It all started with a fairly regular purchase of toothpaste. I bought my normal brand which is a local manufacture because I prefer to avoid foreign goods as a gesture of nationalism. Since it is sometimes difficult for local brands to compete in a product which my class of people believe must be a foreign manufacture for it to be good, or produced under foreign franchise at least, it is common that it be incentivized. Buy one, get one free; a value pack with saving due to bulk; sold along with a supplementary or complementary product so as to make it an attractive purchase; these are some of the common incentives. In this case it was a toothbrush to complement the toothpaste. I think what made it noticeable this time was the fact that their usual, not so well known, toothbrush had been replaced by a more popular and better known foreign franchise brand with the larger tube of paste.
Anyhow whatever it was that triggered the thought, I began ruminating on my experience as an advertising man. It had been a casual affair of a year or so in my early attempts at a working man’s life after I got my degree in economics. Since I soon replaced economics with history as my career path, I had become accustomed to comparing ideas I learnt as a student of economics with those which I found in vogue in earlier civilizations. Recently, when I compiled a history of the Indus Enclave from its earliest known past to the present I started seeing various patterns emerging. The hop from advertizing to the Indus Enclave was a natural change of track in the patterns from that study; so here I am.
I let the cat out of the bag at the very beginning, with the title. If the cycle of modern day economics is assumed to be the normal groove of a screw which gets tightened clockwise then the Pakistani economics gets tightened by twisting it anti-clockwise. The mechanics in Pakistan refer to this kind of screw [with reversed grooves] as a puthi churi. Generally the puthi churi is used in a child-proof or tamper-proof situation where the uninitiated will tighten the screw while trying to open it. The Pakistani economy is similarly tamper-proof when an attempt is made to change it using modern techniques and procedures.
I realize that this will need quite a lot of explaining; therefore I will first explain how the modern model works. Among its fundamental tenets is the concept of economies of scale. What this means is that by producing in bulk the cost of production can be brought down. Now every product has a limit of utility within its area of production. For example, if the population of a town is a hundred thousand, and all people use a toothbrush for a month, it will be possible to sell a hundred thousand toothbrushes a month. If the plant that is set up can produce twice as many brushes because that scale is economical in terms of plant and other inputs, there will be a surplus of a hundred thousand brushes. The manufacturer will then try to capture the market of a neighboring town to sell off the surplus.
As the sale targets get achieved, profits begin to accumulate and the capital formed has to be put in again. Good business thus enters a growth cycle; so, production always exceeds sales or is in arrear of demand if the product is good and advertising is better. This second caveat means that, for a start, the packaging of the product should be attractive. If a good product has a shoddy appearance, it may not get used, so it will be unable to prove that it is good. On the other hand, a mediocre product may be sold due to attractive packing and the consumer may never know that the other product is actually better. To this armory of attractive packing, modern advertising has added snob value. A competent person with a better salary may get away with less deference to a boss. Similarly a product that is better commands a higher price. If a product claims to be better, it must demand more money. Since it is already better dressed [well packed], all that is needed is a little arrogance.
I need not spell out the dynamics because this isn’t a lesson in advertising or really a case against it. What is pertinent here is that a better packaging, quality improvement, airs and graces or other ‘value additions’ lead to involvement of other skilled and unskilled people in the production process. This generates employment and enhances economic activity.
I do not remember any economic doctrine from the time that I was studying the subject which pointed out that enhanced economic activity originates in a motivation to exchange leisure for labor. Marxian economics points out that labor is perhaps the only component that could be increased without limit whether it was in the form of managerial activities and skills or as unskilled force. Based on personal temperament and social dynamics, one is inclined to choose a socio-economic slot to keep body and soul together.
I believe that, more often than not, a person chooses a slot well below his/her potential because it is not possible to assess one’s potential at the early age when these choices are forced on us by society. The assessment is reviewed as our self-awareness increases, but balance between leisure and work is built into the position one takes.
Sometimes society gets in a groove where the expectations of people are accelerated and the economy picks up speed. Generally, however, the movers and shakers of society have to put in an effort to find triggers for enhancing activity. The manager/administrator who wants to increase economic activity, must intervene to tilt the balance in favor of labor.
