Pakistan is awash with black cash. Since we, as a nation, are generally averse to documentation, it is not possible to know exactly how much black cash is currently in circulation. But if one went by the astonishing rush in our shopping centres and eating places in both urban and rural Pakistan, it becomes too difficult to not question the socio-economic profile of the country put out periodically by the official statisticians.
Since the rich and the not-so-rich agriculturists do not pay any income tax, official statisticians simply have no way of knowing what happens to the cash in the hands of these agriculturists belonging to a sector which makes up 20 to 22 per cent of the economy. Even most of those belonging to the manufacturing sector, which makes up 25 per cent of the economy, are known to have been adjusting their incomes against barren lands they have purchased for just this purpose.
And, of course, most of the professionals, like doctors, lawyers, engineers, most self-employed persons, private hospitals and private educational institutions — which have mushroomed by the hundreds over the years, surpassing now by thousands the number of hospitals and educational institutions in the public sector — either do not pay any tax on their incomes or pay only a paltry sum.
And since the ruling elite, in collusion with the big business, has consistently nipped in the bud attempts to document the economy by opposing with religious zeal all attempts to introduce measures like the General Sales Tax (GST), the government is being deprived of billions in taxes annually from those operating in the legal economy as well.
Add to this the money made in bribes, smuggling and by over-and under-invoicing foreign trade. Power, water and gas are also pilfered by the big business and feudal aristocracy, which if monetised would also amount to billions of rupees lost to the formal economy. Obviously, the official figures of GDP growth of three to four, or even eight per cent, would not reflect this massive amount of black cash in circulation and the growth in the size of the black economy it finances.
An official report has noted that the resilience of the informal sector appears to be pushing the formal economy forward. Everything from auto parts to sports goods, knitwear, clinics and beauty salons fall into the informal economy. All these make a significant contribution to employment and income, and that’s one reason why the economy Is still growing.
The undocumented demand from Pakistan’s 2007 million people means the nation’s purchasing power is more than estimated. Rising crop prices have pumped an extra more than one trillion rupees into the rural economy in the past years, most of it undocumented.
Evidence of consumer demand is everywhere as new shopping malls and restaurants in Karachi, Lahore, Islamabad, Rawalpindi and Faisalabad are filled to capacity. Car sales have been rising without any abetment except in the current year, as more people could afford a Toyota Corolla or Suzuki Mehran.
One hopes that the IMF program to be signed in June this year would also consider the positive/negative impact of the parallel economy on the overall economic reality of the nation before discussing conditionalities for a new bailout package.
Meanwhile, the problem to understand in a nutshell is that not everything that is profitable is of social value and not everything of social value is profitable. Reality TV, fashion, sports and gambling are all of questionable social value, but each is quite profitable and exists in the private sector. On the other hand, few would argue that the Army, Navy, Air Force, Coast Guard, police department, fire department, libraries, parks and public schools are of no social value, and yet, they could not exist if they were required to be profitable. To reiterate, the key issue is this: not everything that is profitable is of social value and not everything of social value is profitable. The proper role of government is the latter.
A government has no business doing business. Sounds logical. But a government devoid of the necessary instincts of a sharp businessman would find it almost impossible to frame socio-economic policies that ensured progress with equity. Such governments either end up widening the gap between the rich and the poor, or failing them both miserably.
Governments in poor countries, especially those which are totally dependent on imported fuel, need to be necessarily business-minded to be able to not only rationalise the dependence, but also reduce the burden on the import bill by being an expert of the market as are the international oil sharks, racking in millions on price fluctuations of as little as a minimal most fraction of a cent.
Donor-driven poor countries need business-minded governments even more because if you are not well versed in what is happening in international trade, more likely than not you are going to end up returning almost the entire aid back to the donor country in import bills.
Also, it is only a business-minded government, which can make a distinction between an enterprise that yields profits of immense social value and those that yield purely financial profits.
Take for instance, the Steel Mill. No matter how you run it, at the production capacity of 1.1 million metric tonnes, it can never be financially profitable even if you cut its fat to bare bones. Its social value is too dubious to merit any consideration. So sell it today even if it brings in only one dollar (the land in its possession should, however, be sold at market rates) because every passing day would only add to its losses and increase the burden on the national budget. This is true for most of the items earmarked by the government for privatisation and disinvestment.
However, this will never be true for PIA, Pakistan Railways, power generation and distribution entities, Oil and Gas Development Company Limited, Pakistan State Oil, utility stores, National Bank of Pakistan, Civil Aviation Authority, Pakistan National Shipping Corporation, Karachi Port Trust and Port Qasim, etc. In rich countries perhaps, these entities would be better off in the private sector. But in poor countries like Pakistan, these entities have as much social value as the armed forces, security agencies, libraries, parks, public schools and public health institutions.
A government without business know-how would hardly be able to maximise social benefits of a public sector entity at a minimum financial cost. In most developed societies, this is done by letting the public sector compete with the private sector but with keeping the latter’s profit motive within reasonable bounds by establishing legally sound autonomous statutory regulatory mechanisms.
And even after such mechanisms are developed, air, road and rail transport, energy-related units, public schools and public health institutions, at least up to primary levels, would need to be kept under government control, no matter how much the cost.
A big chunk of unnecessary financial losses that these public sector entities of social value are incurring currently can be eliminated by cutting down on waste and replacing inefficient managements with efficient ones. Also, their burden on the budget could be significantly eased if the government were to collect the taxes that are due to it from all its citizens who earn taxable incomes. Only a business-minded government would know the importance of enforcing tax laws strictly across the board without exception and exemption.
And you need a government well-versed in doing business to negotiate an IMF program that ensured growth with equity.