Economic Freedom of the World 2005 Annual Report: Special Pakistan Edition

Economic Freedom of the World is the most comprehensive index of economic freedom in the world and the only that uses reproducible measures for peer-reviewed research. The 2005 Annual Report explores the evolution of economic freedom over the last quarter century and the impact of economic freedom on people’s lives.


As it is, to be successful or profitable, a business venture needs certain freedoms out of which economic freedom is the most crucial. In simple words, economic freedom means, on the one hand, freedom to engage in any economic activity; and on the other, freedom from any external control, be it government or any such authority, which it exerts by regulating and taxing the businesses. Excessive government control results in less and less economic freedom and an unpleasant environment for the growth of overall economy and individual prosperity as well.

The state of economic freedom in Pakistan is not encouraging. Too much regulation and too much taxation and their red-taped implementation are sitting at the entry point of any business activity and hinder their growth. Not only does it interfere with the personal choice of the people; intervenes in the voluntary exchange; and thus restricts the freedom to compete on the part of producers and traders; it increases the cost of starting a business also, and thus creates such an environment that is not conducive to the development of private economic activity in Pakistan catering freely to the needs of people.

Economic Freedom of the World is the most comprehensive index of economic freedom in the world and the only that uses reproducible measures for peer-reviewed research. The 2005 Annual Report explores the evolution of economic freedom over the last quarter century and the impact of economic freedom on people’s lives.

It answers many important questions, including:

• Has economic freedom been increasing or decreasing?

• Do poor people benefit when countries become economically free?

• What countries have made big gains in economic freedom in recent years?

• What effect does economic freedom have on prosperity?

• How does economic freedom influence investment?

• How does economic freedom influence productivity?

• What impact does economic freedom have on income inequality?

• How does economic freedom reduce violent conflict and promote peace?

Download the Economic Freedom of the World 2005 Annual Report (PDF)

Economic Freedom Report 2007: Pakistan Climbs the Ladder of Economic Freedom

Pakistan climbs the ladder of Economic Freedom scoring 6 points ranking 101 out of 141 countries; leaps big in Legal Structure and Security of Property Rights area by improving from 2.5 to 4.4; loses big in Access in Sound Money by sliding down from 6.4 to 6.0.


Pakistan climbs the ladder of Economic Freedom scoring 6 points ranking 101 out of 141 countries; leaps big in Legal Structure and Security of Property Rights area by improving from 2.5 to 4.4; loses big in Access in Sound Money by sliding down from 6.4 to 6.0.

Pakistan climbs the ladder of Economic Freedom scoring 6 points ranking 101 out of 141 countries; leaps big in Legal Structure and Security of Property Rights area by improving from 2.5 to 4.4; loses big in Access in Sound Money by sliding down from 6.4 to 6.0.

India inches up from 6.5 to 6.6; Hong Kong and Singapore rated best for economic freedom, Zimbabwe and Myanmar rank worst.

Lahore September 07, 2007: Hong Kong once again tops international rankings for economic freedom, with Singapore a close second and New Zealand in third spot, according to the Economic Freedom of the World: 2007 Annual Report, released today by Pakistan’s first free market think tank, Alternate Solutions Institute.

Pakistan ranked 101 out of 141 countries this year, after ranking 91 (out of 130 countries) in the last year’s report. In 2006 Report Pakistan scored 5.7 points out of 10; while this year its scored leapt to 6.0. The areas that improved Pakistan’s overall performance are: size of government; legal structure and security of property rights; and, freedom to trade internationally. The areas in which Pakistan lost a lot are: access to sound money; and, regulation of credit, labor, and business.

The annual peer-reviewed report uses 42 different measures to create an index ranking countries around the world based on policies that encourage economic freedom. The cornerstones of economic freedom are personal choice, voluntary exchange, freedom to compete, and security of private property.

Research shows that individuals living in countries with high levels of economic freedom enjoy higher levels of prosperity, greater individual freedoms, and longer life spans. These measures are part of a fundamental base needed to build a free and prosperous nation. A quick glance at the names of countries scoring lowest on the index quickly shows that without protection of property rights and judicial independence, there is little individual freedom and little in the way of prosperity.