This needs two drivers, one on the demand side and one on the supply side. That is to say that a person has to begin to want more goods and services than he/she is able to get from the income available at the time, the demand side. At the same time the person must have enough energy, skill and motivation to supply the requisite output which will obtain what is needed to get the goods and services demanded. If these things are not available, first a motivation to acquire or generate them will be needed. Sometimes the family works as a unit to generate the requisite income, sometimes, the individual surrenders time or energy or both to be able to do so; the utilization of female labor force is a popular option.
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Leaving this chain of thought at this stage, since there is a world full of economic thought that may be added to what has been said; but this illustrates the line of thinking. I can turn to the other side of the coin. Rather than increase economic activity, if we help people to obtain satisfaction of desires without extra effort, the economy retains its inertia and settles at the level where most people have chosen to slot themselves. When this has become the culture of a community or society, it becomes difficult to get it out of the rut. This is the case with the Pakistani economy with the reversed grooves. This condition is a cultural construct and cannot be dismantled with the common tools of modernity
In some segments, and particularly for communal occasions like birth, death or marriage, there is a great desire to show off the wealth one possesses or claim a social status which one believes to be a birth right. If a person finds that he or she is short of finances at that time, it is likely that the amount will be borrowed and generations may pay for its return.
It is also possible that the very social status for which the money was borrowed is lost in the process of returning it but people will avoid putting in the effort to earn it to raise the level of their income. One important reason is that, generally it is not possible to sacrifice a social or communal status for increasing income; another is that the moment of need is an accident that may not befall one for generations of successful traditional usage.
Modern economics is acquainted with at least one mode of increasing satisfaction without any increase in effort; this is the kink in the demand curve. When a person with less than enough income wants a product that is beyond reach, the product is differentiated in such a way that a less valuable component or variety is sold at a lower price. A highbrow sale is one way to achieve this. Blemished high-value branded products that escape inspection and are placed on the shelf can be sold by placing them on sale. Sometimes, as a policy, blemished units are set aside during inspection to be placed on the sale shelf; occasionally it can happen that an unblemished item gets damaged on the shelf, this too goes on sale. Some multinationals which employ Third World labor in a developing country also allow that a blemished item be sold in that country at a price that consumers can pay there.
The Pakistani salesmen and manufacturers, like many other developing economies, use a kinked sale policy as a matter of routine. The difference between Pakistanis and the other Third World countries is not the economic side of differentiated sales but the cultural side of exchanging leisure for work. Pakistanis place a great premium on socialization at work and during leisure, with the result that quality or quantity of output may be sacrificed by both, owner and employee, to make allowance for communal claims.
The most common excuse for ignoring a schedule is ‘death in the family/neighbourhood’. Birth is not as high in the scale as is a marriage in the biradri, unless it is one’s own child. It is also acceptable for a workman to delay the completion of a task if a ‘client’ arrives at the place of work and presents a legitimate or acceptable cause for taking priority.
Most Pakistani Pakistanis will know several other examples of this “economy” if asked to advert to it. In the normal course of their lives, they tend to factor it in without adverting to it if they ask for a task to be performed at a particular time or in a particular manner.
I would therefore like to move on to the consequences after a brief look at the aspect that has fascinated me the most: the practice of cooperative-competition especially between shopkeepers but even in case of some manufacturers and craftsmen. The shopkeepers in Pakistan generally set up a product market in one area; so, when a customer walks by, many of them will invite the person to step into their shop.
Shopkeepers often offer deals to outsell their competitor so long as he is in the shop. All this changes when the competitor is absent from an open store and a customer decides to stop in front of that shop. Now, either a salesman from a neighbouring shop will call out to the owner who is chatting nearby, or he will walk into the shop where the customer has stopped and serve him there. In this instance he will not entice the customer into his own shop even though he has the same goods to sell, perhaps at a better profit.
