Leadership and extraction | 9 | Political Survival in Pakistan

ABSTRACT

How rulers obtain resources affects national political well-being. Not all routes are equal. Transparent, uniformly applied taxation policies are associated with efﬁcient property rights and public goods. A weakly enforced tax structure, or alternative ﬁnancing located through non-tax revenues, is often more susceptible to reallocation into “private goods” and special privileges for small distributional coalitions. Moreover, direct taxation from a broader base in the polity will have a different ﬁscal sociological and state-building consequence than indirect taxation and a narrow tax base. This chapter focuses on extraction choices by examining speciﬁc leaders’ records in Pakistan, particularly those of Ayub Khan, Zulﬁqar Ali Bhutto, and Zia ul-Haq. AmongPakistani national leaders, AyubKhan has been called a “developmentalist”;

Zulﬁqar Bhutto, a socialist; Zia ul-Haq, an Islamist. These characterizations are commonly asserted. Each used the Islamic symbol to some degree. Critical decisions related to extraction, a key state activity with consequences for public goods and private goods, however, were not driven by ideological motives as much as by pragmatic considerations related to political survival. The paramount consideration and consistent consideration in each case has been maintaining a winning coalition and warding off challenges to rule. Pakistani leaders have generally failed to tax agriculture substantially, which,

given the agricultural sector’s size, is a major reason that domestic extraction in Pakistan remains low. While agricultural taxation remains a “provincial subject” (meaning that the central government is not constitutionally permitted to tax agricultural incomes), constitutional instability, major changes through amendments, and martial law regimes mean that the constitutional bounds alone are usually soft compared to other polities. The provincial governments have not collected signiﬁcant agricultural taxes beyond fees related to water (aabiyana canal tax) and land (land revenue). Introducing agricultural income tax assessed on up-to-date produce indices would be a major shift. Agriculture has been a key sector from which extraction by the central govern-

ment has historically been difﬁcult or impossible. Combined with Pakistan’s failure to develop agricultural taxation, rural ownership structures continue to present a signiﬁcant hurdle blocking development-oriented policy changes. Meaningful land reform has the potential to radically restructure state-society relations, as land

ownership confers status, wealth, and power. It may increase efﬁciency, and to the extent that it weakens the powerful landlord lobby, land reform better positions the state to increase agricultural taxation. With successful redistribution, state capacity grows, and the country’s ﬁscal skeleton is strengthened. According to Pakistani economist and former government ofﬁcial Shahid Javed

Burki, reducing unequal land distribution can also increase efﬁciency. In Pakistan, agricultural productivity was estimated by one study to be 2.75 times higher in small as compared to large farms (Burki, 2008c: 242-243). The Green Revolution in the 1960s meant more productivity on larger mechanized farms. However, rural economic development was needed to provide a domestic market with which to sustain industrialization; this was a reason that Ayub Khan introduced his Land Reform Act in 1959 (Nasr, 1996: 257-258). High military spending and debt servicing burdens have squeezed Pakistani

public ﬁnance. It is widely argued that perceived security concerns have dominated and distorted Pakistani strategic planning and budgeting. Thornton (1999) describes Pakistan’s mixture of ambitions and threat assessments as being “out of balance” and resulting in wasted budget resources (Thornton, 1999: 184). In The State of Martial Rule, Jalal (1990) describes Pakistan’s political economy as being fundamentally directed by high perceived defense needs. Siddiqua (2007) has found that the military has progressively built itself into a dominant social class with vast business interests, landholdings, and a ﬁrmly ensconced political role, even when not in direct control. This chapter makes several assumptions: that taxation, particularly direct taxa-

tion, is politically risky, that international ﬁnancing is less politically risky, and that money creation policies bear the least political risk, to the extent that they remain undiscovered and do not create excessive inﬂation. However, in ﬁscal sociology terms, direct taxation is the best policy, international ﬁnancing is worse, and money creation is the worst policy. Indirect taxation is easier to implement but is usually regressive and does not have the same ﬁscal sociological consequences as direct taxation. This chapter examines extraction choices in Pakistan. Sub-sections on international ﬁnancing and taxation policies under each regime are included. Money creation or covert strategies are not subdivided into the time periods but treated separately. The purpose here is not to provide a comprehensive representation of all taxation, international ﬁnancing, and money creation efforts in the Pakistan’s history. Rather, some prominent initiatives are examined for their value in elaborating hypotheses on the relationship between political survival and strategic choice in public ﬁnance. A brief description follows. In the international ﬁnancing sections, the focus is on whether aid or non-aid

international resources in any form are made available or not. The idea is that even aid tied to speciﬁc projects can form part of an indirect “international solution” to a government’s policy problems in at least two ways. First, tied aid can potentially free up resources elsewhere for the government, if the externally funded project would otherwise have required domestic funding. Second, a foreign-funded project may produce acquiescence to the status quo among social beneﬁciaries of the project (such as employees). Morrison (2009) ﬁnds that non-tax revenues generally

increase regime stability. Tied aid may serve a similar function by reducing the burden of welfare provision on the state and thus freeing up resources elsewhere. Material aid, such as shipments of machinery or arms, also have a relieving inﬂuence on the ﬁscal burdens by freeing up resources that might otherwise have to be spent on arms purchases. The taxation sections include historically prominent actions that directed or

