CONTENTS:

• A Citizen's View of the Budget
• Market Economy and Good Governance
• Does Prosperity Depend on Education?
• Urdu Translation of "The Adventures of Jonathan Gullible: A Free-Market Odyssey"
• Letters
• FreePakistan News Briefs

A CITIZEN'S VIEW OF THE BUDGET
By S M F Hassan

The State Bank governor in a post-budget seminar in Lahore on June 11 revealed that 70 per cent of development budget was being misappropriated by the executing agencies and only 30 per cent was actually spent on the specified projects. He admitted that there was no possibility of any visible improvement in the quality of the life of the people during the next ten years.

If this is the reality, then what is the wisdom in draining the last drop of people's blood by collecting 72 per cent of total revenue - against 30 per cent in countries of sound economies - through indirect taxes and allocate Rs 160 billion for development and Rs 190 billion for poverty alleviation during the next year.

It would have much better if indirect taxes could have been reduced by granting direct relief to the common man through reduction in levies on electricity, gas, petrol, medicines and subsidizing, price of flour, pulses and edible oils, as is done even by rich countries of Europe and America. This would have enhanced the purchasing power of the people, increasing demand for goods and services, thus encouraging the private sector to meet this additional demand by expansion in industry, commerce and employment. More employment would have further augmented the purchasing power of the people, generating more demand for goods and services and creating a reproductive cycle of more purchasing power, more production and more employment in private sector without wasting 70 per cent in public sector.
[Courtesy: News Post, The News June 19, 2003]

MARKET ECONOMY AND GOOD GOVERNANCE
By Noor Fatima
[In a prestigious English daily, an article suggests how to achieve prosperity by adopting "market friendly" measures to finance a (sort of) 'redistributive state.']

In recent years, many developed and developing countries have begun to re-evaluate the role of governments and the political-administrative relationship has been re-defined which has given birth to the concept of good governance which ensures greater accountability and transparency.

The good governance is "the manner by which power is exercised in the management of economic and social resources for development". For the World Bank, it is synonymous with sound development management. The bank has shifted towards development side because it realized that projects financed by it, although technically sound, fail to deliver the expected results due to bad governance. Now the good governance is considered as an essential complement to sound economic policies.

Mature institutional frameworks take a great deal of time to develop but that is no guarantee that arrangements that are supportive of economic growth and poverty alleviation will, in fact, emerge. Why do some states behave differently from others? What are the conditions that permit success? Economists argue that institutions defined as the rules of the game in a society determine the performance of economies.

The absence of good governance has proven to be particularly damaging to the "corrective intervention" role of government. Programs for poverty alleviation and environment protection can be undermined by lack of public accountability, corruption, lack of adequate information and controlling of public services by elite class.

Mainly, a market economy should achieve three transitional targets: high output to allow high level of consumption, an adequate amount of public goods assured by the government and maintenance of existing real capital. These transitional targets need good governance and flow of information. The following four dimensions of good governance are crucial in transformation of economy: public sector management; accountability; predictability and the legal framework for development; information and transparency

MANAGEMENT:
Pakistan's economic revival needs a faster growth which requires an attractive investment climate. This in turn requires a stable macro-economic environment, good governance, provided by efficient governance. A government plays a key role in the provision of public goods, attracting foreign investment, promoting private sector and facing strategic challenges resulting from globalization. It is also responsible for security, foreign policy, defense, police, education, basic infrastructure, and social security; and strong legal framework for enforceability of contracts and agreements which is indispensable for promotion of investment and growth.

Even in societies, which are highly market-oriented, only government can provide two sorts of public goods: rules to make markets work efficiently and corrective interventions. Without strong institutions and supportive framework of the state to create and enforce the rule, to establish law and order and to ensure property right, production and investment will be deterred and development hindered, because of high "transaction costs".

Economic history shows that only economic and political freedom in combination with stable institutions allows the achievement of suitable prosperity. As in the 70's, governments relied on and rushed into unwise policies and interventions which often were responsible for market failure and investment did not yield adequate returns.

Though, governments now increasingly recognize the need for more restraint and for taking "market friendly" steps particularly to influence the allocation of resources, which means making decisions about how to employ given resources for competing ends. There is an important international dimension of government and markets, when such services are directed to the poor and are not forthcoming from the private sector. Essential goods and services ensured by governments like skilled labor and adequate infrastructure are fundamental to the quality of investment and development.