This courtesy fascinates me but I am amazed by the other side of the equation. If you go into a shop and ask for something that is not in stock, the shopkeeper will frequently tell you that he will make it available [please note that the use of the male gender isn’t a bias but because most shops are run by males in Pakistan]. Sometimes he will phone another shopkeeper in the neighbourhood in your presence and ask him to send the item but more often, in my experience, they send me to the neighboring shop saying: my brother owns a shop down the road, please get the item from there. Better still, they ask where I live and, when told, they may as easily promise to deliver the good, as to suggest a shop in my area and advise me to get it from there with their reference to get the best deal. The communal promotion of competitors and facilitation of customers is a part of our socialization. The trader slots a customer in a social category and offers a compatible level of bonhomie; he is friends with an equal, gracious with a poor man and deferential to an official.
Now, as I turn to the implications, let me first clarify that my reason for focusing on the pros of the Pakistani way is because I expect most of my readers to be aware of its cons. Similarly, I have asserted the failings of the modern economy as I think its pros are well known to the English reading public in Pakistan. There are many malpractices in the local way of doing things which are also known to the street-smart Pakistani. In addition, many mongrel practices have crept in which integrate the ills of both models.
My concern here is to “bury Ceaser, not to praise him”; we need a resolution between the modern ways and age old Pakistani social traditions as they impact on economic issues or policies. To let the cat out of the bag again: monetary/fiscal policy, international market indicators and other means by which government is able to influence economic activities in other countries are inconsistent, unpredictable and only partly effective in Pakistan.
The social factor in the reverse groove is not the only wild-card of the pack. The leisure trade-off, or prestige advantage of a person verses the money income, are also mercurial. Some motives which drive Pakistani elites are universal but others are so unique that they need the special kind of management to be discussed another time.
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Given the ground realities of the Pakistani situation which I have indicated above, and the fact that its international interface is dominated by the modern economic dictum, there is no option but to find a systemic solution. The state must adopt procedures that the IMF or World Bank and the International market do not find alien or incomprehensible.
However internal dynamics cannot be ignored either. Since I don’t like to be impractical, I want to offer a pragmatic option. It seems to me that the key lies in innovative taxation policies. International exchange rates are not based on the purchasing power of either of the currencies in the equation, they reflect the demand and supply of those currencies in the international market. The Pakistani Rupee purchases, in the domestic market, three to five times its dollar parity, except in foreign goods, despite a dollar sensitive market.
As developed countries of the so called First World dominate international economics, it is impossible for the Third World to get a favourable deal at any level or forum. I believe that the value of imports and exports must be calculated according to a purchasing power index which applies to the category of goods such as machines, electronics or food items in order to reflect comparative strength of different economies.
When the dollar income of a Pakistani is calculated, it does not reflect the living standard because a rupee can purchase more food than its equivalent in dollars and less electronics and mechanical technology. Thus, for subsistence, the value of the rupee may be equal to more than twice the exchange rate and for technology it may be half or less.
In actual fact, the price of a good in the country of origin does not reflect its dollar value in the market; the cost of a compatible product in a Pakistani market may be considerably less than its price due to exchange rates. While accounting the value of an item according to a Pakistani index will not influence international prices or sale, it will influence traders in Pakistan who import goods in accordance with the comparative index in local markets instead of an inflated exchange value which makes them ‘prestigious’ products.
Similarly, fluctuation in currency rates generally works to the advantage of the dollar and the disadvantage of the rupee because American business is more receptive to the modern economic state measures. When the shift of the exchange rests on the fiscal measures of a state, the Pakistani state is unable to manipulate its market with the same flexibility as the American or European economies. What is worse still is that the Pakistani state is hit at a domestic level in almost all cases. If the rupee gains, exports loose, if it loses, imports get expensive; if it gains, creditors defer claims, if it loses, they ask for payments.
Because a loan is calculated at the rate which prevailed then but its repayment is assessed at the rate current at the time of repayment, both the principal and the markup increase if a payment is scheduled when the rupee is down. A beggar cannot negotiate terms as from a position of equality. Once in the debt trap, the options keep getting reduced as loans are needed to pay off overdue loans; with dire consequences in case of failure.
A fair loan should maintain the same rate of exchange during the stages of repayment and only be renegotiated in case of a defaulted payment. I believe that extending a fresh loan for the purpose of repayment of one’s own loan is as unethical as insider trading due to the ability of the ‘loaner’ to manipulate the loan against the interest of the loanee.