affected the administrative capacity of the state or suggested that an effort to adjust state-society relations with regard to resource distributions was taking place. These include such efforts as increases in tax rates, changes in tax structure, and nationalizations, which may represent a 100 percent tax (Barnett, 1992). Other elite-driven efforts to change formal political institutions of governance, such as constitutional changes, have been ignored here unless they have a direct impact on the capacity of the state to tax the national income. Deﬁcit spending generally is a burden on future tax revenues. From a develop-

ment perspective, policy-makers have preferred to use foreign savings for needed investment, because drawing on domestic savings only reallocates funds from the private to the public sector (Interview with Ishrat Husain, February 2009). The narrow tax base also has a ﬁscal sociological consequence; a large population segment (the non-payers) stay removed from the implicit social contract of accountability that comes with providing resources for rule. This in turn prevents a larger tax-paying coalition from becoming politically activated. Thus, the political leadership continues to rely on a narrow winning coalition, and remains oriented to providing private goods rather than public goods. Money creation efforts (especially when they are exercises in seignorage)

are frequently covert. As a result, while there is strong evidence to suggest that these have been repeatedly and consistently pursued, the actual coverage of such strategies here is disproportionately small. Often there is not clear information about money creation activity in the time period under consideration. Secondary accounts contain some general assertions and claims without speciﬁc reference to any but the most prominent policies. Consequently, observations about money creation have been gathered separately before introducing the other strategies in depth. The choice of public ﬁnance strategy affects state power. Money creation and

international strategies tend to reinforce the current condition of state power

(Barnett, 1992: 211). Restructural strategies, however, have the potential to alter state power. The linkages between public ﬁnance policy and state power are multiple and inﬂuence ﬂows in both directions.1 This is rather abstract and can potentially take different and unexpected forms in actual cases, as shown by the Egyptian and Israeli experiences. Robert Bates has argued that international strategies are a chronic condition in

developing countries (Levi, 2006). The Pakistan leaders’ experiences reviewed below adds an additional aspect-the constraints faced by regime leaders as they sought political survival by retaining a winning coalition. Pakistan is not usually considered a “strong” state comparable to Israel. Even

Egypt would be considered a stronger state, especially when compared with Pakistan’s early years, but also in comparison to India. Barnett’s ﬁnding was that a strong state like Israel was able to engage in some domestic extraction increases in wartime and for war preparation (Barnett, 1992). Nevertheless, there were important limits to what could be achieved. Similar and greater limits have existed in the Pakistani cases. Taxation is generally politically risky because it may allow challengers to mobilize (Interview with S.M. Fazal, July 2009). One interpretation is that the political survival perspective predicts that all states, irrespective of state strength or political capacity, will avoid seeking increased domestic extraction whenever possible. If the attempts to increase domestic extraction have been severely constrained in all states, then the political survival perspective receives support. One factor to consider in public ﬁnance is that subnational state governments

also collect taxes. In Pakistan, the central government’s revenue collection far exceeds the provinces.2 Interprovincial tension often accompanies the awards given by Pakistan’s National Finance Commission, which distributes the federal revenue’s “divisible pool” among provinces. Former State Bank Governor Ishrat Husain refers to this as the “vertical imbalance” issue in Pakistan’s taxation: the provincial governments spend largely from resources that are obtained through taxation at the federal level (Interview with Ishrat Husain, February 2009). In expenditures, defense spending is wholly central and borrowing is mainly central. Therefore, the central government bears the resource burden for war preparation. It is also the central government that has the option of an international or seignorage strategy open to it. Fiscal decentralization remains an ideal to many, but has not been implemented (Interviews, 2009). Hence, the focus here is on the central government in Pakistan. Anecdotal and scholarly accounts report corruption, inefﬁciency, and ineffec-

tiveness in Pakistani tax collection. For example, Nawaz Sharif, the former prime minister of Pakistan, belongs to a well-known, wealthy, industrialist family. That family reputedly paid a minute total tax bill, and was lambasted in the press. There is a general sense from the man on the street that major reform in tax policy and collection is required. It is widely acknowledged that Pakistan continues to have problems in getting the well-off to pay their “fair share” of taxes (Almeida, July 3, 2009; Weinbaum, 1999: 89). Horizontal inequities are rife: citizens in different sectors who make comparable incomes but pay different amounts in taxes create resentments (particularly among salaried corporate workers in public

and larger private enterprises who ﬁnd their incomes taxed) (Interviews, 2001, 2009). According to Martinez-Vazquez’s international comparison based on regression

analysis of developing countries (controlling for GDP composition and per capita income), Pakistan’s tax/GDP ratio should be four percentage points higher than it is (Martinez-Vazquez, 2006: ii). Others point to the lack of a “tax culture,” low education, and mistrust of tax collectors, as well as a cumbersome ﬁling process, as culprits (Interviewee B, 2000). A prominent business executive ranked himself among the top individual taxpayers in Pakistan, but emphasized that this was not because he was among the richest people in Pakistan-others evaded taxes while he simply chose to pay for personal reasons that did not have anything to do with enforcement or policing (Interview, 2009). While there have been some efforts at tax reform, they have been short-lived, and this, according to a former ﬁnance ofﬁcial, is responsible for the ongoing ﬁscal crises that Pakistan found itself in during the 1990s and beyond (Interview with former ﬁnance ofﬁcial, 2001).