M. Ali Kemal's Blog

Q & A

2011-12-09T02:30:00.001-07:00

Q: How many classical economists you need to change a light-bulb?
A: None, the invisible hand does it

Q: How many neo-libral/austrian economists?
A: None, the market takes care of it.

Q: How many keynesian ones?
A: All of them. Because this way you create employement, increasing
demand and does multiplying employement and so on.

Q: How many marxist ones?
A: None, the lighbulb contains the seeds of its own revolution.

Q:How many economists does it take to change a lightbulb?
A:Eight. One to change it and seven to hold everything else constant.

Are Consumers Rational?

2011-07-24T22:51:00.000-06:00

Are Consumers Rational?

When we start studying Microeconomics the first thing we study is that we have limited resources and we have unlimited wants. Second thing which we studies is that “Consumer is Rational” and our teachers used to explain us that the consumer will not buy a rotten tomatoes and rotten vegetables; which is true when we talk only about buying tomatoes or mangoes etc. However, if we think in a broader sense, beyond grocery items then consumer may or may not remain rational, e.g., taking stocks in stock market, doing investment, buying foreign exchange, movements of interest rate, buying a lottery ticket etc.

We’ll take this one by one:

People, especially the retired ones” always thing that decreasing interest rate is a bad thing and what they are getting in hand is meaningful. These people do not have an idea about real interest rate but I don’t blame them because if prices go up 3fold and interest rate initially goes up to 13 percent and they are getting good amount of money. But after inflation has declined and interest rate declines too they are getting profit or interest money on the same fixed amount and money they are getting at, say 6.5 percent, is half of what they are getting previously. In this case they do not want interest rate to decline. J According to their own view they are rational ones but if the rationality is to lower inflation and lower interest rate then they are not rational.
Continuing with the interest rate, if there is a recession, with high inflation and high unemployment --- increase in interest rate leads to more unemployment and inflation otherwise. Policymakers would want to reduce more at the same time but due to trade-off they cannot. Simply stating, unemployed wants to re-employ again and already employed people want inflation to be at the lowest. Who is rational then, unemployed or already employed or both are rational.
In the long run we are all dead, said by a biggie and people use it out of context J most of the public (I am using here for general consumers) has a myopic view and cannot or do not want to see what’ll happen after ten years. They want their rewards the next day. Some people do not believe my statement and they say that no we do not want our rewards the next day, “yes” they can wait for a year. But they always argue that what has happened in the last 20 years or so is not favorable for us and these are those people who do not have confidence in the government. Thus who are rational, those who do not believe in the government or those who believe in the government. Because when u don’t believe in the government then government cannot make the policies correctly because they had in mind that consumers are rational (irrational) and they believe don’t believe) us J.
Continuing point three from where I started, i.e., Long Run. Does general public know what is long run or this word is used just to fool general public? Or if you do not know about long run then you are not rationalJ. Medium plans are made, long term 2010, 2020, and 2030 plans were made. But is it again the question whether people have confidence in government or not. Some people want quick money and some people think that 30 year is a long period and no idea whether they’ll live till then or not. Are these people Rational?
There will be different points where we can ask whether consumer is rational? Trading in FOREX market when exchange rate is increasing. Buying stocks when it’s increasing. Most of the big investors do not think that it’s a good idea to buy when stocks are increasing. Thus are these people rational?

Continued…. With your comments

Hazrat Ali’s (RTA) letter written to his Governor in Egypt

2011-07-02T00:59:00.002-06:00

All the best to the Government

2011-06-14T23:57:00.000-06:00

Annual budget 2011-12 of Rs.2.767 Trillion was announced few days ago. It is 14.2 percent higher than last year budget. It is adjust to inflation rate (14.1 percent) is an immature statement right now. But there is nothing wrong if they have done it accordingly. If we divide the current budget estimates by the inflation rate to make those values comparable to previous year, it is interesting to note that increase in total expenditures by 0.5 percent only.

By looking at the last three years, tax revenues were always more in the budget estimates and expenditures are always less in budget estimates. At least government is consistent in these estimates J LOL. In 2008-09 ratio of budget estimates to revised estimates of tax expenditures was 0.94 and same was the last year. However, it was 0.99 in 2009-10, which was good. If we go into further bifurcation, direct taxes are always short of target and in 2009-10 indirect taxes increased its target mainly due to revenues from sales tax.

Current expenditures always increase it’s budget estimates and on the contrary development expenditures always less than the budget estimates. However, total expenditure always increase the budget estimates.

There is another interesting point noticed from the last three years that ratio of direct tax to total tax has decreased and indirect tax has increased even though the FBR has special emphasis on increasing direct taxes.

Few challenges which are addressed in the budget are

· Containing of Fiscal Deficit.

· Reducing Inflation.

· Overcoming energy shortage.

· Increasing investments.

· Creating employment.

· Reducing Public Debt.

We’ll take these challenges one-by-one. As far as containing fiscal deficit is concerned, two things are important, reducing expenditures and increasing revenues. However, there is no major policy announced which shows that Government is interested in lowering expenditures and raising revenues. Increase in tax revenues is ambiguous after announcement of decrease in Sales tax rate by one percent and increase the lower limit of income tax. Moreover increase in PSDP program to $300 Billions which is 53% more than the revised estimates 2010-11 and 15 percent raise in the salaries does not tell us decline in expenditures. Furthermore every year we collect less revenues that we expected and spend more what we thought. Thus, it is extremely impossible to achieve the target of 4 percent fiscal deficit. All the best to the Government.

Reducing Inflation and Creating Employment has a trade-off. We are having double digit inflation and to decrease current inflation we need to increase interest rate, which means contracting money supply be lowering credit creation and thus reduction in investment and lesser employment opportunities. But of course there are different ways to do this other than standard textbook materials. Again All the best to the Government.

Overcoming energy shortage is one of the major issues inside Pakistan. Rs.115 billion which include Rs.32.5 billion through budget is allocated for power generation by WAPDA. These will be hydel projects. Rs. 22 billion are also allocated to Pakistan Atomic Energy Commission to produce energy from nuclear source. However, how much energy they can produce and when it is available to people is a serious concern. All the Best to the Government.

Reducing public debt is a difficult task in the presence of fiscal deficit. If we consider fiscal deficit to be 4 percent of GDP, Government may need to borrow which increases public debt again unless we repay more than what we are borrowing and we pay debt servicing as well. All the best to the Government.