While these activities involve the use of resources, and agents for collection of revenues, a government has to put tax and regulations to avoid market failure. The public sector in developing counties has been characterized by uneven revenue collection, poor expenditure control and management, underpaid civil service, large parastatal sector, etc. The measure of good governance is heavily concentrated on public expenditure management, civil services, decentralization and tax reform.

Taxes are main source for revenue for delivering public goods. On the other hand it is a source of important constraints. People will aggressively avoid paying taxes and obeying rules and regulation if government does not clarify the reason that why these taxes and regulations are required. Moreover, there is no denial of the fact that income distribution, which builds up in the marketplace, is not in line with the political goals.

In redistribution of the income, caution is to be taken that high and progressive taxes are likely to contribute to capital outflows and reduced economic growth. This will therefore, reduce motivation to work and to save. Pakistan's tax system is suffering typically with such type of problems. Our tax administration had been lagging behind, though recently started to re-pick which includes setting the large tax payers unit measure for improvement of services for tax payers and development of tax payers friendly administration.

In addition to that, keeping the challenges of the market economy in view, the public perception of the state of governance is being improved. Reforms in the key public institutions such as the State Bank have been initiated. Establishing and strengthening the regulatory bodies, such as Nepra, Pemra, PTA and OGRA is the outcome of these reforms to build and promote the trust of investors in Pakistan. Implementation of such reforms will improve the public's perception of the state of governance, though Pakistan still ranks in the low in field.

PREDICTABILITY:
The "rule of law" is a comprehensive concept. In the context of economy the most important element of the rule of law is the provision of an efficient system for the enforcement of contracts.

Transactions in markets take place via contract between the demand side and supply side, and relations of the firms are also based on the contracts. To ensure effective communications with stakeholders, the information of contracting, partnership arrangement and how to become involved should be clear and prompt.

The effectiveness of the legal system is inevitable to assess economic opportunities, risks to make investments of capital and labor, to transact business with two parties, and have a reasonable assurance against arbitrary interference or expropriations.

INFORMATION AND TRANSPARENCY:
Governments, however, don't operate in an information vacuum either. They have to know what their citizen's and the private sector's "needs and wants" are. In the same vein, the latter parties need to know what their governments are planning and implementing, and what impact these decision have on their ordinary lives, livelihood and business.

Beyond the internal demands of information, governments as well need to be informed on events and policies in the global arena. Thus 'they' need to be apprised of the opportunities and /or threats offered by trading companies, donor countries, political associations, international agreements, treaties and other instruments to enable them participate productively and timely in global events, and if needed, make the necessary adjustments in the government structure.

On the contrary, international actors, i.e. private investors, bilateral/regional partners, donor agencies need information on the internal conditions of the state to reach on a decision which could be crucial for investment, loans and development projects. They would need to know if government could enforce contracts and provide the necessary protection for private property rights prior to making any economic decision. The good governance demands the main task to establish a clear and consistent framework for individual economic freedom and responsibility of all actors.

Clear information about rules, regulations, economic policies, property rights will make easier for every body to form consistent exceptions. A competitive market economy requires that economic actors have access to relevant, timely and reliable information. The less available or credible the information, the greater the uncertainty and risk and therefore the costs of committing capital or labor. There are three areas in which improved information and greater transparency are beneficial: economic efficiency, means of preventing corruption and the importance of information in the analysis, articulation and acceptance of policy choice.

Economic efficiency requires that information about government decisions, policies and actions be available, the major processes of economic policy-making (the budget) be reasonably transparent, and public should have some opportunity to influence the decision-making process.

"Decision-making is worst in Pakistan", the donor agencies observed. Economic decision-making need certain behavioral consideration. In a market economy, individuals achieve benefits relying on competitive market.

Individuals do not make decisions in one period of context, rather they have a long time horizon, but the government and public entities often have a short time horizon. There is a need of strong political commitment, to ensure reforms. Tensions between economic benefits and political costs are typical of reforms in this area.

The accurate information about decision-making process ensures an appropriate balance between freedom to manage accountability and legitimate interests of the different stakeholders. It means that decisions taken and their enforcement are done in a manner where rules and regulations are followed, information is freely available, accessible to those whom such decisions and their enforcement and will affect, is provided easily and in understandable forms.

ACCOUNTABILITY:
Accountability means holding public officials responsible for their actions. The economic objective of the accountability is to ensure congruence between public policy and actual implementation. Not only this, but government capacity and willingness to monitor the overall economic performance creates efficiency in investment, in production and delivery of goods and services in public sector.