Pakistan scores in key components of economic freedom (from 1 to 10 where a higher value indicates a higher level of economic freedom):

• Size of government: changed to 7.3 from 7.2 in the last year’s report

• Legal structures and security of property rights: changed to 4.4 from 2.5

• Access to sound money: changed to 6.0 from 6.4

• Freedom to trade internationally: changed to 5.8 from 5.7

• Regulation of credit, labour and business: changed to 6.3 from 6.5

International Rankings

In this year’s main index, Hong Kong retains the highest rating for economic freedom, 8.9 out of 10. The other top scorers are: Singapore (8.8), New Zealand (8.5), Switzerland (8.3), Canada (8.1), United Kingdom (8.1), United States (8.1), Estonia (8.0), Australia (7.9), and Ireland (7.9).

The rankings and scores of other large economies are Germany, 18 (7.6); Japan, 22 (7.5); Mexico, 44 (7.1); France, 52 (7.0); Italy, 52 (7.0); India, 69 (6.6); China, 86 (6.3); Brazil, 101 (6.0); and Russia, 112 (5.8).

The majority of nations ranked near the bottom are African and all the nations in the bottom 10 are African, with the exceptions of Venezuela and Myanmar. They are: Zimbabwe (2.9), Myanmar (3.8), the Democratic Republic of the Congo, (4.0), Angola (4.2), the Republic of the Congo, (4.3), Central Africa Republic, (4.6), Venezuela (4.9), Burundi (5.0), Chad (5.1), Togo (5.1) and Niger (5.1). Botswana’s ranking, tied for 38th with a score of 7.2, is the best among sub-Saharan African nations.

Five nations increased their score by more than three points since 1980: Hungary (3.0), Peru (3.0), Uganda (3.2), Ghana (3.6), and Israel (3.7). Only three nations decreased their score by more than one point: Zimbabwe (−1.7), Venezuela (−1.7) and Myanmar (−1.3). Other nations that saw reductions are: Nepal (−0.7), Bahrain (−0.3), Hong Kong (−0.2), Malaysia (−0.2), the Republic of Congo (−0.2), and Haiti (−0.1).

“Weakness in the rule of law and property rights is particularly pronounced in sub-Saharan Africa, in many parts of the Middle East, and for several nations that were part of the former Soviet bloc although some of these nations have shown improvement,” said James Gwartney, lead author of the report and a Professor of Economics at Florida State University. “Many Latin American and Southeast Asian nations also score poorly for rule of law and property rights. The nations that rank poorly in this category also tend to score poorly in the trade and regulation categories, even though several have reasonably sized governments and sound money.”

This year 11 additional countries have been added to the index. These countries are Angola (4.2, 138th), Bosnia and Herzegovina (6.1, 97th), Burkina Faso (5.5, 122nd), Ethiopia (6.0, 101st), Kazakhstan (7.3, 32nd), Kyrgyz Republic (6.8, 60th), Lesotho (6.8, 60th), Mauritania (6.5, 76th), Moldova (6.5, 76th), Montenegro (6.8, 60th), and Serbia (5.6, 119th).

Global Spread of Economic Freedom

The 2007 edition of the Economic Freedom of the World report also includes new research from Russell Sobel, economics professor at West Virginia University, and Peter Leeson, professor in the study of capitalism at George Mason University, showing how economic freedom spreads between countries. Sobel and Leeson note that historically, many foreign policy decisions have been based on the notion that economic reforms in a few key nations would substantially improve the economies of other countries throughout the region – the so-called “domino effect.”

The authors conclude that while economic freedom changes in one country have only a modest impact on neighbouring countries, when multiple neighbours experience simultaneous changes in economic freedom, the impact is much greater. Broad regional changes in freedom can and do have significant impacts on surrounding countries. By liberalizing trade with foreign nations, economically free countries can exert a positive, if modest, impact on economic freedom in less free nations.

