KHALID ABBAS SAIF
FAISALABAD (March 11 2010): Economists have suggested that fiscal incentives should be provided to the returning Pakistani migrants who wish to set up small and/or medium-scale businesses.
In a study titled 'Remittances and Household Welfare', prepared by Vaqar Ahmed, Deputy Chief of Macroeconomics Section of Planning Commission of Pakistan; Guntur Sugiyarto, Economist, Development Indicators and Policy Research Division, Economics and Research Department, Asian Development Bank, and Shikha Jha, Senior Economist, Macroeconomics and Finance Research Division, Economics and Research Department, ADB, observed that these incentives may take the form of tax breaks, or other related initial concessions.
Second, to ensure future remittances cash flows, a special exchange rate may be offered on remittances arriving in special savings accounts in domestic financial institutions.
Third, the banking sector should be more proactive to increase the speed and certainty of remittance transactions to encourage more migrants to send their money through official banking channels, they added.
The economists said that this step would help in the development of the financial sector in the economy and contribute to the stability of macroeconomic fundamentals, in particular the balance of payments. It is also a challenge for the government to make remittances more redistributive by making the tax system more progressive to help low income households. It is important to note, however, that the tax structure, related to remittances, should provide incentives for migrants to send more through the formal channels. This may require amendments to the current Income Tax Ordinance, they added.
They pointed out that the challenge for Pakistan is to channel the remittance flows toward long-term investments that can contribute toward sustained growth in the real sector, while at the same time leveraging the economy away from consumption-led growth. In this regard, several key measures that have been seen across the developing world have also been considered for Pakistan. It is also a challenge for the government to make remittances more redistributive by making the tax system more progressive to help low-income households. It is important to note however that the tax structure related to remittances should provide incentives for migrants to send more through the formal channels. This may require amendments to the current Income Tax Ordinance.
In "Key Findings and Policy Implications", Economists revealed that with around two million Pakistani migrants in the Gulf region and almost the same number spread in North America, UK, and other countries, remittances from abroad have contributed significantly to the economy. The current contribution of foreign remittances is more than 4percent of GDP, and in some periods, they have become the major source of foreign exchange reserves. This paper examines the impact of remittances on the macro economy and household welfare in Pakistan using a CGE model and micro-econometric analysis. They said that the first approach is to highlight the macroeconomic and distributional effects of a reduction in remittances, while the second method is to show how remittances decrease the probability of being poor and affect the household consumption expenditure and hence poverty.
They pointed out the key findings are as follows:
(i) Descriptive analysis from survey data indicates that the mean income of a migrant household is 17.3 higher than a non-migrant household. The share of remittances in the total income increases as the household moves to a higher income group. Remittances also contribute more to rural household incomes than to urban household incomes. The share of remittances in rural households increased from 3 percent to 5 percent during 2002-06, while in urban areas it remained stable at around 4 percent. Regional characteristics also affect significantly the pattern of migration and therefore the flows of remittances in Pakistan.
(ii) The CGE simulation analysis shos that a 50 percent reduction in remittances adversely impacts real GDP growth by -0.74, real investment by -7.7percent, and total household consumption by -2.8 percent. As a result, poverty headc ount increases by 6.35 percent.
The reductions in consumption levels of rural non-farm and landless agricultural households shows the largest cut because of the remittance drop.
The poverty impact is much stronger in rural than urban areas, showing the stronger link between migration/remittance and poverty in rural compared to urban areas. This further highlights that many migrants from Pakistan are still low-skilled workers coming from agricultural backgrounds.
(iii) Results show that the probability of becoming poor declines by 12.7 percent if the household receives remittances from abroad. An increase in the household size and number of persons with secondary education lead to an increase in the probability of household member migrating. On the other hand, increasing the number of males over 15 years of age, living in urban areas, and having more household members with university education lead to a decrease in the probability of the household member going abroad.
(iv) The shares of household expenditures on food, education, clothing, and recreation increase with the availability of remittances. The predicted mean expenditure of migrant households is 41 percent higher than nonmigrant households. The highest increase is in the expenditure share on durables, ie, 74 percent. The budget share for education increases only by 2.9 percent for migrant households.