In short we are surrounded by several problems such as terrorism, high inflation, high unemployment, low investment, low growth, low education, low health facilities, bad governance etc. We need to fix these one by one. If we want to fix them jointly even then we need to do it gradually (Apart from terrorism; eradication of terrorism in the most important among others). It’s time that we realize that we need to take singles and doubles instead of hitting fours and big sixes. Instead of starting huge projects and borrow money from World Bank and other financial institutions, we can start small projects with our own money. If we can we should depend less on the foreign aid.

Monetary Review of Pakistan by Money and Banking division at PIDE

2011-03-14T22:07:00.002-06:00

From the Ecnomist on the Budget Deficit

2010-06-15T03:37:00.000-06:00

The following Article is take from "The Economist".
You can view the article at http://www.economist.com/node/16333407?story_id=16333407&fsrc=scn/fb/wl/ar/slashnbounce

DO NOT expect much applause when you are chopping your government’s deficit. Chancellor Angela Merkel touted as an “unprecedented feat” her plan to save €80 billion ($96 billion) from Germany’s federal budget by 2014 when she unveiled it on June 7th after a two-day cabinet meeting. But the reviews were mixed. Opposition politicians denounced the plan’s “social callousness”. Businesses targeted with higher taxes fumed. Economists noticed that the savings were neither as big nor as certain as Mrs Merkel suggested. The feat may need revising.

Yet in one sense it is a breakthrough. For the first time since her re-election last September Mrs Merkel seemed, if briefly, to be in charge. Before this the Free Democratic Party (FDP), junior coalition partner to her Christian Democratic Union (CDU), had forced tax cuts upon her that she did not really want. She reluctantly bailed out wobbly members of the euro zone. After Horst Köhler, the German president, quit suddenly on May 31st she nominated a successor to placate powerbrokers within the CDU. The budget package, by contrast, is largely her handiwork. She chose investment over redistribution.

Its main purpose is to cut the federal government’s structural deficit—that is, the part not related to the business cycle—from an expected 2.5% of GDP this year to 0.35% by 2016, as required by a recent amendment to the constitution. That is also supposed to set an example to profligate members of the euro zone. To avoid crushing a fragile European recovery, the savings will be phased in. Growth will be dampened but, says Eckart Tuchtfeld, an economist at Commerzbank, “the economy seems to be pretty resilient.” Investment in education, research and infrastructure, the sources of future growth, has been largely spared.

This does not mean that the package has been fully thought out. Many of the proposed savings are to come from schemes that do not yet exist. Producers of nuclear power are to contribute €2.3 billion a year; in return they want to keep the plants running beyond a deadline for closure set by an earlier government. That is a sure way to mobilise banner-waving crowds. Banks are to kick in €2 billion a year through a “transaction tax” as penance for the economic crisis, but that may depend on securing international agreement. Many subsidies undeservedly survived the cull.

The proposed cuts to benefits, by contrast, look brutally concrete to many Germans. The government plans to eliminate a heating subsidy for the poor and to stop paying welfare beneficiaries’ contributions into the pension system, saving €1.9 billion a year. Such cuts are defensible: the contribution subsidy raises pensions by a negligible amount, for example. But while shaking down the unemployed, Mrs Merkel proposes to spare the rich. The FDP, which reluctantly gave up the idea of further tax cuts, vetoed increases in income and consumption taxes. That apparent unfairness dismays some of the chancellor’s allies, as well as the opposition. Norbert Lammert, the Bundestag’s president and a member of the CDU, called for raising taxes on top earners.

Having just about regained the political initiative, Mrs Merkel could quickly lose it. A row over health reform between the FDP and the CDU’s Bavarian sister party, the Christian Social Union (CSU), has descended into name-calling. The Bavarians are “wild pigs”, said an FDP official in the health ministry; the liberals are “bush leaguers”, shot back the CSU’s general secretary. No one is enthusiastic about Mrs Merkel’s pick for the presidency, Christian Wulff, the stolid premier of Lower Saxony. The opposition candidate is more exciting: Joachim Gauck, an East German human-rights activist who presided over the opening of the secret-police archives after unification. Mr Wulff ought to prevail in the Federal Assembly, which convenes on June 30th to elect a new president. If not, Mrs Merkel will be in real trouble.

Historic Day March 31, 2010

2010-04-01T19:30:00.000-06:00

"March 31 is a historic day in the parliamentary history of the country. Why? Because after 77 meeting in 9 months the committee formed for the 18th amendment got the signatures with the consensus on the report. The committee was chaired by Raza Rabbani and for me they’ve done their work. I wish that we’ll soon get the good news when both the houses will pass this report.

Even though I may not like some of the clauses in the 18th amendment but this we should respect it. Why? Because after so many years it is passed with a consensus in the presence of different parties which shows that even if they have ideological or political differences they came up with some special thing which is accepted to everyone.

Fehmida Mirza announced that the room in the parliament house where the committee had conducted over 77 meetings in the past nine months for the revival of the 1973 constitution in its original form should now be called the constitution room

I was thinking that issue of renaming NWFP was also in the constitution and ANP leader and JUI-F leader was not there (However, Afrasayab Khattak and Haji Muhammad Adeel (ANP), Rehmatullah Kakar (JUI-F), were present there and signed the report) and I hope in the end no one would say that even the renaming issue which should be the issue of NWFP people and it is passed in Punjab through the consent of PML-N and PML-Q or you can include PPP as well.

Those who signed the consensus amendment document included, among others, PPP’s Raja Pervez Ashraf, Babar Awan, Haji Lashkari Raeesani and Mian Raza Rabbani, PML-N’s Ishaq Dar, Sardar Mehtab Ahmad Khan and Hassan Iqbal, PML-Q’s Wasim Sajjad, S.M. Zafar and Humayun Saifullah Khan, Muttahida’s Dr Farooq Sattar and Haider Abbas Rizvi (MQM), Afrasayab Khattak and Haji Muhammad Adeel (ANP), Rehmatullah Kakar (JUI-F), Justice (retd) Abdur Razzaq Thaheem (PML-F), Srarullah Zehri (BNP-A), Prof Khurshid Ahmad (Jamaat-i-Islami), Mir Hasil Bizenjo (NP), Aftab Ahmad Khan Sherpao (PPP-S), Abdul Rahim Mandokhel (PMAP), Shahid Hasan Bugti (JWP) and Munir Khan Orazkzai (Fata). Karamat Hussain Niazi, secretary of the National Assembly, and Raja Muhammad Amin, secretary of the Senate, also signed the document as parliamentary officials.

