DOES FOREIGN AID HELP TO ACHIEVE ECONOMIC STABILITY

Every nation on this planet covets progress and development in every field of life. But, it is also a reality that while some countries are making huge headways in the realm of progress and development, others are still grappling with extreme poverty. Latest data suggest that nearly 1.3 billion people live in extreme poverty — less than $1.25 a day. There are many countries in the world that do not possess ample resources to feed their populations. So, they have to depend on aids and grants from developed countries or international financial institutions.

In today’s globalized world, every nation-state needs to maintain trade relations with other nation-states in order to run the country’s affairs. For this, they need also to depend on development banks, international donor agencies and other financial institutions so that inter-state trade and relations fare as per the norms of international law and a fairness in the deals is maintained.

Developing countries like Pakistan in their struggle for self-reliance need international assistance and foreign investment so as to fund the development projects in the country. Historically, the countries which got freedom from the colonial powers remained dependent on the developed countries except those which realized the need of making developments by relying on themselves rather than on foreign aid and loans. Unfortunately, successive governments in Pakistan resorted to running the country on foreign loans and aid. Consequently, the country is tangled in an intricate web of debt burden and deficit financing.

At present, Pakistan is the third largest debt-recipient country in the region. Its external debts have reached 33 percent of the GDP as compared to India’s 15 percent and China’s 7 percent.

When Pakistan became independent in 1947, it had meager resources and establishment of basic infrastructure was the biggest challenge for the nascent state. Moreover, the looming threat of Indian hegemony was also aggravating the situation. So, Pakistan reached USA for military and economic assistance and because of these factors, the country joined the capitalist bloc in Cold War era. From the very beginning, Pakistan’s growth model had been based on foreign dependence rather than capital accumulation from within the country. This policy led to increase in debt and a greater import-export imbalance. Economic policies adopted by successive governments were pro-rich; for example, Ayub Khan opted for trickle-down policies that only increased the gap between the haves and have-nots. This policy impeded country’s process of raising its own capital and reforming the tax regime. Although a lot of foreign capital was available, the rich as well as those in power did not bother taxing themselves. So, the governments had to rely heavily on indirect taxation which caused more poverty and further burdened the poor.

Foreign loans and grants always come with certain conditions that, in effect, means the country at the receiving end must not only bear an increased debt burden but also has to follow some conditions. Hence, such a loan is like a double-edged sword as it, on the one hand, fails in sufficiently fulfilling the needs of the recipient country while further piles up the debt, on the other. The incumbent PML-N government is also treading the same beaten track and is relying heavily on foreign lending which would causes more problems. The government needs to increase tax base by improving taxation system and imposing direct taxes to the rich landlords and big businessmen. Like its predecessors, the present government is trying to increase its revenue through indirect taxes. Nothing solid has been done in order to strengthen Federal Board of Revenue (FBR) where corruption prevails and an utter disregard to merit and consistency in policies is taking a heavy toll on country’s economy.

The government needs to introduce radical reforms and carve out prudent, pragmatic policies. Following suggestions may be instructive in this regard:

1. Country’s defence expenditure should be reduced as in this modern world of nuclear warfare having large arsenal of conventional weapons is not a wise option.

2. Pakistan’s economy is reeling under the claws of the elite of the country and this class is also at the helm of country’s affairs. Whenever an attempt is made to broaden the tax net, only a few privileged individuals become hurdle and thwart the emergence of progressive taxation. Unless these handful of people are meritedly taxed, the economy cannot improve.

3. Big landlords do not pay taxes on their incomes. Although, laws on agriculture tax have been imposed by the provincial governments yet it those are too weak and are like a nose of wax. Moreover, some landlords are out of tax net and exploiting their clout at the local level, they do not pay Abiana/ Water rate or other government dues. Hence, a stricter implementation of law is the most pressing need of the hour.

4. Pakistan’s tax machinery is weak and collects only a paltry amount in direct taxes whereas corruption is also rampant in it. The Tax Amnesty Schemes launched by different governments have failed to get the desire results. Radical reforms in this realm are direly needed.

Pakistan’s aid dependence is rooted in the very structure of the economy. It has been shaped by an institutional framework that restricts the process of savings and investments to the elite. Therefore, aid dependence can be overcome only by restructuring the economy through an institutional change that enables the middle class and the poor to participate in the process of savings, investment and innovation.