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The Great Divide

The great divide
Huzaima Bukhari & Dr. Ikramul Haq

The rich-poor divide has been increasing at an alarming rate in Pakistan as evident from a number of informative — though highly disturbing — studies conducted by the World Bank and the Centre for Research on Poverty and Income Distribution (CRPID).

According to latest figures compiled by the World Bank, Pakistan ranks most exposed to poverty risks among 43 countries, with the poverty rate jumping from 23.9 percent to 37.5 percent in three years. This, according to the World Bank, can be described as devastating.

The CPRID’s 2008 study showed that 63 percent of the poor in Pakistan were in the category of “transitory poor”. The remaining 32 percent and five percent of the population “living below the poverty line ” were “chronic” and “extremely poor” respectively. The chronic and extremely poor households are those that are always below the poverty line during a defined period.

Similarly, on the other side, 13 percent and 21 percent of the total non-poor (above the poverty line) have been classified as “transitory vulnerable” and “transitory non-poor” respectively.

Since 2008, more and more people are moving from the transitory category to the chronic category, courtesy irrational economic policies, especially regressive taxation retarding growth and causing inequitable distribution of income and wealth. Monopolisation of assets by the ruling elites is the root cause of the ever-widening gap between the rich and the poor. A special cause of concern is nearly 40 percent increase in rural poverty and the fact that 24 percent of the population is undernourished

Unfortunately, no comprehensive research is available covering all the dimensions of the rich-poor divide in Pakistan. Some studies (notably of A R Kamal and Talat Anwar) provide estimates of various inequality indices in Pakistan. According to Kamal, studies on income inequality in Pakistan show different estimates arising due to five important factors.

First, different studies use different data sets, some based on household income and expenditure surveys, others that make use of income tax data, and some other studies splice the two sets of data. Second, while some studies consider inequalities in income, others consider inequalities in the consumption expenditures. Third, while some studies are done for Pakistan as a whole, others examine income inequalities in both the rural and urban areas. Fourth, some studies report income inequalities across households; others report inequalities across population or earners. Fifth, some researchers classify data by deciles prior to estimation of the Gini coefficient; others employ the income intervals that are not uniform.

All studies, however, confirm that income inequality from 2000 to 2007 had been the maximum compared to any other time period in the history of Pakistan. The poorest 30 percent lost their share while the richest 20 percent gained in both the urban and rural areas during Musharraf-Shaukat Aziz era.

The great divide in today’s Pakistan relates to income and wealth disparities between the rich and the poor. The wealth of the nation is confined to a few families. The main burden of taxes — 70 percent collection is from indirect taxes — is on the less privileged classes while the rich are not even ready to share a very negligible portion of their colossal wealth with the have-nots.

The overwhelming majority of the elected members of parliament does not file tax returns and keep assets benami (in the name of others). India banned all benami transactions through the Benami Transactions (Prohibition) Act, 1988. Interestingly, we still have no such law and even in the presence of Article 19A of the constitution, the public has no access to assets of top military brass, honourable judges of Supreme Court and High Courts and grade 21 and 22 civil servants.

In the past, some of our retired generals have been adjudged as the richest in the world by Time magazine. Our elected representatives are very efficient at creating personal wealth but very bad in increasing national wealth. One prime minister who enjoyed two stints in office accumulated much property in the west, courtesy her skilful husband. The three-time prime minister has not established any charitable institute despite his mega wealth and has not contributed substantially to the Sharif Trust, established by his late father.

Two recent PPP prime ministers viz Gilani and Raja made large fortunes during their tenures. Earlier, a wealthy banker who became finance minister and prime minister during the Musharraf era got two plots from the National Police Foundation in Islamabad at throw-away prices of Rs1.1 million and Rs 0.24 million. Within a year their market prices shot up to Rs12.5 million and Rs1.5 million respectively.

The most unforgivable crime committed by the ruling elites is grabbing state property and non-payment of taxes on unprecedented perquisites and perks enjoyed by them –they get state lands as rewards (free or at throw-away prices) and a host of free benefits but do not pay taxes due on them even where the law so requires. Adding insult to injury, the taxes collected from the masses are shamelessly wasted on their (the elites) luxuries — palatial bungalows, fleets of cars, army of servants, foreign tours and what not.

Inequality in income and wealth in Pakistan, as elsewhere, largely reflects inequalities in the distribution of assets. Since the poor have virtually no assets and the lower-middle class owns very few assets, income distribution is skewed. Distribution of state land; development of plots and houses for the common man at affordable prices and instalments; the sale of shares of public enterprises in smaller lots; human resource development; and credit to the micro, small and medium enterprises are some of the ways that might help the poor in acquiring assets.

However, the role of official bodies set up by federal and provincial governments in this regards (for example, the much-publicised Benazir Income Support Programme or Khushal Fund!) is simply hopeless due to various weaknesses even the allocated funds have either remained undistributed or misutilised.

Income inequality has increased sharply during the last 30 years and the trend continues unabated despite tall claims of poverty reduction from official quarters. The main factors that govern personal income distribution include: distribution of assets; functional income distribution; transfers from other households, government and the rest of the world; and the tax and expenditure structure of the government.

The single most devastating factor for increased income and wealth inequalities remains the regressive tax system. Taxes on the poor since 1991 when regressive taxes replaced progressive levies have increased substantively (35 percent) while the rich are paying no tax on their colossal incomes and wealth in their case tax burden has decreased by 18 percent for the same period.

Studying Pakistan from this political economy perspective is very crucial. We are facing economic disparities, undernourishment, starvation, scarcity of food, power shortages and lack of essential services. The great divide between the rich and the poor, if not reduced through immediate curative measures, may eventually lead to a bloody civil war.

The writers, tax lawyers, are visiting professors at Lahore University of Management Sciences.


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