You are currently browsing the category archive for the ‘World economy’ category.

I was fortunate enough to spend the past month shadowing one of Pakistan’s leading constitutional lawyers (For privacy’s sake, I will omit his name). A talented jurist, he would roll into court with reams of case law, a thick folder – containing the petition, affidavits, counter-affidavits, rejoinders, what have you – and an excellent memory. He would dazzle some judges and piss off others with his often novel theories about why such and such law was ultra vires or unconstitutional. As I sat there in the hot and stuffy court rooms of the High Court, I noticed that the majority of his cases and those of other prominent lawyers were about taxes. The clients had been taxed too much, or the clients simply didn’t want to pay some taxes, so they went to lawyers to figure out ways to avoid paying them. Given the poor drafting, implementation and execution of laws, it goes without saying that the lawyers didn’t have too much trouble striking down seemingly valid taxes.

What’s happening in the courts is just the tip of the iceberg. These are some of the bigger players in the Pakistani economy, and they can’t easily escape the scrutiny of the Federal Board of Revenue, the national tax collector. They, at the least, are seeking a legal way of avoiding taxes. While there are about three million registered taxpayers in Pakistan, only about two million – about 1.1 percent of the entire population – file tax returns. That number excludes the fact that most of those taxpayers do not declare significant parts of their income by way of complex legal maneuvering, tax code loopholes, or simple misrepresentation. If a tax investigator starts asking questions, a bribe can usually make him look the other way.

Nobody anywhere likes paying taxes. There’s a saying, attributed to American Founding Father Benjamin Franklin, that encapsulates this universal antipathy: Nothing is certain but death and taxes. But in Pakistan, the former is almost always assured and the latter is rarely certain.

The scope of the Pakistani tax problem has recently amplified, as the country experiences historically high inflation (14.5%, according to official figures. The true figure is perhaps a few percentage points higher). Pakistan relies on foreign aid for a large chunk of its budget at a time when it’s struggling to reassert its sovereignty and to forge an independent foreign policy. And as long as it continues to rely on American aid to prop up its institutions, the Pakistani government cannot reasonably assert any sovereignty. This has lead members of the Pakistani media to demand the political leadership to increase the tax base. Almost daily now, a news talkshow host will decry the the woeful neglect of the taxation system. The problem, however, isn’t a lack of a well developed taxation bureaucracy. Pakistan’s FBR is descended from the British Empire’s Indian Civil Service’s efficient structure, and today is a modern, functioning organization. The problem, as Emma Duncan identified in her book Breaking the Curfew, published in 1989, is that Pakistanis simply don’t want to pay taxes. She noted that a study of the country’s tax system found no shortcomings in the bureaucracy’s management or its structure. So then we’re left to ask: why don’t Pakistanis want to pay taxes?

During a major tax case involving billions of rupees and hundreds of businesses in the province of Sindh, the judge interrupted the businesses’ lawyers as they presented their initial oral arguments. He went on a tirade about how prominent lawyers come into his court room everyday to challenge the validity of tax laws. He then pointed out the stark contrast between Pakistan and India’s tax revenue to GDP ratio. India’s is a modest 18%, but Pakistan’s lags at an inadequate 9%, he said. The two countries inherited the same tax bureaucracy structure, and yet the difference is significant.

Mosharraf Zaidi, of The News, has authored an insightful op-ed, offering an explanation for the high rate of tax avoidance in Pakistan. He argues that the disconnect stems from the lack of a social contract:

Pakistan is a state and society operating without a modern social contract. The state exists and persists without a linear fiscal relationship with the people. In plain English, the state is unaccountable to the people of Pakistan because the people of Pakistan do not pay taxes. The state doesn’t “owe” the people any services, or answers, and the people don’t feel that they owe the state any money.

It’s the chicken and the egg conundrum. Pakistanis do not pay taxes because the state is not accountable. And the state does not feel accountable to the citizenry because they do not foot its bill. There is no social contract to bind the two. It’s a compelling argument, and anecdotally, it’s constantly affirmed when you ask Pakistanis why they don’t pay taxes. The common response invokes corruption: if we pay, then it goes to the pockets of corrupt politicians and bureaucrats, so why bother. But I’m not entirely convinced that corruption alone is the problem. Take, for example, India, a state that’s equally corrupt. Yet, India manages to recuperate almost twice the percentage of tax in relation to GDP.

