Monday, January 25, 2016

Franchising super power


As the super power brand built by the US has shown that you become a super power by suppressing smaller powers around you, the franchisee of Saudi Arabia has tried to follow the same route

Fantasies never fail to succeed. Superman, Spiderman, Batman and Star Wars, no matter which sequel it is, still capture the imagination of audiences across countries, across cultures, across age groups and across continents. They touch the basic human instinct to supersede human boundaries and control and subjugate many forces in the world. That instinct in real life is best seen in politics where politicians act as supermen and try to fight star wars with other countries to become the super power controlling the planet. The US has coined these fantasies but has also envisioned itself as the super power of the world by claiming to suppress the evil forces trying to destroy the universe. Since the definition of evil forces is highly tilted towards the stereotyped figure of a Muslim state with rebels turning into terrorists trying to fight for their own definition of religion, the last two decades have seen wars in South Asia, i.e. Afghanistan and Iraq, spilling over in the region with disastrous effect. Somehow, without peace being restored and without a war being won, the US does turn out to be the victor and retain its super power status.

The super power brand in politics is now also being franchised in Asia where the fight between China and India is on to win this race. This trend has also reached the Middle East. Saudi Arabia and Iran have always competed and contested on religious views, political philosophies and oil economics. The Saudis traditionally have played caddy boys to American politics and Iran has preferred tilting towards the Russians due to its revolutionary leader’s bias towards anti-capitalism. However, Obama /Rouhani politics have shaken the regional balance and that, coupled with the oil price consistent crash, will make the new round of power struggle in the region a very important factor in the future of the new world order. This new world order has seen a shift of power by the super power from a pure reliance on the House of Saud to a more balanced tilt towards the house of the Ayatollahs. This tilt needs to be understood by all countries and very careful foreign policy postures need to be adopted.

Saudi Arabia and Iran are the two biggest economies in the region. Iran, battered by sanctions, had been faring poorly according to all economic indicators till 2014 when Rouhani changed its policies of confrontation practiced by Ahmadinejad to those of collaboration. The impact of this renewed dialogue resulted in a much better economic dividend than in the previous many decades. The economy expanded by three percentin 2014, on the heels of annual economic contractions of 6.6 percent and 1.9 percent in 2012 and 2013, respectively. As of August 2015, the official and parallel market rates were trading at 29,797 Iranian rials per dollar and 33,400 Iranian rials per dollar, respectively, thereby representing a difference of about 13 percent, down from roughly 190 percent in the second quarter of 2012 when sanctions were tightened. The inflation rate declined from a year-on-year peak of 45.1 percent in 2012 to 15.6 percent in June 2015 in line with the lifting of sanctions and the tightening of the monetary policy by the Central Bank of Iran.

On the contrary, in 2014, the Saudi Kingdom ran its first budget deficit since 2009 and faces budget deficits for the foreseeable future because it requires an oil price greater than $ 100 per barrel to balance its budget. The petroleum sector accounts for roughly 92.5 percent of Saudi budget revenues, 90 percent of export earnings and 55 percent of the GDP. That is where the problem lies. Oil prices are nose-diving as the demand and supply have become skewed to favour buyers. Shale oil production by the US as its substitute and now the lifting of sanctions from Iran are all indicators to make Saudis vulnerable to economic shocks. There have been six plans to diversify the economy since the 1970s but little implementation on them.

The problem with being the franchisee of a brand is that you have to take the good and bad in the same plate. As the super power brand built by the US has shown that you become a super power by suppressing smaller powers around you, the franchisee of Saudi Arabia has tried to follow the same route. Its clash with Yemen on the pretext to suppress Houthi rebels and its intervention in Syria to counter Islamic State (IS) threats is a brand emulation of US interventions in Iraq and Afghanistan to counter terrorism. Iran has been raising the anti-American ante but siding with the opponent, Russia, whose intent and strategy is not very different from that of the US. However, these two countries forget that they do not possess the intellectual or the military sophistication of their role models. Thus, the damage that they can create for themselves and the region may actually benefit the other contenders for super power status like China and India.