(v) The poverty headcount ratio and Gini coefficient decline by 7.8 percent and 4.8 percent, respectively, for households receiving remittances. Due to the global financial crisis, developing countries such as Pakistan, have witnessed a brief reverse migration following the laying off of workers abroad due to business closures and a general lack of demand. Pakistani overseas workers have returned home with their accumulated savings that increased remittance flows.
Furthermore, according to the Study, statistics shows the poverty estimates for both migrant and non-migrant households. The results suggest that poverty declines by 7.8 percent if the households receive remittances from abroad. This substantial reduction in poverty level signifies the importance of remittances received by households in Pakistan.
Similarly, the poverty gap and poverty severity also decline even by higher rates, ie, 11.5 percent and 14.9 percent, respectively. This implies that some of the remittance recipients are actually the poor households so that remittances reduce the poverty gap and poverty severity. Moreover, the income distribution of migrant households is actually better than non-migrant households. The Gini coefficient of migrant household is 4.8 percent lower than non-migrant households, study report said.
Copyright Business Recorder, 2010
Showing posts with label tax. Show all posts
Showing posts with label tax. Show all posts
Monday, March 15, 2010
Sunday, January 10, 2010
The great divide (on Inequality)
From Business Recorder 8-01-2010
Huzaima Bukhari and Dr Ikramul Haq
A number of informative - though highly disturbing studies - conducted by the Centre for Research on Poverty and Income Distribution (CRPID, www.crpid.org), confirm that rich-poor divide in Pakistan is increasing alarmingly. According to conservative estimates, 63% of the poor in Pakistan are in the category of 'transitory poor'. The rest of the 32% and 5% of the population - subsisting below the poverty line - are 'chronic' and 'extremely poor', respectively. Chronic and extremely poor are those households that are always below the poverty line, all the time during a defined period. Similarly, on the other side, 13% and 21% of the total non-poor (above the poverty-line) have been classified as 'transitory vulnerable' and 'transitory non-poor', respectively.
This portrays an alarming situation as more and more people are moving from the transitory category to the chronic category, courtesy regressive taxation leading to inequitable distribution of income and wealth, monopoly over assets by a few, and wasteful expending by the government. Rulers in Pakistan since 1948 have shown extreme apathy towards the poor. They are not at all interested to make Pakistan an egalitarian society - providing economic justice to all. One wonders if the present government, badly trapped by the forces that matter in the land in various non-issues, is cognizant of this state of affairs and devising some practical means to overcome it.
Political economy is the theory of wealth and of how wealth is created and shared within the society. Its key concepts are production, distribution, exchange, and consumption. Historically, the political economy is a response to the rise of capitalism and capitalist society. Its concepts are refined, redefined and added to as capitalism progresses from the mercantile or merchant capitalism of the sixteenth and seventeenth centuries, to the agricultural and manufacturing capitalism of the eighteenth century, to the industrial capitalism of the nineteenth century, from the rise of a unipolar world power, to quest for monopolies in the 21st century.
Unfortunately, nobody in Pakistan has conducted a comprehensive research to determine all the dimensions of the rich-poor divide. Different studies (notably that of late A. R. Kamal and Talat Anwar) provide estimates of various inequality indices in Pakistan, wherein the Lorenz Curve and Gini Coefficients, have been most commonly used. According to Mr. A.R. Kamal, studies on income inequality in Pakistan show different estimates arising due to the following five important factors. Firstly, 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 in 2000-2007 had been the maximum compared to any time period in the history of Pakistan. The poorest 30% lost their share, while the richest 20% gained in both the urban and rural areas during the Musharraf-Shaukat era.
