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Priorities for Pakistan

Assisting Pakistan Must Come with Structural Reforms

SOURCE: AP/B.K.Bangash

Vice President Joe Biden meets with Pakistan's President Asif Ali Zardari at the President house in Islamabad, on January 12, 2011 for a discussion about the continued need for government reform.

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If you’re looking for a symbol of the disconnect between Pakistan’s current problems and the priorities of many of its loudest political voices, the rally this past Sunday in Karachi offers one of the most glaring recent examples. The gathering, organized by members of an array of religious parties, only drew a tiny fraction of Karachi’s population, but it still succeeded in commanding media and political attention in the aftermath of Punjab governor Salman Taseer’s murder. To hear the speakers tell it, the number one crisis facing Pakistan today is the possibility the government might overturn the country’s blasphemy law, as Taseer had advocated. That such a move is irrelevant to the material future of the Pakistani people makes it no less effective as a mobilizing flashpoint for political identity and a basis around which to organize.

The tumult of Taseer’s killing and the debate over the blasphemy law have almost succeeded in eclipsing the other major development of the new year in Pakistan: the brief walkout of the Muttahida Quami Movement, or MQM party, from the Pakistan Peoples Party, or PPP-led governing coalition in the National Assembly, which left Prime Minister Yusuf Gilani with a tenuous minority government in the parliament. There were multiple motivations behind the move, but the foremost grievances the MQM cited publicly were a January 1 reduction in government subsidies for fuel and other petrol products and government efforts to introduce a reformed general sales tax, or RGST, to increase domestic revenue generation. Both policies were key conditions of an ongoing $11.3 billion IMF loan package agreed to in November 2008, and the government’s failure to make progress on reducing its budget deficits appears to have led to the indefinite postponement of the disbursal of the $3.5 billion left in that agreement.

Should the Gilani government manage to limp its way through the remaining two years of its term, it will have secured for itself a historic record for tenacity in the face of a multitude of crises. (And also for its luck in terms of its opponents, who collectively appear be as divided, insecure, and uncertain of themselves as the government itself.) The government’s accomplishments are thus far much more slight in terms of addressing Pakistan’s host of long-neglected priorities and preparing for its future needs—which, beyond closing persistent revenue gaps to pay for these needs, includes reversing decades of underinvestment in education and basic human capital development; economic modernization and trade expansion; and making long-term investments in the country’s transportation, water, and energy infrastructure. In this regard it has ample company among its predecessor governments, both military and civilian.

Governance has never been the strong suit of Pakistan’s governing parties. No elected civilian government in Pakistan’s history has ever completed a full term in office. Pakistani citizens have never had the opportunity to reflect on a government’s full tenure and reward it with a return to office or punish it for mismanagement by bringing in its opponents. Organizing for the attainment of political power, rather than its retrospective justification through the provision of public goods, forms the overriding priority for elected officials. Military coup-makers, of course, have shown even fewer inclinations toward accountability, and while religious demagogues have shown the ability to shout loudest, they have little to say now on Pakistan’s needs. The cumulative effect is the dire economic, diplomatic, and security situation the Gilani government finds itself understandably overwhelmed by today.

The Obama administration is certainly aware of this challenge. Beginning with the passage of the Kerry-Lugar Bill, administration officials have sought to rebalance the United States’s own priorities in Pakistan, and move away from the exclusive focus on military aid that characterized the Bush administration. Secretary of State Hillary Clinton has repeatedly spoken out on the failure of many wealthy Pakistanis to contribute to the country they call home. The continued need for reform will be intertwined in the promises of U.S. partnership delivered by Vice President Joe Biden in his visit to Islamabad this week, and will be a subject of discussions between President Obama and President Asif Ali Zardari in his visit to Washington today.

The tax measures the government and the International Monetary Fund are proposing are not ideal. As a form of consumption tax, the RGST is regressive, falling heaviest on the country’s large poor population whose incomes will be most vulnerable to the resultant rise in prices. It will do little to alter the balance of taxation in the country, where only 2 percent of the population pay income taxes and the uppermost tax bracket stops at $100,000. The average worth of a member of parliament, by contrast, is $900,000. Justified public skepticism that taxes will be misused and the availability of tax shelters in the nearby United Arab Emirates makes implementing new revenue-generating measures extremely challenging, as does the deterioration in Pakistan’s basic civil service capacity.