In case of Pakistan both, international debt and interdepartmental circular debt are caused by anomalies and lack of ethics in the modern economic system. When payment is being made from the same exchequer or financial agency to two institutions, there is no ground for designating their exchange of goods or services as a debt. If at all one needs to be paid for some part of the services by the other, it should simply be deducted at source from the payment to one by the disbursing authority and credited to the other in the next payment made to it by the relevant authority; thereby avoiding a departmental confrontation.
Since modern economics is currently obsessed with increasing the net of direct taxation, a taxation protocol needs to be developed where ordinary Pakistanis can be induced to pay a personal tax which will net the state a revenue equal to the income it generates from tax that is levied on goods. That is to say, incidence and impact of tax is on one and the same person, and that that individual should be recognized by the state as a tax paying citizen.
Now the common Pakistani prefers to pay indirect taxes, through a consumption function. The choice of daily consumption can then allow the individual to choose which indirect taxes he/she is willing to pay, without directly making the choice of rate of taxation.
Although Pakistani governments have been innovative in meeting costs of governance by manipulating taxes on utilities and fuels, this procedure does not satisfy the creditors who fund our imports: mainly the IMF, World Bank and European or American state bodies. I personally feel that they should be content with getting their payments on time rather than how the Pakistani state generates the funds, but then, who is asking me? No one! Hence a vicious cycle is created in which the state becomes the villain for both parties.
The international community blames the state for incompetence and requires it to reduce subsidies on utilities for the underprivileged. This raises the cost for a common man with no benefit to the state as indirect tax, or as relief to the poor; making it a domestic villain. The citizen is alienated from the villainous state and responds with its age old tool, a civil disobedience through tax evasion. The beleaguered state turns to international institutions for further loans; making it an incompetent failure in their books and stricter terms in the next round. So it goes on with each government suffering from earlier terms. The bottom line here is that there is no hope that the Pakistani government can convince the arbiters of modern economics to rethink their procedures of economic management.
We must therefore turn to the internal options for a government in Pakistan to get out of this vicious cycle. Pakistan will never be in a position to negotiate favorable terms for the international loans that are due today. As of June 2019, the value of our debt was a time and a half of what it was two years ago merely due to escalation in dollar value exchange rate. Some government will have to take the bold step to sell invaluable national assets such as gold or coral reserves to cancel existing debts in a sudden and unpredictable move so that our creditors cannot apply the banya principle.
We old school Pakistanis would be aware that a banya [money lender] used every device possible to ensure the debtor wouldn’t be able to pay the principal amount. Consequently a debtor would constantly be paying interest on a loan, preferably by taking an additional loan – sound familiar? A second option that has been frequently mismanaged in the past is if an autocrat usurps power and can control internal dynamics for a sufficiently long time, the debt trap may be broken but Pakistan’s dictators have failed in this.
Shah Faisal, Saddam Husain, Gaddafi and Nasser present a history that suggests that at such times, the West is most conscious of violations of human rights and democratic norms. Only Iran is a success story so far as a state due to its pervasive nationalism. As a person, we may see in Erdogan an example of national support which has thwarted the West. If Pakistani leaders can get support from the masses, we can break the debt trap.
Modern economics started as political-economy, turned into econometrics and resolved the differences based on the assumption that politics is driven by the economy. It has now focused on a set of procedures of manipulating citizens to achieve interests of state or the objectives of a government. The puthi churi on the other hand works on the principle that economy is driven by politics and politics is driven by socialization. Consequently it can be regulated through a socio-political program with a limited economic agenda.
The primacy of economic human motivation that applies to ‘normal’ or ‘regular grooves’ of ‘modern’ European and American economies evolved from the rise of the ‘Germanics’ as a racial group under the leadership of Britain starting with the mercantilist era. French and German efforts to take the lead under Napoleon, Bismarck and Hitler failed because of the superior diplomatic maneuvers of Britain leading to Anglo-Saxon dominance with five members: Britain, America, Australia, New Zealand and Canada, the current alpha-male is America; World Bank and IMF as its lead dogs for controlling world economics.