This research indicates that free-trade agreements allowing a number of nations to simultaneously coordinate trade liberalization could have a sizeable influence on spreading economic freedom to economically repressed regions of the world, Sobel and Leeson said.

About the Economic Freedom Index

Economic Freedom of the World measures the degree to which the policies and institutions of countries are supportive of economic freedom. This year’s publication ranks 141 nations for 2005, the most recent year for which data are available. The annual report is published in conjunction with the Economic Freedom Network, a group of independent research and educational institutes in over 70 nations.

For downloading the Report, data sets, and previous Economic Freedom of the World reports, visit www.freetheworld.com

For more information, please visit http://asinstitute.org or contact at info@asinstitute.org

Tax-evasion and Money-laundering in Pakistan: An Overview

“There is no business in Pakistan today which can be run without paying bribes to the ministers and secretaries.” Yusuf Haroon, a businessman [Quoted in Shahid-ur-Rehman] The economy of Pakistan is heavily regulated and controlled by the government. The ever-increasing burden of taxes and regulations has given rise to a parallel economy (usually termed as black economy) of which tax-evasion and money-laundering are two significant phenomena.


by Khalil Ahmad

“In a society, deep neck in corruption, I more often than not, find myself a misfit. There is no place for a veteran businessman anymore in the society.” G. M. Adamjee, a businessman [Quoted in Shahid-ur-Rehman, Who Owns Pakistan?]

“There is no business in Pakistan today which can be run without paying bribes to the ministers and secretaries.” Yusuf Haroon, a businessman [Quoted in Shahid-ur-Rehman]

The economy of Pakistan is heavily regulated and controlled by the government. The ever-increasing burden of taxes and regulations has given rise to a parallel economy (usually termed as black economy) of which tax-evasion and money-laundering are two significant phenomena.

The part-I of this brief study will focus on the following:

  • The nature of taxation
  • The process of taxation and tax-collection
  • The governmental uses of tax-money
  • The magnitude of tax-evasion
  • Why do people resort to tax-evasion?

The part-II of this study will focus on the following:

  • The nature and process of money-laundering
  • The sources and magnitude of money-laundering
  • The state of legislation regarding money-laundering
  • Why do people resort to money-laundering?

The part-III of this study will focus on the following:

  • The legality or illegality of tax-evasion and money-laundering
  • Tax-evasion and money-laundering and from the perspective of a free society
  • Concluding remarks/Recommendations

Khalil Ahmad
Alternate Solutions Institute
Lahore, Pakistan

Part I

The Nature of Taxation in Pakistan

Currently, it is understood in Pakistan that a nation or a society cannot do without a government; and, to run the business of a government, taxes are levied. It is said that the business of a government comprises two things: i) to provide services to the people such as maintaining law and order, and accomplish development works such as build and maintain roads, etc; and ii) (in case of a redistributive state) to provide welfare services such as ‘food, clothing, shelter,’ and education, health care, etc. For most of the people, it is quite natural a political philosophy!

Obviously, the more duties and responsibilities we assign to a state, the more machinery (bureaucracy, etc.) will it require, and the more expenditures will it incur. Thus, in addition to maintaining law and order, if a state is required to provide everything to its citizens, then its government won’t remain limited. It will require more revenue, and will resort to high taxes. Conversely, if its duties are limited to the protection of life, liberty and property of its citizens, it will have no justification to have recourse to more and more taxes.

But all the governments tend to expand, and develop a big state-apparatus which it with the passage of time becomes difficult for them to sustain without imposing high taxes. As a result, they are caught in a net of clear disproportion: their non-development expenditures outweigh their development expenditures; and, in some cases, their development expenditures, too, can be termed as non-development expenditures as they are spent without producing any tangible results. Such a state because of its erratic policy of taxation turns into an unhappy burden on the shoulders of its citizens.