Absent a serious public discussion over how to overcome these issues, however, the situation will only get worse, and coalition and identity politics have far overshadowed the debate. The PPP government has not been able to forge a consensus on what course to take and appears to have abandoned any movement on the RGST for the time being. Its coalition partners and opponents in parliament, free from accountability to either Pakistani taxpayers or international donors, have been content to tweak the PPP for the unpopularity of the tax but have proposed few concrete alternatives of their own—although the MQM, whose base is solidly urban, has argued for agricultural taxes, which would hit at the PPP’s rural base. The Pakistan Muslim League-Nawaz (PML-N), the biggest opposition party in parliament, has continued its hedging strategy, opposing the tax but producing only broad manifestos in return.

Pakistan has one of the lowest rates of tax generation in the world, currently around 10 percent of GDP. It has to some degree offset the resulting deficits with budget slashing and inflationary borrowing from the central bank, but the primary means by which Pakistan has survived has been through infusions of assistance from external donors. In the words of Brookings Institution scholar Stephen Cohen, Pakistan “negotiates with a gun to its head,” a rentier state that provides donors with the promise that it will not collapse and take the neighborhood with it. This practice severs another key component of accountability, leaving Pakistanis with little direct investment in the policies and programs their nominal representatives are presiding over. It also makes the collective determination of national priorities extremely difficult since outside donors pick their own causes and are rarely able to muster contributions on the time and financial scales necessary to fully address Pakistan’s needs.

The Pakistani military bureaucracy, for its part, has been successful at defending its own budget priorities thanks to the absence of parliamentary oversight and continued lines of credit from the United States and China. And, it appears to have stayed out of the tax debate entirely, confident that its needs will always come first in the pocketbooks of Pakistanis and international donors alike.

Only a process of internal political debate and organization can answer the question of Pakistan’s priorities and how to share the cost of meeting them. But international donors’ outsized influence over Pakistan’s solvency means they are one of the few entities capable of enforcing accountability on the government. The IMF has granted the Pakistani government a nine-month extension, but has not indicated that further funds will be disbursed during this time if Pakistan does not make good on its pledges. The United States and other members of the Friends of Pakistan donors forum should continue to hold this and any subsequent Pakistani governments to the revenue-generation and deficit-reduction commitments it has made, while providing technical assistance for the development of any RGST alternatives and the development of Federal Bureau of Revenue capacity to help meet its benchmarks.

As a further incentive to focus the debate, the international community of donors should consider entering into a structured debt-forgiveness agreement with Pakistan. Under the agreement, progress in broadening the tax base would be matched with the progressive elimination of the country’s outstanding $55 billion debt burden, whose annual servicing currently consumes more than a third of the country’s budget. The United States could also put teeth in its advocacy for democratic civilian government rule in Pakistan by conditioning its sizable assistance to the Pakistani military on an annual assessment by the secretary of state that the Pakistani parliament has conducted debate and oversight of the country’s defense budget, which has traditionally been presented by the military and passed as a single line item.

The United States and other supporters of Pakistani reform face immense challenges in digging out of the moral hazard trap they find themselves in. Pakistani leaders may point to the damage inflicted on their country by catastrophic floods this past August and the toll borne by their military and citizenry over the past decade and ask how the international community can demand more of them after such heavy losses. They are not wrong to do so. Pakistan’s military leadership may seek to maximize their bargaining position by leveraging its spoiler powers in Afghanistan and its position as guardians of the country’s nuclear crown jewels. These security concerns cannot be ignored. But if the international community continues to subsidize Pakistan indefinitely without structural reforms that can allow the country to set and support its own priorities, it will only treat the symptoms of a deeper disease, and postpone the eventual day of reckoning.

Colin Cookman is a Research Assistant for National Security at American Progress.

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