What will happen to Islamic clauses of 1981  or in other words the Islamic clauses made in the era of General Zia-ul-Haq. Hudood ordinance has already been abolished in the Musharraf era. Thus it will be restored when 18th amendment will be abolished or these are few things which they are considering in the 18th amendment, related to the powers of Prime Minister and President. In that case Politicians are just doing it for their own sake without taking into consideration of the will, wishes and well being of the people. I am not saying here that hudood ordinance is or isn’t the will, wishes and well being of the people but generally, is everything will be abolished what Musharraf did or few things from his amendment.

Talking more about the religious laws, what about the Blasphemy law are they going to change it? I was listening to one of the high ranked Islamic scholars who is also a mufti that hudood ordinance under the law is accurate but the main problem is system. I would say first correct the system and then implement hudood ordinance. Similarly, if Blasphemy law is not implemented accurately then let’s correct the system first and the implement the law, otherwise we’ll end up with killing innocent people without any reason. Though I believe that before the law non-Muslims were killed without taking the name of this law and now they kill them by taking the name of Blasphemy law.

I would hope that after these amendments, politicians will be looking into the other problems, such as consumer protection rights, price control measures, law of institutions, and above all they will form a committee who will actually work and give some solution within a year that how to implement the laws, regulations in the country.

Put everything behind

2010-03-27T03:08:00.000-06:00

Put everything behind, do we have manners to speak in a forum or even do we have manners to talk one-to-one.

Talking of Kashmala and Dr. Fridous Ashiq Awan, Both Parliamentarians, live on TV, Dr Firdous abused Kashmala so much that Kashmala stopped syaing anything.

Two supporters of PPP at Machester TV were talking and suddenly one person started hitting other.

Similar kinds of incidents happen everyday in each city. Is it egoistic problem? Everyone wants to win a arguement. I know that everyone his/her own opinion and we should respect every opinion and listen to others quitely and tolerate even if we do not like the opinions. We can definitely disagree with the opinions but we should not start hitting others.

Another case which was recorded by The NEWS is;

Saturday, March 27, 2010

The civil judges of Lahore and Arifwala have requested for one month leave against slapping of a civil judge by a lawyer in Faisalabad whereas four additional session judges and ten civil judges have resigned in Depalpur.

Conclusion is;

Can we just talk in a good manner, I think it'll resolve some of the social problems in our culture.

I am sad today, very sad

2010-03-12T21:21:00.003-07:00

I am sad today. Why? Because there were 6 explosions at Allama Iqbal Town, Lahore and 2 at RA Bazaar, Cantt, Lahore. More than 50 people died on the spot and several injured. Where are we going. Who is leading these attacks. Who are these coward suiciders, brain washed by some, killing innocent people. Aren't they thinking what are they doing. Can't they think whether the people who asked them to do this have no agenda but the Kayos. Is our intelligence so weak that they cannot track these people. Does common person do not have basic awareness or common sense to report any suspecious activity or their duty is just to read news and abuse government and others. as Sohail Ahmed said "ainan nun Ted khurkan to ilaawa kam hi koi nahin".
Above all Mr Munawwar has given a remarkable statement that It is all done by Blackwater and Interior Minister is also involved with them conducting these attacks. I would jsut aks Mr Munawwar that does he has any evidence for it. He knows in Islam blaming anyone without evidence is wrong, when he knows that he is presdient of the largest Religious party of Pakistan and people listen to him. If he has evidence then why don't he show it to public so that everyone knows the culprits.
Who is doing this is the Big Que. Everyone has their own opinion but how do we stop them is the main question. Though most of the Pakistanis have the answer for this Que as well. Is it a good time for documentation. Documenting the records of each person living in the homeland, documenting the raw materials coming from and then who is purchasing it so that Govt or intelligence knows that who is buying what. Moreover people should be aware of what is happening in their area and instantly report any suspecious activity.
May Allah Bless or Country and us (ameen)

AID or Investment: Kerry – Lugar Bill and Pak – US Relationship

2009-10-15T03:12:00.000-06:00

Kerry Lugar Bill is nothing but another aid package from USA to Pakistan. However, this should not spend a penny out of it. This time it is different because of the relative independent media and better awareness of the nation on security issues of Pakistan. I would vote for democracy as well as media (hats off to both) who made this possible. Credit goes to Musharraf as well because the media got independence in his era, even though he was a dictator but quite a liberal person.

People are literally talking about the sovereignty of the country. Why? Because USA tried to make sure that none of the aid will be spend on army and other security forces. Interestingly, even then they are expecting that the army will continue their operations against the Talibans and Al-Qaeda and Pakistan Government will continue their support against war on terror with the help of Army and other security agencies. Remember this war was not ours and it was asked by USA is 2001 to support them and we’ve spent $35B+ (America claims that they gave $15B to Pakistan which includes the resnt for the barracks they used in Pakistan) on this war (according to the Government of Pakistan) and now it becomes the war of our existence. Now we are becoming target of those who were targeting Americans in the start. No doubt when the bill was made by Biden and Lugar initially and called it the Aid for civilians only, it sounds great but why do we need such clauses in the bill which shows that they do not trust Pakistani government and Pakistani army that it will be spend on what it is given for. More importantly why there is a need for “c(1) The government of Pakistan is continuing to cooperate with the united states in efforts to dismantle supplier relating to the acquisition of nuclear weapons – related materials, such as providing relevant information form or direct access to Pakistani nationals associated with such networks”.

Moreover, it is a clear cut open dictation to the Government of Pakistan when they say that they can waive the limitations applied on the army if there is a need but it has to go through from secretary of state under the orders of President of USA. What is this crap? This implies that Obama (US President) is a deciding that, money they are giving to us, how should be the money spend one each thing. So, he is a budget maker for the aid they are giving it to us.

I can think of only one thing right now. Do we need $1.5B per year with a huge balance of payments deficit? Do we need $1.5B only as an aid with so much clauses and restrictions? My answer is NO. I have two reasons;

1. If America is very very very interested in developing the better social sector of Pakistan such as schools and health, then why doesn’t she invest in the education and health sector in Pakistan? Even after giving aid they would send their consultants to study the appropriate areas of investing who will take away 20 percent of the aid. Why don’t they conduct that study on their own and then investment for the civilians? In that way they’ll have transparency and accountability. Greg Mortensson is one of those examples who build several schools in Pakistan.

2. Does aid is better than investment and the answer is again NO. When Mansha said that I’ll bring more investment in Pakistan than you are getting aid from this Kerry – Lugar Bill. Why don’t we want to give a chance to local person who is trying to do something? Though as an researcher I know that as an industrialists he’ll ask for several incentives but those would be better than the clauses of Kerry – Lugar Bill. May be after twenty years these industrialists will be counted among Gates, Ambani and Tata.