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Last year I happened to have a discussion on possible tax reforms with an advisor to the government. These are the points I presented to him; so I repeat them here.
- It is the ‘black’ economy that is keeping us afloat. Instead of fighting it, we should align our tax system so as to capitalize on it.
- “No taxation without representation” is the key. Whatever tax authority we work through, it has to go to the communities and ask them what direct tax should be imposed upon them and how they are willing to pay it.
- The rate of tax should be negotiated along with the terms of collection and what the community will expect from the state [or its local/relevant government] as quid pro quo for the tax in terms of facilities, services and utilities. Naturally the state should not be blackmailed nor should citizens be diddled. Negotiation should be reasonable to both.
- I would like to advocate indirect taxes. They influence consumer choices in Pakistan but more importantly, the common Pakistani knows how to equalize [not neutralize] their influence through market forces so that the ‘impact’ of the taxes is shifted to those who can sustain its effect through the ‘kinked demand curve’ and the informal economy.
- The ‘single tax’ for individuals should not be collected by the central government, which should satisfy itself with the list of such tax-payers. Even provincial governments should only be entitled to its share of the taxes for services that it provides. Such tax should be negotiated at the level of the Tehsil, Union Council, or Town Council as the case may be. The town [Tehsil HQ] should assess its hinterland as villages or rural units, as pastoral, mining and industrial zones with a direct interface with communities.
- All other Levels of government, District, Division, Province, Federation, should negotiate with the Tehsil regarding the services they are to render in lieu of the taxes collected at that level. If the communities of a Tehsil wish to benefit more from the services that any of the above levels is to provide, they must be willing to pay additional taxes.
- Actually all tiers/levels of state are service-providers to the citizens. It is essential that they agree on which service is to be handled at which level. Naturally, a national plan on any issue needs federal ratification [politics at the centre]. However, apart from the six issues raised by the Bengalis, nothing needs to be a service provided by the centre. All the other services and facilities need only be coordinated by the centre.
- This aspect has two sides: First, the level at which a service can be provided feasibly: local roads must be a Tehsil or town issue, inter-city roads will need provincial or District level management and highways or motorway by provinces or the Centre. Second, the need, ability and willingness of the community/locality/Tehsil/District/Division/province to foot the bill. This is the arena of politics, this is where the ‘political’ negotiation of taxes should, and in fact must, take place. Which brings me to my last point:
- The six items of national politics that must be handled directly by the centre should be managed through taxes like the import-export and monetary policy etc. In addition the centre should be able to pay its functionaries from its share in the tax down to the grass-roots. Indirect taxes are invaluable in this context.
I am not a fan of increasing the tax-base. Given our current demography [approximately 1/3 of urban residents, 1/3 of rural settlements and 1/3 of pastoral communities], increasing people in the ‘tax-net’ seems as irrelevant as assessing the value of a business by the size of its shop. Our ‘informal economy’ [as I like to call it instead of ‘back’], in fact the ‘mainstream’ of our economic system, has cut out the state; because the state has a ‘wheel that cannot rotate’. The way to get a working wheel is to prepare a system of taxation that caters to this informal,mainstream economy. This is what I mean by the remark that we should align our tax system with our economic practices.
The non-urban Pakistani is getting his/her share of services from the state mostly through the so called ‘black’ economy. He/she is being taxed indirectly by the tax on utilities [sometimes twice and thrice removed in both payment of tax and receipt of services] like oil, gas, and electricity. For an average Pakistani, the state is alien; and is insisting on its alien rules. It is a corrupt villain. If a bureaucrat or government official facilitates the citizens and asks for a ‘justifiable’ gratification he is liked by the common man. One who facilitates merely at the cost of a little homage is a hero.
Let the formal economy interface with the industry, trade and commerce, through the relevant urban centre. The interface between the formal economy and the informal economy should be managed at the level of the interface between the District management and the hinterland it governs. Below this level lies the rural and pastoral demography of Pakistan which is at most getting market access and a bit of fuel/power from the state. Generally the pastoral Pakistani is not even getting that and, consequently has no association with the state.