Amendment

The constitution of Pakistan, as amended over the years, is now a federalist document that prescribes devolution of such powers and responsibilities to the provinces that can be reasonably and effectively undertaken at the provincial level.

The functions that provinces cannot effectively perform – for instance, creation of money, conduct of foreign policy, maintenance of armed forces, setting uniform national standards for medicines – are made the responsibility of the federal government.

This way the federal government is mandated to undertake functions that only a central government can do and other functions are relegated to the provinces. A natural extension of this should be further devolution, on much the same principles, from provincial governments to local governments and municipalities.

Ever since Adam Smith wrote his magnum opus ‘The Wealth of Nations’, economists have understood that private-sector suppliers of goods and services, in trying to make the most profit, will try to outcompete one another on prices and quality to the point where they will, as if by magic or an invisible hand, accord maximum benefits to the consumers. A prominent exception is when suppliers have a monopoly and have no incentive to reduce prices or improve quality. This is why for industries that are dominated by one or just a few suppliers – such as electric utilities – we have government regulators deciding prices. Similarly, when we fear that suppliers will form a cartel we have regulators busting cartels. But for competitive industries with many suppliers we don’t need to regulate, knowing that competition will ensure that suppliers don’t short change consumers.

The same cannot be said of the government’s provision of services. There is no mechanism like competition, which ensures that a government restricts taxes and keeps improving the services it provides. Voting periodically is an incentive to improve services but still it doesn’t, theoretically or practically, ensure that governments will maximise citizen welfare.

However, if governments are composed of small territorial units and are made to compete with one another for taxpayers-residents, then it is likely that taxes will not be excessive and services would be according to the desires of the people. In other words, competition among small jurisdictions will lead to citizen welfare becoming paramount.

If, for instance, one locality charges high taxes but doesn’t pick up trash or doesn’t provide good schools, citizens can move to a neighbouring locality. This ‘voting with their feet’ will ensure that citizen welfare remains topmost in government officials’ minds. This is why public finance experts favour smaller federating units and devolution of power to the locality or municipality closest to the people.

Generally it turns out that people who live in the same area have similar income levels, educational achievements, aspirations, etc. In other words, people living in the same area will have similar preferences about what they want their governments to do. This of course suggests that the government services that the people of, say Vihari, want may be quite close to the services demanded by the people of Mailsi but may not be very similar to the services needed by the more affluent residents of Karachi or Islamabad.

Thus not only is it injudicious for Islamabad to decide where parks and schools should be built in Vehari, but that decision is also best not made in Lahore. The decisions about Vehari’s local matters should best be made in Multan if not in Vehari itself.

In our short history, we have experimented with quite a few local government systems. In the 1960s we experimented with Basic Democracies and ‘One Unit’, but ignored the discontentment and alienation among our Bengali citizens. In 1971 we paid a price for this neglect and hence in 1973 we came up with a very inclusive constitution that catered to the wishes of all segments of our population. Since the federating units at the time were unprepared, the 1973 constitution kept a concurrent list of responsibilities that were to be transferred to the provinces in ten years’ time.

Ten years went on to be 37 years, and finally with the passage of the 18th Amendment in 2010 the concurrent list was abolished and Pakistan became a truly federal state. Even so, there are still embers of discontentment within our country (particularly in smaller provinces) that leave us vulnerable to foreign manipulation. Therefore, the need is not to reverse the federal character of our country but to further empower the lower levels of governments and bring all areas into the national mainstream. This will ensure that no segment of our population feels alienated or disenfranchised and all of us contribute to a stronger federation.

I have earlier argued in this space that the 7th NFC Award transfers too much money from the federation to the provinces, thus both weakening the federation and also disincentivising provinces from raising their own revenues. The 18th Amendment stipulates that provincial shares may not be reduced from 57.5 percent of the divisible pool. That being so, I cannot see how our federal budget can be balanced even if we have a very frugal and effective leadership at the helm.

However, the solution to our fiscal woes doesn’t lie in doing away with the 18th Amendment. For a nation that has already been dismembered once and whose enemies are just waiting to take advantage of any fissures within, it would be a most rash move indeed.

The solution is to pay some legacy expenditures, such as debt servicing, from federal tax revenues before transferring the money into the divisible pool. This need not be done in one go but can be done over a few years. This will temporarily reduce provincial revenues but over time provinces will learn to raise their own revenues and rationalise expenditures. The literature that suggests devolving power to lower levels of governments also prescribes that, as much as possible, taxes be also raised by lower level authorities – ie provincial and local governments.

It makes no sense to weaken our nation, and the federation and the important services it provides, because of fiscal issues. It is also quite counterproductive to require the federal government to raise all revenues and transfer to the provinces and for provinces to make little or no effort to raise their own revenues.

Some fiscal rejigging of the NFC award aside, rather than limiting the scope of the 18th Amendment and the federal structure of our country, we should make federalism more entrenched in Pakistan. The PTI government has a rare opportunity to implement this by creating new provinces of South Punjab and Bahawalpur, but most importantly also by strengthening and empowering local government systems across the country.

A happy development has been the integration of Fata into Khyber Pakhtunkhwa and thus into the national mainstream. This wouldn’t have been possible without the difficult work done by our armed forces to beat back terrorism in the region and also the vision shown by our political leadership, led by the PML-N, to amend the constitution. But now that it has been done, the wishes of the people living in other areas should also be fulfilled.

The writer has served as federalminister for finance, revenue andeconomic affairs.

Twitter: @MiftahIsmail