Everything above may or may not be very correct but after writing all this I am thinking that the congress of US has made something with “great sincerity” after consulting the administration of Pakistan and Lobbyists of Pakistan in the US and now Pakistani people are rejecting the bill. This will might hinders the relationship of Pakistan with US. However, as Kerry said we can amend it no problem so let’s do it.

It’s time now we should think first and then deliver, rather than deliver and then think. Thought at least we’ve started thinking.

Promoting Peace with Schools, Books: Greg Mortenson

2009-09-03T09:49:00.003-06:00

Monday 31 august 2009 was a fortunate day for me because I met a living legend Greg Motensson whose worked marked a sign of peace in Pakistan with a different angle. Q&A session from 2:00 pm – 4:00 pm organised by SLiCE was the kick off and contrary to my belief he was so humble after doing all the remarkable work in Pakistan and Afghanistan, at least I am surprised (pleasantly). Those who are still thinking who is this guy; he is the author of “Three Cups of Tea”. If you still do not know who he is, just go and do the Wikipedia.
Before going to my point which is a question to me here are the main points of what he said at the Montfort lecture.

He is a very shy guy and grew up in a mixed culture in East Africa.
In Islam education is necessary for both males and females.
The first word revealed on the Prophet (SAW) was “Iqra”, which means Read.
Whenever you go and meet with a person from different culture, always have a smile on your face, meet with humility.
Listen more than speak.
Educate females especially because if you educate one male you are education one individual but if you are educating one female then you are educating one community (African Proverb)
In Kunar Province in Afghanistan, people told him while pointing towards stones in the mountains that each stone represents those martyrs who fought against Russians, Talibans and other invaders but it’s now time to get rewards of those sacrifices by changing these stones into schools. His next book titles “Stones into Schools”.
Another interesting story he told us that when the book was first published the publisher insisted on the bottom statement that it should be “One man’s mission to fight terrorism one school at a time”. After discussing with others when he got the answer that publisher is right he told the publisher that if hard copy did not do well we’ll change it to “One Man’s mission to promote peace . . . One school at a time”. Hard copy did not do well and as promised the soft cover came out with the change title and it became number one seller. The next book’s title is “Stones into Schools: Promotes Peace with books not bombs in Afghanistan and Pakistan”.
Last but not the least he told the audience then he asked me and I endorsed him that in the Pashutns area which NWFP women takes whole burqa from head to toe when they are out of the house which in the western median consider to be suppression but in their homes they have good decision power, which means that they are not suppressed. I am glad he talked about it.

I agreed with him 99 percent but I have one issue which I asked him as well but his answer was female education and I did not agree with him. May be I’ll agree with him after some years. He told us that in Bangladesh female literacy has been three fold since 1971 and this is one of the main factors in reducing population growth rate. I asked him why it is not true then in Sri Lanka where the literacy rate in close to 100 percent. Moreover, in a male dominating society like Pakistan where males ask problems from a local “Moulvi” who is not a learned man and do not want females to go to schools. In this kind of society how do we promote female education? For example Talibans were so much against female education that they demolish 650 schools and 90 percent among those were female schools. My Question is how can we change the mindset; Greg Mortensson insisted that the answer lies in the female education but how…?

Do we have some duties

2009-08-25T03:43:00.001-06:00

We are a nation of 170+ million people. Out of 170+ million 50 percent (still an underestimate figure) are those who cannot eat properly three times a day, 54 percent are so called literacy rate. We are under immense pressure of eliminating terrorism from our country. Smuggling, shirking on the job and corruption are the core issues since independence. Market forces do not work properly because of insufficient implementation of regulation and lack of property rights.
We have same things each year to cry on. For Example bachat bazaars and Ramzan bazaars established by the government to provide relief to the common person have completely failed to provide relief to the masses. What does this mean that under high corrupt society and lack of proper governance we can’t think that intervention of government would be fruitful. What is missing here; Our role as a person in the society. What are we doing in the society. If seller is selling sugar for Rs.55/KG and we know the original rate is Rs. 45/KG then we are not doing our duty if we take sugar for Rs.55/KG and go home and abuse the government. We have certain duties as a nation to restrict that person to sell at a proper price. We need to tell the authorities about that person or at least do the “Chittar Parade” of that person who is doing black marketing.
We generally give an example of developed countries and the people of developed countries. For Example USA but we do not behave like the people of USA. Rather we do behave like them on the streets, while dancing and dressing and listening to English music or trying to speak English language or trying to be cool. But we do not take responsibilities as an individual in USA takes his responsibilities. IF we know our own responsibilities and we do our work properly then we can have a good collective society. But who cares…!

Free trade with open eyes

2009-08-02T17:16:00.000-06:00

Free trade is not beneficial for everyone. Some will be gainers and some will be losers. The gainers will compensate the losers. Under WTO safety nets program is just for this reason but who will take out from the pockets from gainers and who’ll give to the losers. Are we looking towards the government who is very inefficient due to high transaction cost including corruption and high maintained status quo and hierarchy? In the corruption index we are at number 10, though improved from number 9 last year but still among the most corrupt countries.
This is one problem which we might face under free trade. Another problem is that the losers will lose the job as well as money. If they get do not get required amount of money to live their standard life they’ll be deprived off what they were getting without free trade. Moreover, we are ignoring the component of satisfaction here. A person who was previously working is either unemployed or working at some place where he does not want to work. In other words his job satisfaction is zero compare to his/her previous job, hence the overall satisfaction. If the person remains unemployed for a longer period of time he thinks of many different thing including shake hands with the extremist element, become a thief or a dacoit. Thus unemployment is definitely a social evil which is very high right now in our country.
From the above can we conclude that unemployment or dissatisfaction from employment could be a big cause of terrorism? After all this do we need blind eye free trade or we need to see pros and cons of free trade for our own country, first solve those issues and then pursue for free trade.