Pakistani state is such a high tax state. On the one hand, it is not providing the least of the essential services to its citizens; that is, maintaining law and order, and protecting life, liberty and property of its citizens. On the other, under the slogan of Welfarism, it is resorting to high taxes and control over the lives of the people, and thus it has to sustain an ever-increasing state-machinery. Moreover, it has instituted monopolies, and likes to take care of their interests. And, last but not least, it has gathered around a ring of rent-seekers in the shape of politicians, privileged groups, civil and military bureaucrats, etc. who cause to manipulate its policy of taxation to their own benefit or to the detriment of others.

Another important aspect of the nature of taxation in Pakistan is trade protectionism; or, in other words, another cornerstone of taxation is the protection of local industry. For this purpose, the interests of the consumers, the common citizens, are ignored and, rather sacrificed on the altar of that holy cow, local industry. High duties are imposed on all of the imports, except ones benefiting the privileged ones, to protect the local industry which is inefficient, uncompetitive, and dependent on the help from the government to sustain itself. As a result of this, consumers are forced to buy low quality and expensive goods.

The Process of Taxation and Tax-Collection in Pakistan

In Pakistan, taxes are levied at three levels: federal, provincial, and local. At federal level, Central Board of Revenue (CBR) takes care of the revenue-collection. At this level, there are four major taxes: Income, Customs, Excise and Sales Tax. At provincial level, various departments perform this task. Major taxes at this level are: Stamp Duty, Motor Vehicle, Entertainment, and Electricity taxes. And, at local level, entities of district government levy taxes.

Under the circumstances, as Pakistani government has not been able to form and practice a just, uniform and consistent policy of taxation, the process of taxation in Pakistan is in shambles. Indeed, it has become a tool in the hands of the privileged and powerful elites and groups. They pressurize, bribe or influence the authorities to impose a new tax or increase the rate of an old one to reap the benefits or to harm their rivals. Taxes are imposed and/or reduced to suit this or that elite. “The 1973 constitution had clearly provided that “imposition, abolition, remission, alteration or regulation of any tax” would fall in the jurisdiction of the Finance Bill to be passed by the national assembly. But during the Zia-ul-Hq era when there was no national assembly, this power was usurped by CBR which imposed duties, withdrew duties, exempted industries from payment of taxes and duties, made refunds with retrospective effect when somebody had to be favored, simply by issuing SROs.” [Shahid-ur-Rehman, Who Owns Pakistan?] Perhaps, it’s never thought of in Pakistan that imposing/abolishing or increasing/reducing taxes should be done in the interest of the broader sections of society.

“The Central Board of Revenue (CBR) can enrich individuals and groups beyond one’s expectation and imagination by issuing the right SRO (Statutory Regulations and Orders) or vice verse turn them into pauper by starting investigations of tax evasion and assessing tax liability with retrospective effect.” [Shahid-ur-Rehman] In this regard, the ‘politics of tax holidays, rebates and subsidies’ is also too known.

From the point of view of the tax payers, the mechanism of tax-collection is very difficult, complicated and cumbersome besides being time-consuming. “Pakistan today has a mind-boggling taxation system that defies comprehension of the average citizens and experts alike.” [Shahid-ur-Rehman] The tax-assessing and tax-collecting officials enjoy unlimited discretionary powers, and by using these powers, they harass and blackmail the tax payers, and extort money from them. In Pakistan, it is said that even an honest tax payer can not pay his taxes honestly; he will be forced to bribe the concerned authorities to pay his due tax.

The most corrupt departments in Pakistan are the tax departments. “CBR has the reputation of being corrupt, besides being one of the most politicized departments of the Government of Pakistan. From the office of the chairman to middle and lower ranks, appointments are made in CBR on political and financial considerations. One frequently comes across people in Islamabad with offers of money for appointments or postings in departments under the jurisdiction of CBR. The amount that these people offer, even for a clerical job in customs, income tax or other subordinate departments give a measure of corruption and graft in CBR. . . It is thus not mere coincidence that the chairman of CBR has invariably been the first to go with each change of government since 1988.” [Shahid-ur-Rehman] That was why, to contain the excesses of tax officials, in the year 2000, the federal government had to establish a separate institution of Federal Tax Ombudsman. Though, its scope and jurisdiction is too limited, but it is playing an important role in redressing the grievances of the tax payers against the tax officials.

