Politically destabilising inequalities

LAHORE: Uptick in exports is based on subsidised power and gas, which shows that instead of reducing cost of doing business by improving public sector inefficiencies, the government is booting the additional bill of the already bleeding power sector.

The cost of imported RLNG is much higher (30-40 percent higher) than the rate at which the gas is supplied to the exporters. This is a fire fighting measure and the sustainability of exports is subject to continuity of these subsidies.

It goes without saying that subsidies undermine the competitive process as they interfere with market signals and where provided on inputs lead to inefficient allocations as perceived prices deviate from cost-based prices.

After 30 months in power, it seems the government has realised that improving efficiencies of power and energy sectors is beyond its capability. The power sector is bleeding profusely due mainly to management inefficiencies.

Still the government is reluctant to privatise the power sector companies. By removing management inefficiencies, the government can bring down the electricity prices to realistic levels.

It is absolutely essential to plug the gap between cost of production and power tariff. The government needs to handover the public sector power companies to the private sector through a transparent process.

The private sector has the ability to bring back the capacities of public sector plants to their original rated value and maintain them properly and remove corruption in the power distribution system.

In fact, the government should opt out of doing business and instead act as a facilitator for businesses. However, this government is still in denial mode. It is trying to retain both the Pakistan Steel Mill and Pakistan International Airlines after massive pruning of their workforce.

State enterprises in Pakistan have never operated efficiently. These two entities might show some improvement after restructuring, but the inefficiencies would creep in after some time.

Whenever an attempt is made to privatise some entity, so called experts start evaluating its assets. It is unwise to go into the details of the worth of the assets of public sector entities.

Such flawed thinking would go on burdening the exchequer, as assets would continue to dilute overtime to service loans taken by these entities. Moreover, it should be understood that the privatisation proceeds should be used by the government to look after the surplus employees, who would have to leave after privatisation.

Privatisation is an uphill task because the government writ is weak. Governance is much below permissible level.

All inefficiencies would evaporate once the governance bar goes up. With merit and transparency reigning supreme, the government would have no difficulty in increasing taxes, reducing, or eliminating wastages and attracting investment.

There would be no unnecessary subsidies. Credible research has shown that limitations of wasteful subsidies attract foreign direct investment.

Eastern Europe, before opening up was mired with subsidies. These countries attracted huge foreign investment once the subsidies were eliminated from their system.

Pakistan badly needs to upgrade its infrastructure and add on more. The priority sector where investment should be made is infrastructure, as it is a globally proven fact that one percent investment in infrastructure increases GDP growth by 1.8 percent, while one job in infrastructure projects creates 15 jobs in the supply chain – both upstream and downstream.

This bargaining factor is missing presently from the government side. Instead of witch hunting political rivals, the government should use tax reform to enhance political accountability and prioritise tax systems that build effective national and local public authority and improve the link between central and local authorities.

We should also seek to develop tax systems to build the state’s administrative and economic capacity. The planners should recognise that progressive taxation properly linked to expenditure, can improve legitimacy through redistribution that tackles politically destabilising inequalities.

Another factor worth noting is that aid can undermine tax effort, as resources needed for expenses are covered by aid (credit that has to be paid back with interest). Planners must consider how taxation can improve genuine country ownership by expressly acting as the matching funds for local political priorities. Presently we are financing our deficits through loans.

Without genuine reforms and transparency, the poor would remain poor because they earn little from the work they do mostly from the informal sector. If growth does not come with high productivity and higher paid jobs, the purpose to alleviate poverty through development would be defeated.

Industrial employment in the formal sector that pays decent wages has been greatly affected by the frequent busts and boons in Pakistan’s economy.