BUDGET 2009-10 Brief Review: Desperate Voice of a Patriotic Pakistani

2009-07-14T17:38:00.001-06:00

BUDGET 2009-10 Brief Review: Desperate Voice of a Patriotic Pakistani

Though it’s very late to comment on the budget when the books are already written on it. I was surprised to see the budget figures and more surprised when I listen to the budget speech that there’s nothing in the budget except for some general figures and salary increase. Though our ranking have been improved from No. 9 to No. 10 in the Failed State Index but it is one of the biggest issue we need to address.
With a negative per capita growth (Dr Nadeem stated in his article in the Daily Times) we might have announced some policies for the manufacturers which help them investing in the country for the long run. There was no as such significant electricity policy was announced which can boost the confidence of investors. Instead after every weak a minister come on TV and said that the load shedding will be finished by the end of this year and there will be cut down on the load shedding in this month etc.
I was surprised not to see any inflation cut policy in the budget, unless IMF asked them to restrict their money supply at 10 percent for the next ten years. However, it would be a stabilization policy but we also need higher growth rate in the long run with lower inflation.
Money for the development projects mainly go into the projects of big cities. It was surprising to see that out of 150 billion PSDP budget for Punjab Assembly, 30 Billion will be spent on Lahore ring road only.
Industrial Clusters which is one of the important things to do was again neglected in the budget. Sahiwal and Sargodha are two examples of Dairy Clusters which we can build and people of that area will get employment in their own area. Moreover, it’s time to build more cities than having only five major cities. If we develop Sahiwal and Sargodha (for example) as the major cities of Pakistan the urbanization will grow. Urbanization will lead to more investment through development of infrastructure and communication systems. This will attract businesses to procure land in the developing area and set-up factories and offices. Employment will be increased when more businesses are established, which increase the quality of living standard.
Tax reforms are being done for the past several years. Due to those reforms direct tax share has increased and custom and excise duties are replaced by sales tax. But overall tax to GDP ratio has declined in the last decade. However, nothing was mentioned about the reforms in the budget. Now we really need to do four things at least; (1) try to increase the base (I know it’s a very general term), (2) Reduce corruption which affects our overall revenues (3) Introduce new taxes which do not harm middle class people and economic growth in the long run and (4) some reforms are also needed for the transparency of income tax returns.
The industrial policy should not be supply driven but we need to look into the demand side as well. Though investors and industrialists always ask for relief (tax cuts, subsidy etc) but there will be some other measures as well which they will ask. For Example, industrialists always complain the policy of exports such as lack of information sharing at every stage. Even the established industrialists complain about the non-availability of freight charges. In this era of IT it is very easy to put all these things online and update daily in the morning.
Terrorism is one the biggest issue Pakistan is facing. Army operation and having 2.5 million IDPs and then spending Rs. 50 billion is not the solution. There are few people who likes Taliban because if they have some issue to resolve they go to Taliban and get it resolved in days, thus they do not have to wait for years in courts. The unemployed people who do not have education praise/like Taliban who give them protection, employment, money and education. Patriotism is secondary thing if the country is not doing significant for the people of the country.
Now I would write something about the five major issues of Pakistan and I guess if we address them parallel to the other issues and try to solve it ASAP that would be the greatest thing for the people of Pakistan.
1. Property rights: It is such a big issue for the last 62 years and it is neglected as it is not present. Benami transactions, file transfers, not recording/registering the title of the land are the problem which should be addressed to reduce the transaction cost, corruption and fights on the properties.
2. Judicial System: We’ve such a great corrupt legal system that even a Stamp Paper vendor asked for bribe is someone goes to him for a stamp paper. For getting a stamp paper worth Rs. 10 sometimes we need to give him Rs.50 and even more depending on the worth of the person. Oath Commissioner sitting in the “Kutchery” of Islamabad asked for at least Rs.100 if someone needs him to sign a simple paper. Reader asks for money to put the file in line. Moreover, most of the people do not know when their case will be listened by the judge and they daily come to the courts in the morning and leave without anything in the evening. It is the worst place for poor people who come from the villages to those courts. It is very easy to send a letter at least two weeks earlier (so that there is no problem of delayed post) that your case will heard by the judge on this date at this time. Moreover, give a specific time for each case.
3. Clean drinking water: The 2nd necessity for life after air is not available in most of the rural areas of Pakistan. Even in Islamabad people use filter to filter the water before drinking it. The feasibility study was conducted in the Planning and development Division on the Filtration plants in each district and they setup in Islamabad as an experimental basis but no idea what happened after that. MNA, MPA and 13 Union Council representatives in each union council who were voted by the people of their area can do this simple task for their own people.
4. Health: Health sector needs special attention. Corruption is everywhere but this sector needs attention beyond corruption thing. As far as my little knowledge is concerned, we need more BHUs and District hospitals. Moreover, before that we need more doctors there, more nurses, more ambulances plus these should be present at all the times. It would be good if Doctors should get more pay than any ordinary government servant, which will be a good incentive to work. There is a special pay scale for the Atomic Energy people and we can introduce very special scale for the doctors as well. The more important thing is to give subsidy for health expenditures who cannot afford. To do this we need to adopt strict documentation procedure which can be done through either issuing social security number which has all the information of taxes, income from different sources, phone bill, electricity bill, credit cards, etc. Through this card it would be easier to identify the needy person.
5. Education: I guess we cannot do anything about this sector. The problem is very chronic. Teachers in the middle and high schools are in habit of giving sample test papers so that their students can pass. “Rattalization” policy is very efficient and effective in the middle and high schools. Free education for everyone till 10th grade or intermediate along with better facilities in school, low teacher student ratio, better pay to the teachers is one way to improve education system. Examination system should be changed from “rattalisation” to conceptualize the issue.
I guess it is a time to invest in these social issues and it is time that investors, intellectuals, policymakers, think tanks sit together and make a sound policy. I wish everyone best of Luck
Pakistan Zindabad

The ECO award of excellence

2009-06-23T19:25:00.004-06:00

The ECO award of excellence was conferred posthumously on Dr. A R Kemal of Pakistan in recognition of outstanding research and achievements and meritorious services in the field of development economics. Pakistan’s Ambassador in Iran, M. B. Abbasi received the award from President Hamid Karzai of Afghanistan here at an ECO award ceremony, which was attended by heads of state and government of ECO member states including President Asif Ali Zardari. Late Dr. A. R. Kemal was an eminent development economist. He held Masters Degrees in Economics from the Universities of Punjab and Stanford, and Doctorate from the University of Manchester. He served as Director of Pakistan Institute of Development Economics, Quaid‑e‑Azam University. He held key positions in various important organizations including Chief Economist, Planning Commission of Pakistan. He also remained editor of the Pakistan Development Review and consultant to a number of UN and international agencies. A profile writer, Dr, Kemal authored 12 books and over 200 research articles on the issues of economic and social development of Pakistan and the region.