A cursory look at the following table which details the year-wise figures of complaints filed and disposed of by the office of the Federal Tax Ombudsman can convince us of the notoriety of the tax-machinery in Pakistan:

Year-Wise Complaints Filed and Disposal

Year No. of complaints Disposed Balance

2000 72 72 0
2001 1782 1782 0
2002 1549 1518 31
2003 till 15th 1469 885 584
October
___________________________________________________
Total 4872 4257 615

[Source: Dr. Ikramul Haq, Federal Tax Ombudsman: role and challenges]

As to the number and rate of taxes, there is no comprehensive study available. But it is generally believed that everything is taxed and is taxed at a far higher rate. “In 1990, Karachi Chamber of Commerce and Industry had established that the industry was subjected to 50 direct and indirect taxes but the statement of Senator Ilyas Bilour, President PFCCI (Pakistan Federation of Chambers of Commerce and Industry) at the Businessmen Conference in Islamabad on March 25, 1997, that 37 government departments and agencies were collecting taxes gives a measure of the proliferation of taxes that has taken place in Pakistan.” [Shahid-ur-Rehman]

The author of the same book, “Who Owns Pakistan?” has identified 70 major taxes to which consumers and producers are subjected. “In addition there are host of specific taxes like a Research and Development Levy, Drug Manufacturing License and Drug Registration Fee. It can be said safely that there are at least 100 taxes in vogue in Pakistan.” [Shahid-ur-Rehman]

A List of Taxes in Vogue in Pakistan

Federal Taxes

S. No. Name of the Tax

1. Income Tax
2. Super Tax
3. Wealth Tax (abolished. K. A.)
4. Gift Tax
5. Turnover Tax
6. Corporate Asset Tax
7. Corporate Income Tax
8. Import Duties
9. Import Surcharge
10. Export Duties
11. Iqra Surcharge
12. Income Tax on Imports
13. Import License Fee
14. Import Registration Fee
15. Export Registration Fee
16. Central Excise Duty
17. Sales Tax on Manufactured Goods
18. Capital Value Tax
19. Export Development Surcharge
20. Development Surcharge on Petroleum
21. Gas Development Surcharge
22. Federal Education Cess
23. Workers Participation Fund
24. Workers Welfare Fund
25. Estate Duty
26. Zakat
27. Ushr
28. Oilseeds Development Cess on Companies
29. Tobacco Cess
30. Cotton Cess
31. Development Surcharge on Electricity
32. Textile Technology Cess
33. Airport Tax
34. Cargo Charges, etc.
35. Capital Gain Tax

[Source: Shahid-ur-Rehman, Who Owns Pakistan?]

Provincial Taxes

S. No Name of the Tax

1. Professional Tax
2. Property Tax
3. Stamp Duty
4. Vehicle Tax
5. Entertainment Tax
6. Betterment Tax
7. Social Security Contribution
8. Explosive License Fee
9. Provincial Education Cess
10. Capital Gain Tax
11. Punjab Airport Tax
12. Provincial Excise Duty
13. Karachi Dock Labour Board Cess
14. Cess on Hotels
15. Cotton Fees
16. Paddy Development Cess
17. Land Revenue Tax
18. Employee Old Age Benefit Contribution
19. Trade Tax on Jewelers, Garment Shops

[Source: Shahid-ur-Rehman, Who Owns Pakistan?]

Note: These lists are not complete and up-to-date; from time to time, new taxes and duties are imposed, some of the old ones abolished. Now with the introduction of District Government System, an array of newer taxes at the local level has come to play its role. Also, some of the old things are still in existence such as Television License Fee.