The Gini Coefficient is named after Corrado Gini, an Italian economist who published it in 1912. The Gini Coefficient is derived from a statistical formula and expresses the degree of evenness or unevenness of any set of numbers as a number between 0 and 1. A Gini Coefficient of 0 would indicate equal income for all earners. A Gini Coefficient of 1 would mean that one person had all the income and nobody else had any. Thus, lower Gini Coefficients indicate more equitable distribution of wealth in a society, while higher Gini Coefficients mean that wealth is concentrated in the hands of fewer people. Sometimes, the Gini Coefficient is multiplied by 100 and expressed as a percentage between 0 and 100. This is called the "Gini Index". Pakistan's latest position, vis-୶is some selected nations, is illustrated in the Table.
According to UN Official report, from 1987-99 the Gini Coefficient for Pakistan was in the range of 0.33 to 0.43, which deteriorated to 0.68 in 2006, yet Musharraf and his "technocrat team" (sic) keep on claiming a wonderful 'economic turnaround" during the PML(Q) regime. It is a national shame and disgrace; for their insensitivity, indifference and apathy towards the poor masses of Pakistan for which, history will never forgive them.
Inequalities in income in Pakistan, as elsewhere, largely reflect inequalities in the distribution of assets. Since the poor have virtually no assets and the lower middle class own very few assets, income distribution is skewed. Distribution of state land; development of plots and houses for the common man at affordable prices and installments; 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 (much-publicized 'Benazir Income Support Programme' or 'Khushal Fund'!) is simply hopeless - due to various weaknesses, even the allocated funds have not been distributed or are mis-utilised.
The income inequalities in Pakistan have increased sharply during the last 8 years and the trend continues unabated, despite tall claims (sic) of poverty reduction. The main factors that govern personal income distribution include: distribution of assets; functional income distribution; transfers from other households, government and rest of the world; and tax and expenditure structure of the government. The single most devastating factor for increased income and wealth inequalities remains the regressive tax system. Incidents of tax on the poor during the last 10 years has increased substantively (35%) while the rich are paying no tax on their colossal income and wealth. A study of Pakistan from this political economy perspective is very crucial as our society is fast moving towards dehumanizing characteristics, unfettered and unchallenged. We are facing economic disparities, starvations, scarcity of eatables, and lack of essentials services. The Great Divide in today's Pakistan between the rich and the poor is assuming alarming proportions and may eventually lead to civil commotion, if curative measures are not taken immediately.
(The writers, tax lawyers, are visiting Professors at Lahore University of Management Sciences (LUMS)
===================================================
Table: List of recent Gini Indexes for a select
group of nations
===================================================
Japan 14.9 United Kingdom 23.0
Sweden 21.0 Iran 41.0
Germany 22.3 United States 46.6
France 32.7 Argentina 52.2
Pakistan 68.0 Mexico 54.6
Canada 23.1 South Africa 57.8
Switzerland 21.1 Namibia 70.7
===================================================
Source: US State Department report (2008)
Huzaima Bukhari and Dr Ikramul Haq
A number of informative - though highly disturbing studies - conducted by the Centre for Research on Poverty and Income Distribution (CRPID, www.crpid.org), confirm that rich-poor divide in Pakistan is increasing alarmingly. According to conservative estimates, 63% of the poor in Pakistan are in the category of 'transitory poor'. The rest of the 32% and 5% of the population - subsisting below the poverty line - are 'chronic' and 'extremely poor', respectively. Chronic and extremely poor are those households that are always below the poverty line, all the time during a defined period. Similarly, on the other side, 13% and 21% of the total non-poor (above the poverty-line) have been classified as 'transitory vulnerable' and 'transitory non-poor', respectively.
This portrays an alarming situation as more and more people are moving from the transitory category to the chronic category, courtesy regressive taxation leading to inequitable distribution of income and wealth, monopoly over assets by a few, and wasteful expending by the government. Rulers in Pakistan since 1948 have shown extreme apathy towards the poor. They are not at all interested to make Pakistan an egalitarian society - providing economic justice to all. One wonders if the present government, badly trapped by the forces that matter in the land in various non-issues, is cognizant of this state of affairs and devising some practical means to overcome it.