Above, I mapped out the tax revenue to GDP ratio figures (courtesy: Heritage Foundation) of about 167 countries against Transparency International’s Corruption Perception Index. I found a Pearson correlation coefficient of around 0.497, indicating a positive correlation between tax revenue to GDP and corruption. This reflects a medium strength of association. Of course, this test should be taken with a grain of salt. It doesn’t, for instance, account for the real figure we should be measuring: the tax gap, that is, the estimated difference between the tax owed and the tax paid per jurisdiction. Tax revenue to GDP is but a rough measure of the tax gap; it assumes that there is a general positive relationship between tax owed and tax paid, and that this gap is universal. And it isn’t. But what this graph does show us is that there is some relation between the perceived corruption in a country and its citizens’ willingness to pay tax.

And this supports Mosharraf’s original contention. The social contract is not just about corruption, however. It creates that abstract link of faith between the government and its citizens that if the citizens pay taxes, then the government will deliver. I concur that Pakistanis lack that abstract faith in government. Despite the roaring popular nationalism that floods airwaves and television screens, Pakistanis, like anyone group of people, ultimately vote with their wallets. And this aversion to paying taxes is about more than corruption. It’s reflective of a state in taters and a people with no confidence their leaders. We are then to conclude with a twist on an old adage: without taxation, there can be no representation.

Europe is poor. That’s my impression after spending the day strolling Parisian streets, and then hopping on a train to London later in the evening. The observation isn’t an uncommon one, nor is it the first time I’ve made it. And by poor, I don’t mean that there are impoverished beggars stalking tourists–though the gypsies do a pretty good job of it–but that the houses are smaller, the roads are narrower, and that the infrastructure isn’t in the best shape. On the train in from Charles de Gaulle, I saw laundry drying on balconies–a sight unseen in North America, where most houses have energy-guzzling dryers.

The Atlantic‘s Megan McArdle once remarked on that difference between North America and Europe, critiquing Paul Krugman’s–and the American Left’s–fascination with European social democracy. “[T]he standard of living in any given profession is much lower. Preserving London’s dazzling antique architecture has meant that most of the people I knew had much longer and more expensive commutes than their American counterparts would,” wrote McArdle. I noticed that today. Paris and London are beautiful, but the cost of preserving the historic buildings has meant sacrificing on newness. With fewer new buildings, there are probably fewer jobs and less room for the kind of enterprise that the U.S. and Canada have. Paris’ Gare du Nord, a major train hub, for instance, was magnificently built in the mid-nineteenth century. But housing the station in a centuries-old building limits the quality of infrastructure. On a hot Saturday afternoon, a non-air-conditioned station was not the best place to wait for several hours. And for some reason, France’s glorious bureaucratic state has placed only a few benches in a station that sees 180 million visitors a year. (Suffice it to say, waiting there for hours was not fun.)

The title of this post is a bit misleading; there’s no way to peer into the future. But we can see patterns, and make predictions–or at the very least, decipher vague trajectories–about the way we’re heading. The National Intelligence Council, a think tank reporting to the United States Office of the Director of National Intelligence, recently published “Global Trends 2025: A Transformed World.” Peter Goodspeed at the National Post summarizes its basic ideas pretty well, so I won’t bother. It’s ironic how even the United States government is now in the business of American declinism–the genre of political science that imagines the post-American world. Of course, if you read the National Review or The Weekly Standard, you wouldn’t know it. They’d probably just blame it all on pansy Democrats and the Marxist-Islamist President Obama.

On a serious note, the NIC’s central predictions are:

* The whole international system—as constructed following WWII—will be revolutionized. Not only will new players—Brazil, Russia, India and China— have a seat at the international high table, they will bring new stakes and rules of the game.
* The unprecedented transfer of wealth roughly from West to East now under way will continue for the foreseeable future.
* Unprecedented economic growth, coupled with 1.5 billion more people, will put pressure on resources—particularly energy, food, and water—raising the specter of scarcities emerging as demand outstrips supply.
* The potential for conflict will increase owing partly to political turbulence in parts of the greater Middle East.

But how drastically will this shift in global power change the rules of the game? I’m inclined to believe that the rising powers accept the American-inspired values of the current global order–that is, economic competition as the main manifestation of Great Power rivalry. The post-WWII system, including Bretton Woods and the United Nations, established by America assumed, as Americans always have throughout their history, that commerce ought to be the main driving force of international relations. It was that naivete belief that drove Jefferson to impose an embargo on Great Britain and France during the Napoleonic Wars, hoping that economic force alone would penalize the two powers. And that was precisely the motive behind the Marshall Plan, which didn’t punish Europe, but made it richer and viable for trade.