The governmental uses of tax-money

The non-development expenditure of Pakistani Establishment has always been on the increase putting undue pressure on the tax payers. For example, “the level of current Government expenditure . . . (increased) at fast pace particularly during the period 1982-83 to 1984-85. As percentage of GDP at market prices, current Government expenditure fluctuated between 14 and 15 per cent during the period 1977-78 to 1981-82. In the subsequent 3 years the increase in current expenditure accelerated a great deal and as percentage of GDP at market prices it rose from 14.4 per cent in 1981-82 to 17.9 per cent in 1984-85.” [Tax System in Pakistan]

According to a report of the World Bank, Pakistan consumed 10.3 percent of GDP in 2001. [Quoted in 2004 Index of Economic Freedom]

Internationally, Pakistan is considered a ‘soft state.’ But it’s too soft an acronym. Pakistan is one of the most corrupt states of the world. According to the Transparency International’s ranking of the most corrupt countries of the world, in 1996, Pakistan stood 2nd.

“Pakistan is one of the countries of the world that has achieved notoriety in terms of its association with twin evils (‘corruption and money-laundering’) and particularly with corruption. The gravity of the situation can be gauged from the fact that the then prime minister of Pakistan, Nawaz Sharif, himself admitted sometime back that the country was losing Rs.2 billion a day or Rs.720 billion a year to corruption. (This is significant because the total revenue collection in Pakistan is a little over Rs.300 billion.)” [Ijaz Hussain]

After the martial law of 1977, when a civilian government was installed, a new political tradition got started that strengthened the institution of corruption in Pakistan. Members of the parliament were to be given funds to use for the development of their constituencies; these funds were never to be audited.

A letter to the Editor of one of the top national English dailies relates the story as follows:

LEGISLATORS’ DEVELOPMENT FUNDS
[S. M. F. Hasan, Lahore]

It goes to the eternal infamy of the first dictator of Pakistan that to appease his supporters and to tame his opponents, he introduced the vicious system of transfer of huge state funds to his MNAs and basic democrats in the name of public development but actually for their own development. Stark corruption received a stamp of approval creating a new political culture. Money and manipulation became the dominant part of politics.

The abiding tragedy is that every succeeding regime, while condemning corruption and maladministration of the dictator, have retained his system of allocation of large amounts of state money to control MNAs and MPAs.

In no other country of the world, members of the legislature are encumbered with the responsibility of executing or supervising development projects. Their sole function is to frame laws for good governance. Being free of monetary temptations, they jealously guard their independence against the executive authority.

In Pakistan, every MNA, MPA or another public-spirited person should be authorised to submit his scheme of development to the Planning Division for central subjects and to Provincial Planning Boards for provincial subjects to be thoroughly scrutinized. If found suitable, it should be implemented by the normal executing agencies of the government without the intervention of the proposing body or person.

Unless this is done, development funds will continue to be wasted, politicians will continue to be corrupt and the legislators will continue to be subservient to the executive, whether the head of government is a dictator or not or provinces are autonomous or controlled. [The News International Lahore Edition September 3, 2004]

In addition to that most of the elected governments in Pakistan were dismissed by the sovereigns on the charges of corruption, and many a prime ministers and ministers have been and are being tried in the national courts and other country’s courts as well.

“It is noteworthy that corruption was the common ground in the dismissal orders of the three governments since 1990. For example, on 18 April, 1993, when the Nawaz Sharif government was dismissed, the dissolution order read that: “Maladministration, corruption and nepotism have reached such proportions in the federal government, its various bodies, authorities and other corporations including banks supervised and controlled by the federal government, the lack of transparency in the process of privatisation, in the disposal of public/government properties, that they violate the requirements of the oath(s) of the public representatives together with the prime minister, the ministers, and ministers of state prescribed in the constitution and prevent the government from functioning in accordance with the provisions of the constitutions.”” [Ijaz Hussain]

Also, “the presidential order of 5 November, 1996, also embodied the similar charges against the Benazir Bhutto who was sacked for the second time. The order read: “Corruption, nepotism and violation of rules in the administration of the affairs of the government and its various bodies, authorities and corporations has become so extensive and widespread that the orderly functioning of the government in accordance with the provisions of the constitution and the law has become impossible and in some cases national security has been endangered. Public faith in the integrity and honesty of the government has disappeared.”” [Ijaz Hussain]

The magnitude of tax-evasion

Though, investment is directly related with taxation, but it is the rate of tax that determines the volume of investment. It’s a fact that besides political instability and deteriorating law and order situation, high tax rates have played an important role in retarding the growth of domestic as well as foreign investment. Despite utmost efforts of various governments, the volume of investment has been static.

