Thursday, 11 July 2013

Playing with the Data

The article in published on Feb 25, 2013 in the Money Matters

 Playing with data 
 By M. Ali Kemal 
There are countless ways to interpret data and researchers can put their own spin on statistics. Consider the State Bank of Pakistan’s Handbook of Statistics (SBHS) 2010. The following is my analysis using data from the above mentioned source.

According to one researcher, total tax cuts to big business and wealthy individuals that were introduced by Nawaz Sharif’s government in 1990 led to a decline in tax collection by one percentage of GDP from FY90 to FY93. Additionally, other bad policies led to a decrease by 1.1 percent of total tax revenues as percentage of GDP from FY97 to FY99.

That was a period of reforms and tax reforms in particular were top of the list. Tariff rationalisation was initiated in 1987-88 and that process continued in the 1990s. In 1990 total tax revenues were 12.18 percent. The ratio declined to 11.83 percent in 1993 (Table 3.1 SBHS 2010).

Tax revenues declined during Sharif’s first term in power but as this was the era of tariff rationalization, we need to look at the revenues from custom duties. If the revenues from custom duties have declined then can we say that decline in revenues was due to decline in custom duties. Further analysing along these lines, if we subtract custom duties from tax revenues, we find that revenues increased during 1990-93.

Secondly, in the same era, there was an effort to increase the collection of direct taxes, which includes income taxes. The share of income taxes was increased by one percent of GDP from 1990 to 1993. By looking at the two scenarios (i) decline in custom duties which is a tariff rationalisation policy, and (ii) increase in the direct tax share, I would not call Nawaz Sharif’s first term in power was replete with bad policies. We should keep in mind that direct tax is a progressive tax and indirect taxes are known to be regressive in nature. Evidence in Pakistan’s case is not significant but definitely not progressive.

Analysing the second term of Sharif’s tenure makes for an interesting exercise. Sharif’s government came to power in 1997. Thus if we analyse his performance using a base period from 1996 (last government) and end period 1999, then we will see a sharp decline in tax revenues as presented by another writer.

Sharif’s government took charge of the PM office in February 1997, which means that eight months of that fiscal year had already gone. Thus it is not correct to analyse his performance comparing FY96. Interestingly, from 1997 to 1999 tax revenues as a percentage of GDP, declined by 1.12 percent. This decline too was largely associated with the decline in custom duties due to international tariff rationalisation.

Revenues from custom duties decline by 1.37 percent in the same term. Given the above analysis of tax structure, it is incorrect to deduce that tax cuts for the rich, if there were any, led to a decline in tax collection in the 1990s. In fact it is the tariff rationalisation of international trade taxes which led to a decline in total tax revenues. However, we can say that, apart from increase in the share of direct taxes, the overall tax efforts in the Sharif era would have been better.

One researcher suggests that the Sharif government’s economic performance was the worst amongst all the civilian and military governments in Pakistan. He talks about “average 3.1 percent growth” during his second term in power. The said writer neglects to mention that during Sharif’s first term GDP growth rate was 5.16 percent (compound growth rate).

Moreover, while criticising his performance in the second era, the said researcher used 1996 as a base period for comparison and blamed all the problems of FY97 on Sharif. As mentioned earlier, eight months had already passed by the time he took charge. His cabinet could only pray for bumper agriculture crops and wait for some miracle to lift economic growth from 1.7 percent.

However, during FY98 growth rate increased to 3.5 percent. After the nuclear detonation in May 1998, sanctions were imposed but still the government managed to get 4.5 percent of growth in FY99, which indicates that some good policy measures were taken at that time. In 1999 the military overthrew the democratic government and democracy was again derailed. In the second term, even if we exclude the first year, the average growth rate was four percent, which is lower as compared to other governments however still not as bad as it has been made out to be by the researcher in question.

The beauty of research lies in exploring different questions which instigate further research questions – thus debate continues. I believe I was unbiased in this data analysis. However, someone else may find my analysis wanting and come up with additional findings. The purpose of writing this article is to demonstrate proper use of data – examining the data in depth instead of simply showing the apparent picture.

My advice for new researchers is that while writing a research article you need to be very careful if you are not using data. If you want your arguments to be concrete then data is necessary however some precautions also need to be exercised while using the data. It is important then to go into the depth of things to see the real picture.

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