Swat operation and IDPs

2009-05-21T02:31:00.001-06:00

Hey Folks
Some of you are aware of the situation of Malakand Dvision army operation in Pakistan against Talibans. This operation is carrying out in Swat, Buner and Dir Districts. The people of these areas have migrated to different parts of the country. The guess count according to UNHCR of these people are 2.2 million. Currently some of the places have been freed from Talibans and people started moving back to their own places, e.g., bajaur agency. These internally displaced people (IDPs) need our help. Pakistani government recently announce a Rs. 7 billion ($87 million) project for these IDPs. Moreover, people of Paksitan are also doing whatever they can do for our brothers in this difficult time.
As Overseas Pakistanis we have some responsibilities to collect or donate money for IDPs. Some of us gave to one of our friend "Ataullah" who went to Pakistan last week and now One of our other friend "Nasir" is leaving for Pakistan on June 1, 2009. If you want to donate money for IDPs there are few possibilities.1. Give it to me or Nasir and he'll give it to the people in the camps.
2. Give it to us and we'll ask our families to give it to affected people.
3. You can donate at the following organisations

“Prime Minister's Special Fund for Victims of Terrorism” has been changed to the following account number:
Account #: 1001003942
Routing/ABA #: 026004721
Swift: NBPAUS33
Checks made payable to the above account may be sent to the National Bank of Pakistan, 1875 Connecticut Ave. NW, Washington DC 20009 or to the Embassy of Pakistan, 3517 International Court, N.W. Washington, D.C. 20008.

Islamic Relief USA
6131 Orangethorpe Ave Ste 450
Buena Park, CA 90620(888) 479-4968http://cts.dundee.net/t/32179565/135213048/81105/0/info@irw.orgTax ID#: 95-4453134

Minhaj Welfare Foundation (MWF) UK Swat and Buner Appeal: Rehabilitation Programme for Internally Displaced People
To view our poster click: www.mwfuk.org/swat/swat_poster.jpg Read our English letter (includes donation form): www.mwfuk.org/swat/swat_ english.pdf Read our Urdu Letter: www.mwfuk.org/swat/swat_urdu.pdf FOR DONATIONS- By credit card please ring: 01282 723456- Please make cheques payable: MWF, 12 Carr Road, Nelson, Lancs, BB9 7JS
- Direct payment into bank account: Any branch of HSBC Sort Code 40-15-17 Account 21 65 18 03 Swift Code: MIDLGB22Iban No. GB95 MIDL 4015 1721 6518 03
- Please ring MWF Donation Hotline on [UK] (0)1282 723456

Prime Minister Fund for IDPs at Los Angeles
Name of Account: Consulate General of Pakistan, Los Angeles
Bank: Bank of America, N.A., P.O. Box 27025, Richmond, VA 23261-7025
Account #: 2260 0025 1361
For wire transfers: Routing No. 026-009593
Phone (LA) # 310.446.6695, 310.441.5145

Malakand Relief Society
Account Title: Muhammad AshrafAccount No: 0120018853 Branch Code: 0757Branch: Allied Bank Limited Chaklala Scheme III Rawalpindi
Phone (Pakistan) #: Muhammad Ashraf +92 333-9139708

M. Ali Kemal
PhD Student,
Department of Economics,
Colorado State University
Res: 970-492-9227
Cell: 970-690-2815

Recent Increase in Interest Rate by State Bank of Pakistan on Nov 12, 2008

2008-11-13T23:34:00.001-07:00

Several things are happening in the government whether they are done from Politicians, Senate, Governor State Bank or Bureaucrats. I was reading the news of 2-percent interest rate increase (13 to 15 percent), which was definitely a difficult decision and I was thinking that SBP should have done it before that.
However, I was thinking that our so called intellectuals are always ready to criticize the economic policies. By intellectuals I do not mean professional economists but those people who always appear in the TV talk shows and take calls of economists.
As written in one of the newspaper that according to bankers and business leaders it is done in response to the preconditions of IMF. This might show a negative image of government but if we look in other way that Government deliberately delayed increase in interest rate in view that IMF will have precondition and they’ll again ask us to increase interest rate.
Now we’ll come to another point. A TV talk show criticized the autonomy of SBP without knowing the background of the issue of autonomy of Central Bank which was started in 1983. The core objective is to control inflation at the minimum possible level. Autonomy to the Central Bank implies that the Governor’s primary objective is to control inflation irrespective of what is going on with the other variables including unemployment, GDP growth etc. Moreover, it is also important that the Governor should be conservative central banker who hates inflation.
In another article in the newspaper it is rightly mentioned that lawmakers criticized the government for bypassing parliament in accepting IMF conditionalties. It would have been nice if we decide these decisions in the parliament and senate and tell them the need or no need of loans either by IMF or other international funds and foreign countries. In this way we’ll build a proper system and we’ll educate our parliamentarians about the economic system as well. Another plus point of this system would be transparency if the loan taken and spending will be evaluated in the Senate and Parliament.
Finally, I was really surprised on the statements by several senators who, I guess, should know that point of autonomy. It is quite possible that this government would want to appoint their own Governor instead of Dr Shamshad as her first term is about to complete.
It is important to mention here that decrease in interest rate increase money supply which directly affects inflation in the long run. This long run could be one and half years to two years. Right now our overall average inflation is too high and this is mainly due to the policies of last government and we cannot ignore the fact that it could be due to interest rate decline two years ago. Increase in interest rate will not affect inflation instantly but it might take inflation one year to come down. Dr Shamshad did the right thing by increasing interest rate, though I believe that it should be done at least 6 months ago, considering inflation expectations.

Earthquake in Pakistan

2008-10-30T13:25:00.002-06:00

Dear folks

Pakistan is hit by a earthquake of 6.5 magnitude. The death toll has risen to 236 whereas 391 people were injured. The toll is expected to climb further. Pakistan army, FC, government, political parties and charity organizations are carrying out rescue operations in quake-hit areas. we appeal to you to extend your hand to the affectees in Pakistan.

There are several ways to help them one way to help them is in monetary terms and Zakat Foundation has set up a field office to distribute food packages and packages of blankets and warm clothes to these desperate people. Please make a donation to enable the Zakat Foundation to help the suffering people of Pakistan.

Food Package Items Quantity Unit Cost
Flour 10 kg $10.00
Rice 5 kg $8.00
Cooking Oil/Ghee 1 liter $2.00
Sugar 2 kg $1.00
Chana 2 kg $1.50
Tea .5 kg $1.00
TOTAL FOOD PACKAGE COST $23.50
Your donation of $2,500 will provide Food Packages for 100 needy families.
Your donation of $1,250 will provide Food Packages for 50 needy families.
Your donation of $625 will provide Food Packages for 25 needy families.
Your donation of $250 will provide Food Packages for 10 needy families.
Your donation of $100 will provide Food Packages for 4 needy families.