Political economy is the theory of wealth and of how wealth is created and shared within the society. Its key concepts are production, distribution, exchange, and consumption. Historically, the political economy is a response to the rise of capitalism and capitalist society. Its concepts are refined, redefined and added to as capitalism progresses from the mercantile or merchant capitalism of the sixteenth and seventeenth centuries, to the agricultural and manufacturing capitalism of the eighteenth century, to the industrial capitalism of the nineteenth century, from the rise of a unipolar world power, to quest for monopolies in the 21st century.
Unfortunately, nobody in Pakistan has conducted a comprehensive research to determine all the dimensions of the rich-poor divide. Different studies (notably that of late A. R. Kamal and Talat Anwar) provide estimates of various inequality indices in Pakistan, wherein the Lorenz Curve and Gini Coefficients, have been most commonly used. According to Mr. A.R. Kamal, studies on income inequality in Pakistan show different estimates arising due to the following five important factors. Firstly, 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 in 2000-2007 had been the maximum compared to any time period in the history of Pakistan. The poorest 30% lost their share, while the richest 20% gained in both the urban and rural areas during the Musharraf-Shaukat era.
The Gini Coefficient is named after Corrado Gini, an Italian economist who published it in 1912. The Gini Coefficient is derived from a statistical formula and expresses the degree of evenness or unevenness of any set of numbers as a number between 0 and 1. A Gini Coefficient of 0 would indicate equal income for all earners. A Gini Coefficient of 1 would mean that one person had all the income and nobody else had any. Thus, lower Gini Coefficients indicate more equitable distribution of wealth in a society, while higher Gini Coefficients mean that wealth is concentrated in the hands of fewer people. Sometimes, the Gini Coefficient is multiplied by 100 and expressed as a percentage between 0 and 100. This is called the "Gini Index". Pakistan's latest position, vis-୶is some selected nations, is illustrated in the Table.
According to UN Official report, from 1987-99 the Gini Coefficient for Pakistan was in the range of 0.33 to 0.43, which deteriorated to 0.68 in 2006, yet Musharraf and his "technocrat team" (sic) keep on claiming a wonderful 'economic turnaround" during the PML(Q) regime. It is a national shame and disgrace; for their insensitivity, indifference and apathy towards the poor masses of Pakistan for which, history will never forgive them.
Inequalities in income in Pakistan, as elsewhere, largely reflect inequalities in the distribution of assets. Since the poor have virtually no assets and the lower middle class own very few assets, income distribution is skewed. Distribution of state land; development of plots and houses for the common man at affordable prices and installments; 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 (much-publicized 'Benazir Income Support Programme' or 'Khushal Fund'!) is simply hopeless - due to various weaknesses, even the allocated funds have not been distributed or are mis-utilised.
The income inequalities in Pakistan have increased sharply during the last 8 years and the trend continues unabated, despite tall claims (sic) of poverty reduction. The main factors that govern personal income distribution include: distribution of assets; functional income distribution; transfers from other households, government and rest of the world; and tax and expenditure structure of the government. The single most devastating factor for increased income and wealth inequalities remains the regressive tax system. Incidents of tax on the poor during the last 10 years has increased substantively (35%) while the rich are paying no tax on their colossal income and wealth. A study of Pakistan from this political economy perspective is very crucial as our society is fast moving towards dehumanizing characteristics, unfettered and unchallenged. We are facing economic disparities, starvations, scarcity of eatables, and lack of essentials services. The Great Divide in today's Pakistan between the rich and the poor is assuming alarming proportions and may eventually lead to civil commotion, if curative measures are not taken immediately.
(The writers, tax lawyers, are visiting Professors at Lahore University of Management Sciences (LUMS)
===================================================
Table: List of recent Gini Indexes for a select
group of nations
===================================================
Japan 14.9 United Kingdom 23.0
Sweden 21.0 Iran 41.0
Germany 22.3 United States 46.6
France 32.7 Argentina 52.2
Pakistan 68.0 Mexico 54.6
Canada 23.1 South Africa 57.8
Switzerland 21.1 Namibia 70.7
===================================================
Source: US State Department report (2008)
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