Predictability in economics is the most important aspect of accountability. >From the perspective of taxpayers, civil society, and investors, an efficient system of accountability is needed. With respect to the economy the main task is to establish a clear and consistent framework to fix responsibility of all actors.

Regular reports of governments, outside analysis by experts and media coverage can decisively contribute to efficient and good government. For the system of financial accountability to run effectively, an adequate and reliable flow of information is essential. Without it, the rules are not known, accountability is low and transactions' cost is high, uncertainties are excessive and transparency is narrow.

Conclusion: Without any doubt, transformation policy towards a market economy is difficult, as it starts with typical initial distortion. A market economy has its own problems such as unemployment, unstable stock market and high inflation, but with the adequate policy strategy, it is possible to cope with these problems successfully. These strategies cannot be imposed from outside but must be developed on the basis of theoretical reasoning, which will in the long run give achievements.

The aim of society is to protect the people, to create equal opportunities and to contribute to economic prosperity for all individuals. Therefore, the government in power and management is expected to have the authority to frame the economic policies leading to market economy and they should have the capabilities to grasp the issue.

Good governance depends on appropriate economic framework, which encourages investment and trade, and by which investors and stakeholders can be motivated to exercise their rights by providing essential services, maintaining good governance, and providing information timely and accurately and by reducing the transaction cost.

Admitting that the poor governance deters foreign investment, complicated regulations, arbitrary decisions disrupt the economic performance, therefore, openness and transparency and information are essential conditions for ensuring that stakeholders are able to continuously evaluate and relate their gains and could have a constructive interaction.
[Courtesy: Dawn May 5, 2003]

DOES PROSPERITY DEPEND ON EDUCATION?
By Christopher Lingle [
Courtesy: Ideas on Liberty May 2003 www.fee.org ] It has become an article of faith that economic progress depends on having an educated citizenry. A corollary is often attached, requiring governments to provide resources to meet this end. However, like so many self-evident truths, there may be less than meets the eye.

Let's look at this conventional wisdom. Amartya Sen, Nobel Laureate in economics, insists that India's plague of poverty will be best remedied through massive additional state spending on education. Naturally, politicians and state-employed educationists eagerly embrace any idea that lets them acquire more power and gain access to ever more tax money, especially when where there is little accountability for corruption and nonfeasance.

There are several problems with assigning so much importance to education as the basis for a community's prosperity. On the one hand, formal education is neither necessary nor sufficient for either an individual or a community to be prosperous. On the other, proposals to increase public spending on education ignore extensive theory and endless examples of the failures of government provision of goods and services.

What of the effect of education on material success? At the individual level, numerous self-made tycoons succeeded with limited formal education. For example, a Balinese friend of mine never attended school. He learned English and enough of several other European languages to sell curios on the beach. As he grew up, he expanded into handling local art work and then eventually built an art gallery. He plowed some of his money into property that is now worth several million dollars.

Moreover, formal education is not sufficient for economic progress. Consider Cuba and Zimbabwe, countries that are at the top of the charts when it comes to literacy. Obviously, that is no guarantee of success.

What about tax funding for schools? A good place to start is with the numerous failures associated with government provision of education. An Indian government-sponsored "Probe Report" revealed that serious "malfunctioning" of government schools causes harm to low-income families. During unannounced visits researchers found "teaching activity" in only 53 percent of the schools, while the head teacher was absent in 33 percent.

Those problems were not found in private schools serving the poor. Random visits revealed "feverish classroom activity."

Thus it is no surprise that despite desperate economic conditions, many of the poor abandon state-funded schools to place their children in private schools. Government schools offer free tuition, books, and even lunches. Yet in Hyderabad, India, for example, official figures indicate that 61 percent of all students attend schools in the private, unaided sector. This ratio is probably higher since government schools overstate the number of their students to insure more funding.

Private schools are driven by a commercial logic instead of depending on handouts from the state or charities. Despite charging low fees, the private schools in urban ghettos of India make reasonable profits, which are reinvested. Ironically, most private-sector teachers receive about one-fourth of what is earned in government schools because teachers unions have succeeded in detaching wages from performance.

It turns out that the principal reason for the difference between the two kinds of schools is the lack of accountability for government teachers. Private schools provided stronger incentives for teachers to perform well and for administrators to insure that they offer quality education. Teachers can be dismissed by the administrators and parents can "fire" the school by withdrawing their children. No similar incentives operate within government schools, where teachers have jobs for life. Such security leads to complacency instead of inspiring them to be better teachers.

Even though the poor choose private schools, educational entrepreneurs in the slums face hostility from government officials and official barriers to offering their services. One estimate for India suggests that before a private school can be opened, at least 35 different requirements must be satisfied.