Moreover, high tax rates have discouraged the personal initiative of the individuals. They feel deprived of their hard-earned money. That is why, in Pakistan, doing business legally is said to be a very difficult enterprise.

As has been pointed out earlier, heavily controlled economy has given rise to a parallel economy in Pakistan. The volume of this parallel economy exceeds to that of the formal economy which implies a greater volume of tax-evasion.

According to one study, “since 1973, a remarkable size and an upward trend in the underground economy and tax evasion are noticeable . . . the underground economy grew rapidly from about Rs.15 billion in 1973 to Rs.1115 billion in 1996 . . . the underground economy as a proportion of GDP was about 20 percent in 1973, which increased to 51 percent in 1996.

“. . . the level of tax evasion was about Rs.1.5 billion in 1973, which tremendously increased to Rs.152 billion in 1996.” [Zafar Iqbal, The Underground Economy and Tax Evasion in Pakistan: A Fresh Assessment]

It is also noteworthy that “the underground economy grew faster than the formal economy. . . . the underground economy grew annually at the rates of about 27 percent, 14 percent, and 26 percent in 1970s, 1980s, and 1990s correspondingly while growth rates in the formal economy for the same sub-periods were about 18 percent, 14 percent, and 17 percent.” [Zafar Iqbal]

Another study states that “in the base year (1973), underground economy was 20.27 percent of GDP, and it increased to 25.51 percent in 1991. Between 1991 and 1998 the underground economy increased rapidly; it was 54.52 percent in 1998. However, by 2002 it had declined to 37.25 percent of GDP.” [M. Ali Kemal, Underground Economy and Tax Evasion in Pakistan: A Critical Evaluation]

As to the tax-evasion, according to this study, “it increased from 2.15 percent in 1073 to 3.42 in 1990, peaked at 7.22 percent in 1998 and then 4.17 percent in 2002.

“There could be various reasons of this sharp increase in the underground economy and tax evasion between 1991 and 1998. For instance, rise in private investment level which increases the overall economic activity (formal and informal), increase in smuggling, etc. Similarly, decline in underground economy from 1998 to 2002 may have various reasons, for instance, decline in smuggling, but probably low level of economic activity is the most important. . . . documentation of the economy is one of the reasons which helped in preventing black economy not to grow faster.” [M. Ali Kemal]

Estimates of Underground Economy and Tax Evasion

Year Underground Tax (As Percentage of GDP)
Economy Evasion Underground Tax
Economy Evasion
1974 18020 1814 20.27 2.15
1975 21756 2219 19.42 1.98
1976 27781 2944 21.15 2.24
1977 31412 3351 20.80 2.22
1978 41832 4644 23.51 2.61
1979 51774 6186 26.35 3.15
1980 66414 8670 28.24 3.69
1981 74784 9814 26.88 3.53
1982 98406 14076 30.36 4.34
1983 104759 13361 28.75 3.67
1984 130796 17215 31.16 4.10
1985 129443 15878 27.42 3.36
1986 155677 20390 30.26 3.96
1987 184308 26698 32.19 4.66
1988 192752 26672 28.54 3.95
1989 210487 30209 27.38 3.93
1990 227245 30473 25.51 3.42
1991 268951 34163 26.35 3.35
1992 390366 53219 32.39 4.42
1993 470124 62913 35.27 4.72
1994 591899 77655 37.92 4.97
1995 758163 104787 40.63 5.62
1996 1004289 144748 47.37 6.83
1997 1233620 164923 50.80 6.79
1998 1449891 193397 54.52 7.22
1999 1146839 152499 39.03 5.19
2000 1094052 141077 34.76 4.48
2001 1298233 169025 38.00 4.95 2002 1388064 175472 37.25 4.71

[Source: M. Ali Kemal, Underground Economy and Tax Evasion in Pakistan: A Critical Evaluation]

Why do people resort to tax-evasion?