You can donate at http://www.thezakat.org/orhttp://www.erra.gov.pk/WebForms/NewsDetails.aspx?id=320

For further information email me at m.alikemal@gmail.com

Cheers

MAK

Recent Depreciation in Exchange Rate: Its Implications

2008-05-20T18:49:00.001-06:00

In few weeks Rs/$ exchange rate has shot up to above Rs.69/$ from Rs.62/$, which has some serious implications. Though people might say that these are only short term but as argued by Eichner (1979) that problems in short periods give rise to all the serious problems of the economy thus we cannot ignore the implications which could be very serious in the long run, e.g., with a high debt in dollars, increase in exchange rate means our debt in rupee terms has increased as well.
Increase in exchange rate directly affects prices through increase in prices of imported products, which may include food products. Indirectly it affects through increase in the bill (in Rs.) for oil. Prices of oil are creping up to $127/barrel, which is increasing cost of production and depreciation in exchange rate creates a double impact on the cost of production. Increase in cost of production thus increases the domestic prices. However, how much it will increase prices is a major question.
Increase in cost of production will decrease profitability and investment, which directly affects GDP. Decrease in investment affects employment generation as well, which decrease the wage rate because the unemployment will be involuntary.
Moreover, increase in prices lead to decrease in real wages, and decrease in the welfare level of the people. Decrease in purchasing power leads to decrease in consumption, which has the major share in GDP.
On the other hand, it is good to let exchange rate float in the market which was overvalued for the last three years at least. Because foreign exchange intervention in the open market has its on drawbacks. Theoretically, free float removes the imbalances in balance of payment but it can only be done if there are no market discrepancies but in a country like Pakistan we need to think it twice whether it is true or not given the current circumstances. There are certain other advantages of floating exchange rate, e.g., we can use monetary policy effectively, we do not need to change our trade policy very often etc.
However we need to think whether there is a need to stabilize exchange rate at some par value or within some range or let it float wherever it goes. Does stability in exchange rate in Pakistan has fruitful affects on economy or we need to know some threshold level of stability in exchange rate. In the presence of supply shock, e.g. oil price shock, can we keep exchange rate at some par value or within some range. Above all, Is there any pass – through effect of exchange rate on prices because Hyder and Shah (2004) concluded that there is a moderate effect of exchange rate on CPI but stronger in case of WPI.

Comments are always welcome

References

Eichner, A. S. (1979), “A Guide to Post Keynesian Economics”, Edited by A. S. Eichner, M. E. Sharper, INC, New York
Hyder, Z. and S. Shah (2004), “Exchange Rate Pass – Through to Domestic Prices in Pakistan, Working Paper #5, State Bank of Pakistan.

Democracy or no Democracy: Problems in Pakistan

2008-01-07T16:21:00.001-07:00

This answer is in reponse to the post of Akash Jai at Facebook http://www.facebook.com/topic.php?uid=19139865256&topic=3530

Commetns are welcome

Akash's post post reveals different problems which can be eliminated just through democracy. He is very right that we are fighting for out independence after getting indepence in 1947. He mentioned Think Tanks. As far my knowledge is concerned there are many think tanks working in Pakistan and working in their own capacity and I'll be rhetoric here that the policymakers do not listen to those think tanks. Even if they listen their policies are mostly based on their self interest. We, the people of Pakistan, vote the candidates that they'll represent us in the National Assembly but it is quite skeptical that in most of the villages people vote candidate who help those people in different problems or with fear. Feudals are holding most of the things in their hands. So called chaudaries, Waderas, Sardards and Khans are manipulating the things in their favour asking people to vote for certain candidate.Ayres writings are very optimistic about democracy... According to him Democracy is the best way to convince and teach people where they have lack of knowledge but in a country like Pakistan people do not want to listen to what others say. Poverty, Justice and Illiteracy are the three main problems in Pakistan which we need to point out. These three problems can be abolished by making policies in right direction and there should be continuity and consistency in policies.

PROPERTY RIGHTS AND CORRUPTION IN PAKISTAN

2008-01-05T16:51:00.000-07:00

Property rights are the core of economic development. Hernando Desoto argues that capitalism in America and Japan is successful because they have a good system of property rights, thus property rights are essential for the people to believe in the market system and capitalism cannot be successful without having proper property rights system in the country. Protection of property against expropriation is one important yardstick against which foreign investors assess the risk of investment. Thus we should have better system of property rights with lesser corruption to increase investment and achieve ten percent GDP growth rate[1].
Secured property rights reduce the insecurity of land. It also reduces the workload of the courts to settle disputes and credit availability to small farmers is easier due to property ownership. Moreover, it generates tax revenues and prevents cost and time overruns in development projects involving land acquisition. Thus property rights are inverse transaction cost and increase efficiency.
Pakistan’s property rights system has several anomalies such as benami transactions and general power of attorney. There are several loopholes in the system through which big landlords with the help of authority personals avoid/evade taxes and create a scenario where the third (any other) party remains deprived off using the land.
Corruption of authorities is an undeniable fact. Several cases of corruption are reported in Foqia Khan’s paper on Property right in Pakistan in the Lahore Development Authority (LDA), which is the main registration authority in Lahore. Authority personals ask for bribe to issue allotment letter for an already purchased plot, accessing a file, giving NOC etc.
Designing property rights is the most concerned thing because we need to take care of customs and social norms in Pakistan in designing the formal rules otherwise enforcement would be very difficult। Enforcement is the most important element after the rules have been made. The enforcement should be done by third party who is neutral and acceptable to both the parties (buyers and sellers).

Several problems including registration of title, non provision of legal successors in the records, oral declaration of gifts, under the Islamic law, and inherited land, petwari system, khewat based complicated system, and benami transactions.

Designing property rights is the most important step. One need to see at the increase in transaction cost, which can be financed through increase in revenues and setting up some funds for it[2]। Douglas C North argues that to get better outcomes we need to build formal laws based on cultural and social norms (informal constraints) and enforcement characteristics। Thus if people need to learn a totally different system then this might be the major informal constraint. Thus, it should be designed in such a way that the system would be formal, procedure remains the same and there should have third party enforcement which is neutral and acceptable to both parties. Third party enforcement in informal way will definitely reduce the transaction cost in the short run but in the long run in case of disputes the transaction cost will rise. On the other hand, doing it informally will reduce the potential revenues which a government can get otherwise. Thus formal third party enforcement is better as an enforcement agency.