Kishore Mahbubani, former senior Singaporean diplomat, argues that the rising powers don’t want to re-create the global order, but to replicate it and to gain a stake in it through more power in the great councils of the world: the IMF, the G-7, and the UN Security Council.

Another Zakaria-esque, post-America treatise, The End of Influence argues that American political, economic, and cultural influence is waning, though it remains–and will remain–the dominant force in international relations: “America is sure to remain a leader in cultural power, but there is a difference between being a cultural leader and an easy, almost un-self-conscious cultural dominance.”

Jim Manzi has a thoughtful essay in National Affairs discussing how the ordering of America’s domestic political economy is impacting America’s global economic and strategic position. He argues that a trade-off exists between innovation and social cohesion. Policies promoting the latter–government-run health care, unemployment insurance, etc.–undermine American global economic preeminence, while policies promoting the former–free markets–are breeding social divisions and disuniting American society. Ultimately, Manzi, a conservative, rallies to the cause of Reaganism, insisting that America must choose innovation over cohesion in order to preserve its position in an increasingly competitive international order. But his argument for doing so isn’t all that convincing.

Manzi makes two arguable assumptions. He admits that America is “between a rock and a hard place. If we reverse the market-based reforms that have allowed us to prosper, we will cede global economic share; but if we let inequality and its underlying causes grow unchecked, we will hollow out the middle class — threatening social cohesion, and eventually surrendering our international position ­anyway.” Yet, even while recognizing the emerging post-American world order–where the rise of new great powers shakes the foundations of American hegemony–he blithely believes that freer American markets and innovation can actually salvage American economic preeminence. Regardless of the domestic policy choices America makes, the relative (and by no means absolute) decline of American power is underway.

Secondly, Manzi assumes that these new rising powers themselves won’t face the same decision matrix. A cursory glance at the political economies of Brazil, Russia, India, and China (the BRICs in Goldman Sachs parlance) shows how even the much-vaunted new powers will spend far more of their GDPs on social cohesion spending than America. India’s extremely high poverty levels and high regional, ethnic, and caste disparities will force greater state intervention as its economy develops. China’s burgeoning pension crisis and its already significant welfare expenditure–the cost the Chinese Communist Party pays to maintain its power monopoly–means that this nation of one billion will remain mired in welfarism for decades. Russia’s falling population and stagnating economy will call for greater state intervention. And Brazil, which is not a serious geopolitical contender, cannot outmaneuver the world’s largest economy in its own backyard, especially considering the unrest that exists within its own borders.

Of course, the challenges the rising powers face are only part of the picture; their rapid economic development (or in Russia’s case, their possession of natural resources) assure them an important place in the future international order. American power is surely on the decline–relative decline. However, the crumbling of American hegemony has less to do with the failings of America than with the rise of the rest. Thus, when Americans decide on domestic policy–whether health care, immigration, or financial reform–they should not be concerned about their falling place in the international rung, but rather about the kind of future they envision for their country. Do they prefer a social democracy or do they prefer a rogue, laissez-faire establishment?

Want to see how American economic power compares to the rest? See for yourself:

Finally, the G7 (or G8, if you are feeling inclined to include the Russian Federation) have expanded their membership to include those who are most affected by the decisions they take: the developing nations. Permanently including counties like India, China and Brazil, shows forward thinking in terms of addressing the issues that have serious repercussions on most of the world’s population. Furthermore, increased membership shows willingness to admit that these industrialized nations don’t always have the answers, as shown by the policies in place that led to the massive banking meltdown that the world is still reeling from today.

The table gets bigger

The table gets bigger

But what does this expansion really mean for these countries? India in particular had weathered the recession pretty well due to the strong stimulus measures that it introduced late last year but most developing nations have not been so fortunate. A declining growth in GDP (from 6.5% to 1.5% for developing countries across the board) leads to a decline in real capita per income, as any good economics student knows. While this not only screws up India’s stats in terms of its goals of world (economic) domination, it translates into about 90 million people across the world falling below the poverty line. One can argue that this just a matter of semantics, that these people have always been impoverished and the only difference is that they are now classified as being so, but the fact remains that poor people are neither happy nor productive people. This poses a very real problem to not only the economic welfare of developing countries but also to their political stability.

Though it’s great that several developing nations have been allowed to join the exclusive country club that was the G7, unless membership is coupled with a true exchange of ideas, such as taking the appeal to lower protectionism seriously, the G20 will continue on its present path- a truncated United Nations, pretty from the outside without any sort of real power to make change.