Saturday, May 08, 2010

Two Models Of The State, Or Why Mohsin Hamid Is Wrong

Mohsin Hamid -- of Moth Smoke and The Reluctant Fundamentalist fame -- has recently started writing political columns for Dawn. His latest one says Pakistan could solve a lot of its problems by increasing its tax-to-GDP ratio; his central idea is that Pakistan's tax net is cast not nearly wide enough, even compared with other less developed countries. From this identification of a problem, he logically derives the solution: if we pay more taxes, Pakistan will develop more. This is a logical leap that is unjustified. Let me explain why.

There's basically two ways to thinking about the lack of public services and goods provided by the Pakistani state. One way is to think that the state doesn't have enough money to provide us schools, hospitals, roads, and so on. This is the Hamid logic.

But the other way to think about this is that there is some third factor that is causing both the lack of services and the low tax-to-GDP ratio. If this view is correct, then raising taxes, in and of itself, will have no discernible effect on Pakistan's development, because the low tax net itself is an implication of this unidentified third factor. What we really would need to do is calibrate this third factor, which will then take care of both the tax rate and the development rate.

This third factor, for me, is "state capacity". There's two things to say about this. One, Pakistan is a weak state in that its ability to deliver on actual policy choices is low. Policing, law and order, land reform, crime, population control, electricity crises and so on all demonstrate that even when the government decides to do something, it very rarely can (for a variety of reasons that would constitute a blog post, or a book, of its own). One of the areas in which the lack of state capacity is apparent is, indeed, tax collection. It's not as if people aren't meant to be taxed. It's that the people who are taxed don't pay those taxes, and can get away it. That speaks to a lack of state capacity; not being able to do what you want. That's the first point.

The second point is that even those taxes that are collected are generally used in inefficient and wasteful ways: they are spent bailing PIA out, or financing leaders extravagant foreign visits, or to buy fancy planes and toys for a praetorian military. It's unclear how much of an extra rupee in the state's coffers will actually help the average Pakistani.

So here we can set up the competing logics: the Hamid logic says that if we pay more taxes, Pakistanis will have more schools and hospitals. My logic says that if we pay more taxes, those taxes (a) won't be directed to public goods to the extent that they should because of corruption, bloated bureaucracies and elite capture, and (b) even when they are directed to public goods, won't deliver the bang-for-the-buck results because the state's ability to deliver is seriously limited.

In other words, for me, the level of taxes themselves don't really matter. The ways in which taxes are collected, dispensed, and used matter. Even if Pakistan was to raise its tax-to-GDP ratio, which is about 10%, to Sweden's, which is about 50%, we won't get Sweden like outcomes, because Sweden is a more efficient and less corrupt state.

Indeed, as I was saying to someone else on this point, countries like Pakistan are why libertarians exist. The core libertarian idea, remember, is that the state is wasteful and can't do things as well as the private sector. A rupee in the hand of a private organization, be it profit or non-profit, will go a lot further than a rupee in the hand of the Pakistani government.

The problem, of course, is that only the state can institute the type of reform on the scale we need: The Cititzen's Foundation is not going to solve our education problem, no matter how hard it tries. I guess the ideal solution would be to have the Pakistan government transfer all its tax collections to private organizations, and see what they can do.


Umair J said...

I hate being the first one to comment on a blog-post. Makes me feel very vulnerable. Khair, I agree with you for the most parts but here are my 2 cents on the issue.

'My logic says that if we pay more taxes, those taxes (a) won't be directed to public goods to the extent that they should because of corruption, bloated bureaucracies and elite capture'

Our state, however, is not a hundred percent inefficient. What i mean to say is that like all processes in this world you cant get output worth every buck that you put in. In Pakistan you end up getting 1 cent for every 100 cents that you invest. In the US you might get 40, in Sweden maybe 60. So basically the compromise lies in doing what India have done. They have pretty much the same institutional problems (at least historically) as us except they've developed a critical mass that keeps moving the development process further. Put in shit loads of money which benefits a certain portion of the urban population. And your economy keeps moving in the right direction (trickle down etc)

Now i want to come back to the libertarian aspect that you mentioned at the end. You can't privatize public goods for a thousand reasons which you probably know by heart (even though you're at Chicago). However the one thing that the Pakistani state has going for it, in the state capacity paradigm, is penetration. The state is everywhere (barring Balochistan and FATA). It might be corrupt, inefficient, oppressive but it is well and truly present. Thats why the gnomes at the WB and the ADB come up with terms like Public-Private Partnerships. You can take advantage of the penetration of the state while bringing in your own efficient processes of implementation. (I apologize for the development lingo hogwash)

shameless plug of an old blogpost i wrote a month ago on state capacity/state strength

premptive congrats on Barca's title

Alpha Za said...