Following are some of the points which can improve the property rights system in Pakistan. First ten points are take from PIDE Policy View Point Number 3.
1. Removal of obsolete and dysfunctional systems managed by Patwaris, Tehsildars, Tapedars, and Mukhtiarkars.
2. Set up a system of guaranteeing title to land rather than a system that merely serves the purpose of registration of documents.
3. GIS is a good way of enabling quick and efficient recording of title transfers. Though it will be expensive initially but it can be financed through increased tax revenues and setting up special fund for this purpose.
4. There is a need to establish a centralized land registry system in the form of a central registration of title of the most expensive and commercially attractive land, which should be Excise and Taxation Department (ETD) in the provincial governments.
5. There should be a requirement for compulsory registration of all documents relating to property including sale agreements, declaration of gifts, awards, transfers, and powers of attorney.
6. General Powers of Attorney should be abolished altogether [PIDE Policy Viewpoint (2007)].
7. Benami transactions should be declared unlawful [PIDE Policy Viewpoint (2007)].
8. Any suit with respect to any immovable property should be compulsorily registered with the Registrar of the High Court. The Registration Act and the Stamp Duty Act should be amended to reflect this. Moreover, by linking court records to the computer database of the Registrar, prospective buyers would be informed that the property is under litigation.
9. Simultaneously, the government could start a process of converting presumptive titles into exclusive titles after preparing draft lists that would be open to public inspection for a period of 6 months, during which objections and disputes would be settled.
10. One of the main reasons for the long delays in settling title disputes in the courts of law is the system of multiple appeals and revisions even in the case of a small property dispute. This system must be replaced by one in which a party in a civil claim does not have a right of more than one appeal. The final court of appeal should be the High Court, and not the Supreme Court, since property is a provincial subject.
11. Torrens system of land titling is a parcel based system, which is followed in the rural areas and is very successful in Australia[3]. Following this system people may not need to know entirely new system, which helps in reducing the transaction cost initially.
12. One of the main problems identified in Section III was that main emphasis of the registration process is on the identification of parties instead of identification of property. Thus an authority needs to check the existence of property before getting sign the contract between the parties and should not put ask the party to check the authenticity of the existence of property. This evolves the issue of enforcement which should be formal system and done by the registration authority who are registering the titles.
13.The enforcement authority should endure the legality of transaction, actual price of the property and buyer should pay the total amount to the seller as well as revenues to the revenue authority.

Third party enforcement is a better idea for having good property rights law but pertaining to current system of development authorities or revenue boards it is extremely unlikely that it is going to happen on fair basis. Fair role of enforcement authority, i.e., they should treat everyone equally and in a justified way. Moreover, we need to change our habits and role of individual behavior is very important for it. Unless enforcement authority does not do their work with honesty and sincerity, people will not believe in the system and the mindset of the people will not be changed. On the other hand if the individual behavior (mindset) and habits are changed that each individual do not bribe the authorities to have their work done, then the corruption will definitely decrease. Some authors find that (1) it may be optimal to allow some corruption and not enforce property rights fully; (2) less developed economies may choose lower levels of property right enforcement and more corruption; and (3) there may exist a 'free-lunch' such that over a certain range it is possible simultaneously to reduce corruption, increase investment, and achieve a better allocation of talent

Titling and registration of property rights in a formal way, coherent with informal constraints, would definitely increase corruption in short run, i.e., in the period of transition. But in the long run when the system is setup we can hope that the extent of corruption will decrease. Most important, if the punishment and enforcement of punishment for taking and giving bribe is very strong then people and authorities would fear of punishment and corruption will be reduced. This would change the habits and behavior of the people.

[1] This issue was discussed, among other issues, in the PIDE-LUMS seminar on “Law and Economics” in June 2006

[2] PIDE Policy Viewpoint (2007) available at www.pide.org.pk.

[3] Foqia Khan’s Paper on Taxonomy and Immovable Property Right in Pakistan.

Composition and tax efforts in Pakistan

2007-11-28T16:02:00.000-07:00

Like many developing countries, Pakistan also has very low tax – GDP ratio and mostly relies on consumption taxes. Large majority remain out of tax net because of overall low average incomes. Low revenue collection then results in inflation tax as an alternative to raise revenues. Various programs with IMF has special focus on tax reforms including improved tax governance, increasing share of direct taxes, expanding the tax net, imposition of sales tax on wider scales and improving the tax elasticity and buoyancy. Tax reforms efforts since 1990s are quite visible from significant increase of the share of direct tax in total tax revenues (17.3 percent in 1990-91 and 29.4 percent in 2005-06) and share of sales tax in total tax revenues (15.4 percent in 1990-91 and 41.3 percent in 2005-06). Despite visible changes in tax structure of Pakistan, total tax – GDP ratio is little above 12 percent.

Share of indirect taxes in total tax revenues is more than direct taxes, however, since 1990-91 this trend is moving in opposite direction, i.e., share of indirect taxes in total tax revenue was 82 percent in 1990-91 which is now reduced to 68.5 percent. Direct tax is comprised of income tax mainly. Share of direct taxes in total tax revenues has been substantially increasing from under 20 percent to 31.5 percent since 1990-91. The sole contribution is through income taxes, i.e., 93 percent of the total direct taxes in 2005-06. Indirect taxes are comprised of sales tax, custom duties and federal excise tax. After the structural adjustment program in 1987-88 Pakistan has started reducing custom duties (50.4 percent in 1987-88 and 19.4 percent in 2005-06). Custom duties were replaced by sales tax, which increased from 11.6 percent of total tax revenues in 1987-99 to 41.3 percent of total tax revenues in 2005-06. Share of excise tax has also declined to 7.7 percent of total tax revenues in 2005-06 from 22.3 percent of total tax revenues in 1987-88.

It is generally believe that sales tax is a regressive tax but a rigorous study by Sadia Refaqat in 2005 published in Pakistan Development Review concluded that sales tax in Pakistan is not clearly a regressive tax, however 1990s reforms are slightly welfare reducing because sales tax on items such as vegetable ghee, sugar and basic fuels are hurting poor. This is also stated in a study by Faiz Bilquees in 2004 published in the Pakistan Developmetn Review that introduction of sales tax on the petroleum products, gas and electricity directly affects the consumption of poor because they lowered the consumption of other goods. Contrary to this it is theoretically proved that sales tax is difficult to avoid/evade thus to improve efficiency and equity sales tax/VAT is better tax than other.

In my recent study on the long run determinants of tax efforts, I concluded that per capita income and sectoral share of value added sectors are the main determinants of long run tax efforts in Pakistan. However, increase in revenues from sales tax is due to inclusion of new products under the sales tax net. It is also concluded that indirect taxes are difficult to evade.