There has been a change of command in Saudi Arabia and Iran. The young Mohammad bin Salman with all his exposure to western economics has so far the same fear as his elders, i.e. of Iran forming a Persian empire. The latest series of executions, including that of Iranian scholar Nimr al-Nimr, are not indicators of much difference in the style of leadership. Similarly, though Rouhani has put Iran on the path of openness, he is still a messenger of Ayatollah Khamenei. Thus, their philosophies are very much the traditional mode of fighting proxy wars and supporting opposing sides to establish their regional supremacy. The flaw of being a franchisee is that the local context is compromised. In any case, what has been successful in the past or anywhere else in the world may not be successful in the future or in all countries. Americans have learned that religion for or against is the most emotional way of manipulating public support. This has been followed by Saudi Arabia and Iran, which have exploited sectarian feelings to create public sentiment in their favour.

However, the lesson to be learned from the American experience is that wars or religious phobias are not sustainable political anchors. The US economy has witnessed one of the longest and deepest recessions in history while losing nearly all battles they have fought. Saudi Arabia has plunged into a depression while Iran has a golden opportunity to come out of one. But for this they have to understand and wean away from being part of the age-old strategy of British colonialism or American imperialism and that is divide and rule. The obvious opposing strategy is unite and rule but for that you need visionary leadership, which cannot be rented out from borrowed franchises.

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Monday, January 18, 2016

Curious case of the CPEC


The Chinese have already issued a soft warning as they can see that political divides in a project that is dependent on all provinces will increase all risks. As a minimum, these conflicts, if not solved, will cause delays and escalate the cost of the project

The China-Pakistan Economic Corridor (CPEC) is a game changer. With $ 46 billion economic activity generated across the lesser developed areas of Pakistan it is absolutely a project that can transform millions of lives and uplift the most downtrodden through economic and trade activation along the corridor network. The success of any project or plan depends on the alignment it has with its purpose and how much its major stakeholders buy into the purpose, and are willing to play their part in ensuring its success. The recent debate on the CPEC may be termed as creating unnecessary controversy by the government but if not addressed it may become a tragic victim of the win-lose conflict. Thus, the more it is discussed, analysed and sorted out the better it is. Conflict is a natural outcome when so many players are involved with different paradigms and the key to resolving these conflicts wrests on two main factors i.e. transparency and trust.

The amount of meetings and All Parties Conferences (APCs) that have been held on this subject have resulted in more chaos and more confrontation. The reason why these meetings have failed to produce a consensus is because the government has failed to answer three key questions: the changing of the original route, the allocation of projects between east and west, and the financing arrangements. Ahsan Iqbal, key spokesperson on the CPEC, vehemently claims that there has been no route change and presents a map to the provinces that is as clear as Mars. The Khyber Pakhtunkhwa committee on the CPEC has said that the Dera Ismail Khan-Mianwali-Burhan link of the western route that was present in the earlier map was also missing in the latest CPEC map that has been kept secret by the federal government. New routes in Punjab were being added, for example Mianwali was being linked to Islamabad through another planned road at a cost of Rs10 billion. Metro links between Rawalpindi, Lahore, Multan, Faisalabad and Gujranwala have been added. All these changes have been done without taking the stakeholders on board.

Financing of the project is the biggest grey area. While the government has insisted it is an investment, Ahsan Iqbal has been saying it is a loan but on very concessionary rates. The government is still denying this and saying it is not a loan. The best example of this hide-and-seek and complete disarray in the government’s own ranks is that the State Bank, the main financial regulator of the country, is also as much at sea as everybody else. Even State Bank Governor Ashraf Wathra says he does not know how much of this is going to be financed by debt and how much by equity, and has openly professed that the CPEC needs to be more transparent. Even the National Highway Authority has admitted that the western route has been earmarked at Rs 20 billion while the eastern route has been allocated Rs 110 billion.

These are dangerous signs and are indicative of more conflict and more deadlocks. The Chinese have already issued a soft warning as they can see that such political divides in a project that is dependent on all provinces will increase all risks. As a minimum, these conflicts, if not solved, will cause delays and escalate the cost of the project. The most dangerous stance of the government itself is by calling the smaller provinces traitors and accusing them of being jealous of the development in Punjab. They may feel that if they raise this chant of other provinces being anti-Punjab they will create sympathies in Punjab and let the Punjabis pressurise other provinces into submission.

