Main Issues for Setting the Civil Service Reform Agenda in Pakistan

Civil service reform is not new to the development debate in Pakistan. The role of bureaucracy is discussed every now and then. Civil service reform is nowadays quite uniformly discussed as a major problem for development in Pakistan, or at least so it is considered. Most of the blame for policy and programme failures is assigned to the civil service. Recognising the importance, or persistence of the problem, governments over time have attempted to deal with the issue by setting up committees and commissions, many times in this paper I am presenting a discussion of some pre-eminent issues besetting the civil service in Pakistan in my view unless these issues are addressed at the outset no meaningful reform can be formulated or implemented. Addressing them is paramount for setting an agenda for the reform. Civil service reform due to the complex nature of the problem works at various levels simultaneously. As long as this does not over simplify and aggregate problems it can work well. But for good results disaggregating problems will be required. What is required to be done in one branch might not be needed in the other. Legal instruments with a general and most wide ranging application should deal with basic principles of organisation while providing for differential rules to emerge and give detailed structures. A set of actions to deal with the basic structures will be part of any reform but sometimes what remains ignored is that actions are also needed in other spheres of Pakistan’s public life without which the reform in civil service itself will not attain the cherished goals. The paper takes up discussion of issues from these levels of consideration. It begins with the aggregation framework and goes on to highlight the most urgently felt area of local civil service. It ends by highlighting the complementary actions

The Effects of Rent Assignment on Long-Lived Public Goods in Exhaustible Resource Economies

Exhaustible resource rents are an important taxable base in many countries, with revenue sharing often part of the scheme. In some cases large shares are retained for the central government. Generally, the discussions of exhaustible resource taxation consider assignment of resource rent tax base and revenue sharing from the limited perspectives of efficiency and stability. Tax assignment and sharing arrangements are assumed to have a neutral effect on investment of resource rents in long-lived public goods. We attempt to demonstrate that this may not be the case, specifically looking at the question of whether rent assignment is neutral to effects on investment of rents in long-lived public goods, a normative policy objective, and under what conditions it occurs. We test the theoretical propositions with data from the Russian Federation to derive empirical results. The results from the Russian Federation point toward an important dimension of rent tax assignment in a federation. They results show that ceteris paribus, higher share of rent for the federation may lead to lower investment in long-lived public goods and may be constrained by stability. Another argument has been made for reconsidering rent tax assignment using assertive ethnic identity as a manifestation strong ownership claims. Communities with strongly valued identities value ownership over land and exhaustible resource endowments in their areas. This may be the case especially if ethnic identity is important to the resource owning community. The empirical results show that a decrease in the regional share of rent resulted in a fall in investments in the republics and regions with strong ethnic identity. Republics among the producing regions have historical claims to a distinct identity and may have a preference for preserving their identity. This preference is manifested as higher levels of rent investment. Following this line of argument, it can be concluded that rent assignment, through rent tax or revenue assignment, should favor producing regions within the range of stability in a federation, if the objective is achieving higher investment in long-lived public goods

A Computational General Equilibrium Approach to Sectoral Analysis for Tax Potential: An Application to Pakistan

This study develops a dynamic general equilibrium model, applied to Pakistani data, in which optimizing agents evade taxes by operating in the underground economy. The cost to firms of evading taxes is that they find themselves subject to credit rationing from banks. Our model simulations show that in the absence of budgetary flexibility to adjust expenditures, raising tax rates too high drives firms into the underground economy, thereby reducing the tax base. Aggregate investment in the economy is lowered because of credit rationing. Taxes that are too low eliminate the underground economy, but result in unsustainable budget and trade deficits. Thus, the optimal rate of taxation, from a macroeconomic point of view, may lead to some underground activity. We note, in particular, that incorporating a VAT without any other tax reductions greatly reduces the tax compliance of the service sector. We have applied our model to Pakistan, and have calibrated our model to an 8 year period from 2004-2011. We note that it gives a reasonable approximation of Pakistani macro data. We then use a sectoral breakdown of tax data generated by the model to estimate tax gaps on a sector by sector basis. We note that certain sectors are currently paying taxes below their potential, while others may be above their tax potential. These sectoral gap estimates may be used as indicators of where greater tax enforcement efforts should be directed

Tax Assignment: Does the Practice Match the Theory?

This paper builds on the existing literature to better explain the tax assignment choices made by countries in different economic circumstances. In particular, we explain why the degree of tax autonomy given to subnational governments is significantly greater in industrial than in developing countries, even when adjustment is made for differences in income level. We consider several arguments for this disparity. First, electoral regimes are not in place for the accountability gains to be fully captured. Second, tax decentralization may result in unacceptable fiscal disparities, and, third, tax administration costs are higher for subnational governments and there is not enough incentive to take steps to lower them. Finally, and contrary to expectations, we do not find empirical evidence that giving more discretionary powers to subnational governments in developing countries will lead to a crowding out of central revenues, but we do find this result for industrial countries

Pakistan: Provincial Government Taxation

Pakistan’s intergovernmental fiscal system is out of balance. Provincial governments account for 35 percent of all government expenditures but only 7 percent of all taxes. It is doubtful that local residents see much connect between the level of taxes they pay to provinces and the expenditure benefits they receive. This means that the government misses out on one of the most important advantages of fiscal decentralization – taxpayers holding their elected provincial officials accountable for the quality of services delivered. A second dimension of fiscal imbalance is the mismatch between the weak tax administration skills of the provincial governments and the hard-to-collect taxes that they have been assigned. The latter include taxes on agriculture, professions, property and the consumption of services. The result of this mismatch (and politics) is that the level of taxes is equivalent to approximately 0.2 percent of regional GDP in each province by comparison with about 10 percent at the federal level. The purpose of this study is to review the status of revenue mobilization by subnational Governments in Pakistan, and to identify reform options that might lead to a higher level of revenues and a better functioning fiscal decentralization. This analysis is based on case studies of Punjab and NWFP provinces, and on data gathered in the course of field work in the two provinces