Hi, this is my question.

India is just as corrupt as we are, but still their govt. manages to get more stuff done than say our govt. because it has a higher gdp-tax rev. ratio.

And say what you will about India, they have made tremendous progress through spending on schools, healthcare, infra structure etc.

The government may hardly be efficient but the more money they have, the more ability they have to get things done. General Mush-face's government helped increase Pakistan's economy from 40 bn to around 180 bn. That's pretty damn good for a corrupt military dictatorship.

Ahsan said...

Umair: Haha yes, I was being facetious with the privatization point.

And I agree that even if government spending is "wasteful", it still benefits someone, somewhere (your 1 cent vs. 40 cents vs. 60 cents point). But my rejoinder (to Mohsin Hamid, more than you) would be that THAT ratio is what we should be trying to improve, not the tax rate itself. The tax rate will come on its own if the state actually becomes a working enterprise.

Alpha Za: The comparison with India misses the role of the military. It's not India's higher tax-to-GDP ratio that helps it, it's that those taxes aren't disproportionately spent on defense. Compare what India spends on education and health to Pakistan, as a percentage of GDP, and you will have your answer.

Rafay Alam said...

It's not just the tax analysis that's flawed. It's also the to-the-point-of-ignoring-the-reality rosy picture of Pakistan - the "water may have faeces but at least we have mobile phones" argument - that gets me.
And statistical comparisons with India, as a rule, are of no relevance to us. Their social sector indicators are way off, largely because it is one of the largest, poorest countries in the world.
Or as I was saying to someone else (Ahsan), I'd like to know who Hamid's dealer is and smoke whatever it is he's got.

AKS said...

Spot on Rafay. Also, I don't really understand why Mohsin Hamid, like many Pakistani urban writers, feels the need to sure up his hypothesis by referring to his experience of witnessing rural poverty - so you've to Skardu woohoo!

Shahbaz said...

I don’t think that Hamid’s arguments are as flawed as this post makes them out to be. I agree that we need to have a more efficient system of services delivery but at the same time I strongly disagree with the republican-esque logic of handing state money to private enterprise. That just does not work. There are a lot of reasons for this failure but I believe the most important one is how a private enterprise undertakes a task with the bottom line in mind and how a state (should!) goes about its business of providing basic services to its people.

The idea is to have a wider tax net so that more people are involved. As a tax payer, I do feel ownership of the services (be it traffic lights, schools, hospitals etc) and I do feel enraged when this tax money in inappropriately used. If nothing else, widening the tax net will provide more people with this sense of ownership and a legitimate concern on its misuse.

We cannot reject a tax reform simply because the funds are being abused by the elite. We need to stop this abuse WHILE asking more people to carry their own weight by paying taxes.

Ali said...

The author states that many problems can be solved by Tax GDP ratio but then again the industry wheel to rotate there must be stability in the market. For stability the end of terrorist attacks is a must ofcourse. So all this is basically linking up in a circle.

Nabeel said...

Seriously. As Will Smith memorably pronounces in Ali, 'Someone should ask Smokin Joe what have he been smoking.'

"We've just made a collective decision not to use them (resources)" - no, sir, it's just that the people who have the resources have largely decided not to use them for those who don't.

anyway,it seems like you're arguing for more privatization (correct me if i'm wrong) - but that hasn't always worked out for the best (KESC), has it?

and to its credit, the FBR realized way before Mohsin Hamid that focusing on tax COLLECTION was important...good luck getting VIPS to pay their taxes, though. it's no accident that such a high proportion of our tax revenue is GST.