This is where the real risk lies. Buying time was usually what worked in the last government when the PPP and PMLN would raise slogans against each other and then negotiate a deal that would ensure a reasonable share in the pie as they had governments that were aligned to them in smaller provinces. However, the scenario is different now. With both Balochistan and Khyber Pakhtunkhwa already very vocal about what the government did not want to reveal and state institutions also mumbling confusion, this technique will not work. To make matters worse, corruption in awarding projects has already been reported. Two of the four highway projects in Balochistan recently inaugurated by Prime Minister (PM) Nawaz Sharif as part of the CPEC have been awarded to the second lowest bidders instead of the lowest ones, causing a loss of over Rs 650 million to the exchequer. The technical explanation for rejecting the lowest bidder has been unable to satisfy analysts. Thus, the more the government tries to deny that nothing has changed the more this project comes under micro scrutiny by opposition parties and the media.

If this project is somehow trudged along despite all this political smog engulfing it, it may become the government’s own nemesis. Firstly, when projects are not aligned to their purpose they have a very high probability of creating irreparable rifts. The purpose of this project was to provide development to the less development areas and the route was supposed to pass through backward cities providing opportunities to the under privileged. What now appears is that the route is more or less passing through the developed areas and will further enrich the land mafias that are busy buying land along it in anticipation. While the Chinese have crafted their route through Kashgar to uplift the area, Pakistan has missed out many similar towns on this side of the border. This resentment will nourish the seed of haves against the have-nots. Provincial inequity has never been higher in the past. Lessons from East Pakistan and FATA have still not registered with the government. Instead of calling APCs, a meeting of the Council of Common Interest is imperative to ensure that all matters are brought to the table as jittery talk and confusing presentations increase frustration. The government must realise that this project is not just about routes; it is about roots — roots of distrust, roots of divide, roots of disengagement, roots of destruction. Transparency and open sharing of true information are the only de-toxicants that can prevent the CPEC from becoming a game breaker.

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Monday, January 11, 2016

Taxing times


The major question the government needs to ask is why people evade taxes. Are they naturally stingy or crooks? If Pakistanis rank in the top five charity givers in the world, then the answer is that it is not the tax deficit that needs to be worked upon but the trust deficit

“The bill will promote tax evasion and further decrease the tax to GDP ratio.” This is not a statement by the leader of the opposition or parties against the proposed tax amnesty scheme but by Ishaq Dar himself in 2012. Is it selective amnesia syndrome where politicians conveniently forget their own past claims and promises? Is it a scheme that is radically different from the one he opposed last time? Is it that the tax culture has changed sufficiently enough to induce people to fall for this net? Or is it just desperation to accommodate an insistent IMF that tax targets are being missed out too consistently? The answer may be a bit of all this but the question remains that if tax collection has been a system ailing this economy for decades, will this tested tried and failed scheme make much of a difference? Even if we are the optimist economist, the best answer may be “Well, not really.”

That Pakistan’s economy needs additional revenue collection is something we all know. That less than one percent people pay taxes is a constant erosion in the national kitty. That we need to broaden our tax net is something we all agree upon. The debate is only on strategy. The debate stems from the fact that Statutory Regulatory Order (SRO) addiction, and indirect and regressive taxes have created a tax culture that has sowed the seeds of suspicion and distrust leading to tax evasion and tax default on a massive scale, so massive that it has become a norm. When a behaviour becomes a norm or a value it creates an acceptance that by majority conduct becomes almost a law. That is why we see this almost aghast, disturbed and resentful attitude every time a segment of the economy is asked to come under the tax net. The reaction is how unjust, how ridiculous and what a joke! And then they go on strikes against this unethical act of being asked to pay taxes. Thus, introducing schemes and giving packages is literally going to have marginal impact if at all.