The private sector in India, as elsewhere, is ready and able to fill the needs of the people by providing education at all levels. Lessons can be learned from the behavior of many of India's poor, who know that private schools offer better services than government-funded schools.
[Christopher Lingle is professor of economics at Universidad Francisco Marroquín in Guatemala and global strategist for eConoLytics.com]

URDU TRANSLATION OF "THE ADVENTURES OF JONATHAN GULLIBLE: A FREE-MARKET ODYSSEY"

Ken Schoolland's award-winning libertarian fable "The Adventures of Jonathan Gullible: A Free Market Odyssey" has become the outstanding tool for free-market youth education - winning rave reviews from readers, and have been published in a remarkable 26 languages! Urdu translation of JG has recently been completed by Khalil Ahmad and we are awaiting some sponsors to publish it. If you are interested in sponsoring its publication, please visit www.jonathangullible.com or contact FreePakistan Newsletter.

LETTERS

Thanks for your newsletter. I am also excited to note that the Jonathan Gullible version is ready; our Kiswahili version will be out by end of July.
Many thanks
James Shikwati

It is interesting to see that libertarianism is growing all over the world. Here Pakistan as an example: FreePakistan exists for the promotion of Libertarian principles and values such as individual freedom, private property, market economy, limited . . .
LIBERTARIAN INTERNATIONAL ACTION ORIENTED EUROLETTER 85
June-July 2003
Web Site: www.libertarian.to

FREEPAKISTAN NEWS-BRIEFS

A PRIZE OF TAXING THE PRIZES!
This year budget has subjected the prizes offered through winning a quiz or prizes offered by any company for the sole purposes of its sales promotions to withholding tax and the rate of tax as been fixed at 10 per cent. Before this new measure, prize on prize bond or winnings from a raffle, lottery or cross-word puzzle were subjected to 10 per cent withholding tax. Also, where a prize is not in cash, the person while giving the prize shall be required to collect tax on the fair market value of the prize.

THE DISCRETIONARY POWERS OF TAX OFFICIALS CRITICIZED
Speakers at a post-budget seminar criticized the Central Board of Revenue (CBR) for changing the spirit of the Income Tax Ordinance 2001 by inserting amendment to give discretionary powers to the commissioners. A former president of All Pakistan Tax Bar Association and Karachi Income Tax Bar Association raised an objection that the word 'reasonable cost' will give unlimited powers to the commissioners who can challenge any amount declared by the assessee. Other speakers also endorsed this view and appealed to the CBR to either define the term 'reasonable amount' or remove the word altogether.

ENERGY SECTOR IS HIGHLY TAXED
Governor of the State Bank of Pakistan has admitted that energy sector in Pakistan is highly taxed and said that the tax base was being broadened to reduce the burden on power consumers.

FIXED ASSETS TAX IS BAD
Regional Commissioner of Income Tax Corporate Region Karachi has termed the levy of sales tax on fixed assets as a "bad amendment" as the sale of fixed assets does not come under the purview of sales.

EXPERTS SLAM INCOME TAX AMENDMENT
The tax experts have criticized the new amendment in the Income Tax Ordinance 2001 and urged the Karachi Income Tax Bar Association to move a proposal for amending the section. They said that it is very difficult to implement it since the prizes vary from Re 1 in case of bubble gum to Rs 11 in case of tea, or a packet of biscuits, key chain or in the form of items of very small value to bumper prizes like air travel tickets, Mercedes cars, etc. Furthermore, collection of tax on small prizes will not be of very significant nature but will only increase the administrative cost, work, effort and energy required to manage such collections and depositing of tax.

85 ANOMALIES NOTED IN THE BUDGET
The Federation of Pakistan Chambers of Commerce and Industries has received around 85 anomalies relating to sales tax, customs duties and income tax in the budget 2003-04. Out of these, 40 are customs-related belonging to various industrial sectors. Similarly, in the sales tax around 15-20 and in the income tax 25 cases of anomalies have been identified.

ROAD USER TAX FOR THE OUTSIDERS
In its budget, City District Government of Lahore (metropolis of the Punjab province) has levied Road User Tax which will be collected from the vehicles entering Lahore city. According to the new tax, the vehicles, cars, jeeps, pickups and wagon will be charged Rs. 7, and the tax will bring in Rs 100 million.

BAN ON KITE FLYING
The district government of Lahore city has banned manufacturing, sale and flying of kites for three months from july 1, 2003.