In recent history, four such schemes have been introduced and though the government’s claim is that this one is different, its context is the same. Yes it has a different brand name and a specific target segment yet its content and ingredients are almost the same. This one is known as the Voluntary Tax Compliance Scheme (VTCS) and will allow non-convicted traders the benefit of whitening their money earned in the last decade by paying one percent tax on their declared wealth, which on five million rupees declaration may amount to Rs 50,000. This they say will bring two million new taxpayers under the tax net. If, in three years, according to the Federal Board of Revenue’s (FBR’s) data, only 33,000 have been brought under the tax net, it will be miraculous if this number is achieved. Also, history shows that the last four such schemes could not even attract five percent of targeted evaders to become payers.

Expecting a scheme to change tax fortunes is like fertilising a few trees and expecting the forest to change its total habitat. Just as a forest change requires an environmental ecosystem balancing, similarly, tax reform requires a whole tax cultural reformation. The major question the government needs to ask is why people evade taxes. Are they naturally stingy or crooks? Well, if Pakistanis rank in the top five charity givers in the world, then the answer is that it is not the tax deficit that needs to be worked upon but the trust deficit. That is the biggest barrier in inducing people to come forward and pay taxes. The next question is: why do people not trust the government with their money? The answer is that instead of seeing public benefits in the form of service delivery and betterment in their lives, they have seen their money being abused for the sake of living in princely style by the rulers while for those who pay taxes the provision of basic amenities like water, gas and electricity is almost impossible. So, the question is not why do they not pay taxes, the question is why should they pay taxes.

The justification that the government is giving is that this is a successful scheme in 32 countries, including the US and Italy. This justification is ridiculous as the tax systems in these countries are so equitable and stringent that from top to bottom and all across industries tax evasion is dealt with on equal terms. If 70 percent of parliamentarians are hiding their assets and hardly paying any wealth or income tax how do you expect people to be ‘inspired’ by these examples to pay tax. Perhaps the biggest flaw will be the disincentive to all those who pay taxes. Professionals who have to pay 30 percent as tax are already enraged at this token one percent to be paid by traders. Thus, this inequity will create a huge incentive for even more trust deficit and will make it almost impossible for total tax revenues to increase by a substantial amount.

The negative impact of this scheme to reverse taxpayers is already being felt. Despite three extensions in filing tax the number of filers has declined by eight percent as they now want to pay much less tax by availing the scheme. Another evidence of the response is that the government had sent around 233,000 notices to which only 33,000 have responded. Schemes and packages are warranted failure when institutions and sectors have undergone zero reforms. This scheme is confirmation of the failure of the FBR whose main purpose is revenue collection. The FBR has become an institution to give tax exemptions to the powerful. According to the ex-FBR head, Ali Arshad Hakeem, almost 84 percent of tariffs and duties have been slashed to benefit influentials by issuing government SROs amounting to almost Rs 600 billion. The government has not been able to do any tax reforms, policy reforms, FBR reforms etc. In the absence of these reforms, these schemes are just old wine in a new bottle. The sad part is that as these tax deficits will multiply and the IMF will insist on their money the tax axe will fall on the ‘un-influentials’ i.e. the poor, the professionals and the honest.

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Friday, January 8, 2016

Province and providence by Andleeb Abbas


Each province is working in a silo with the result that conflicts and the blame game have marred the mid-term working of the respective governments

The end of 2015 also signifies the end of the mid-term rule of the federal and provincial governments. Though the elections of 2013 were mired with question marks on its transparency and fairness one positive feature related to them was that each province had a different party governing it. This, the analysts, predicted would bring about a healthy competition between the provinces and ruling parties, and show which party had the best governance and performance. The federal government’s performance is tracked regularly through the Pakistan Economic Survey and various ministry reports but provincial performances and their comparisons are rarely available. However, the latest report published by the Institute of Policy Reforms (IPR) on ‘Growth of the provincial economies’ provides a comparison of various provincial economies and provides insights into how the two-and-a-half years of relevant governments have fared in each province. This report also provides insight into how provinces can become more self-reliant and decrease their dependence on providence.

After the 18th Amendment the role of provincial governments should have become very important. This amendment is designed to provide the decentralisation of many important sectors like law and order, health and education, and empower them to make their own plans and decisions on them. However, this empowerment has turned more into a power struggle where, instead of having a coordinated and consensus approach, the provinces feel an abandoned approach as far as resources are concerned and a controlled approach as far as decisions are concerned. This is the classic failure theory of giving responsibility without authority and accountability. The year 2015 has seen innumerable conflicts between provinces and the federal government. The major conflicts have been on allocation of resources like electricity, gas, the China-Pakistan Economic Corridor (CPEC) route etc. The latest one between the Sindh government and the federal government on granting of powers to Rangers is a typical example of how poorly communication and coordination have been designed and done between these two important levels of government.

Similarly, planning is still a cut and paste top down approach where the federal government does a more or less annual ritual of filling up templates in the planning commission that are more to satisfy the IMF, annual reports and slogans in fancy ads than any in-depth analysis to move the economy to the next level. That is why most of the economic projections end up being either revised or unachieved. For any decentralisation to work the approach has to become bottom up. That is the provinces have to make their plans and then these provincial plans need to be coordinated and debated, and collated in the federal government so that the resultant figure is a realistic and consensus-based document that has ownership in all provinces. However, so far, each province is working in a silo with the result that conflicts and the blame game have marred the mid-term working of the respective governments.

According to the report of the IPR based on data gathered from the Pakistan Bureau of Statistics and various other reports published by the government on economy, the GDP growth rate of the mid-term performance of federal and provincial government makes an interesting comparison. Pakistan’s GDP growth rate for the last two years i.e. 2013-2014 and 2014-2015 has averaged at 4.1 percent. In provincial GDP growth rate, Khyber Pakhtunkhwa leads with 5.1 percent, followed by Punjab at 4.4 percent, then Sindh at 3.4 percent and Balochistan lags at 2.7 percent. This performance of Khyber Pakhtunkhwa, despite the province being adversely affected by the war on terror, is remarkable. In this analysis, Punjab has been mired by the miserable performance of the agriculture sector. The agricultural growth rate that was a sterling four percent in the 1990s has now declined to two percent. Similarly, Sindh, which was a hub of industry in the 1990s due to its law and order situation, has slipped to third position as far as growth in the economy or industry is concerned. Employment and tax revenue growth factor is the highest in Khyber Pakhtunkhwa followed by Punjab, Sindh and Balochistan.

This mid-term analysis shows why the Pakistani economy is faring worse than that of Bangladesh, Sri Lanka, Nepal and many other minnow nations that were far behind us a few years ago. There is a high correlation between economic development and human development. Pakistan is ranked below these countries as far as Human Development Index (HDI) ranking is concerned. Imagine that Bhutan is ranked at 132, Maldives at 104, Nepal at 145, Bangladesh at 142 and Pakistan is below all of them at 147. Consequently, its economy has become uncompetitive in the region. While Pakistan’s GDP growth rate is 4.1 percent most of these economies are growing between five to six percent. This embarrassing performance is backed by some almost shameful facts. Pakistan’s literacy rate, instead of increasing, has actually decreased this year by two percent i.e. from 60 percent to 58 percent according to the Pakistan Social and Living Standard Measurement. As per the UN Millennium Development Goals, Pakistan had signed up to increase literacy to 88 percent by 2015 and, sorrowfully, we are 30 percentage points behind that goal. Within provinces we have seen Sindh’s economy faring the worst because in Sindh literacy has crashed by four percent. The best provincial economy has been that of Khyber Pakhtunkhwa as, according to the same data, the focus on female literacy in the last two years has resulted in a one percent increase in literacy in the province.

These figures prove that no amount of infrastructure resources, financial resources and natural resources can match the power of human resources. We can install the best machinery, the best project, the best software, the best programme in the world but, without an educated and skilled workforce, they will become trashed as junk in no time. The Prime Minister (PM) has recently stated that his government has just started getting the hang of things midway. Let us hope that it is not the same things that they have been doing every time they come to government. Let us hope that they realise that investing in people will always pay off more than investing in brick and mortar. Let us hope that they realise that taking provinces along will make planning and decision making more effective. Let us hope that they realise that power sharing has to go beyond kinship and connections. Let us hope that they understand that the rule of law is a rule of law for them too. Let us hope 2016 changes mindsets, approach, policies and actions to a direction where this country achieves the potential it is capable of.

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