The first answer to this question that comes to mind is that people do not want to lose what is their own. The English actor, Charles Kemble (1775-1854), after paying his tax to the tax-collector, said: “Sir, I now pay you this exorbitant charge, but I must ask you to explain to Her Majesty (Queen Victoria) that she must not in future look upon me as a source of income.” [Quoted in Kaleem Omar, The ins and outs of taxes]

But that is quite a radical position. Sometimes people are willing to pay taxes provided the rate of tax is not too high and is not an unbearable burden on their personal income (one of the findings of a Canadian study tells that a ‘reduction in the marginal tax rates will increase taxable revenues.’ Taxpayers’ Response to Tax Rate Changes: A Canadian Panel Study), the taxation system is simple and intelligible, and they know that their tax money instead of being wasted will be properly utilized. But, in Pakistan the rate of tax is too high. The top income tax rate is 35 %, rated by 2004 Index of Economic Freedom as a ‘high tax rate; whereas the corporate tax rate is 43 %, and is rated by the same Index as a ‘very high tax rate.’

In addition to these factors, a great ‘incentive’ to tax-evasion is a complicated tax system. “Over the last fifty years, this country’s (Pakistan’s) tax regime has become so complex and baffling that a whole legion of accountants is now lucratively engaged in figuring out just which taxes taxpayers have to pay.” [Kaleem Omar]

Dr. Ikramul Haq states that “one of the factors responsible for the present situation (‘perpetual crisis of resources for the developmental policies, crisis to meet trade deficit, crisis on account of fiscal deficit’) is the great speed with which black money is generated. The Central Board of Revenue is directly responsible for this as its Mafia-like operations has helped the people to avoid tax on incomes by paying hem “due share.” Through the infamous system of SROs, the CBR’s stalwarts provided “legal” ways and means to the mighty sections of society to amass the very survival of state.”

But, especially in the case of Pakistan, it may be pointed out that since a culture of corruption has taken root, the corruption has become a norm of daily life. The reason is very simple:

Corruption is just like snow
It falls on the cliffs of the hills
And melts down below.

As an American actor, Will Rogers referring to income tax said: “It has made more liars out of the American people than golf.” Too much control, too much law and too much tax tend to make people ‘unethical.’ They start inventing ways to evade what is imposed unethically upon them.
“Too many taxes can be too much of a good thing, killing the proverbial goose that lays the golden egg.” [Kaleem Omar]

As to this state of affairs, Mr. M. Ali Kemal is of the opinion that “We should improve our taxation policy. It is pragmatic that our tax rates are too high and, if possible, should be reduced to minimum level where every person in the tax net is willing to pay tax. Moreover, people have general dissatisfaction with the way government manages its budget and utilises tax income.”

The overall situation is not much different from what was recorded in a report of a working group in (May/June) 1986. It stated that “Pakistan’s tax system, even after four decades of independence, continues to have essentially the same features as were inherited from the colonial period. The tax receipts continue to be pre-empted almost entirely by current expenditure on general administration, defence and debt servicing. For financing development expenditure, reliance has been placed almost exclusively on internal and external borrowings. The tax system continues to be regressive in character due to its over-dependence on indirect taxes and has failed to be conducive to the achievement of the objectives of growth, efficiency and equity.” [Tax System in Pakistan]

Part II

The nature and process of money-laundering

The case of money-laundering, especially in Pakistan, is no different from the ‘crime’ of tax-evasion; here too the government itself is an accomplice. “The ugly face of black money emerges in the corridors of power, political as well as administrative.” [Dr. Ikramul Haq, Money laundering facilitated by tax laws] In fact, “Pakistan has been the worst victim of money-launderers as during the last 30 years, the successive governments showed an extremely benign attitude toward corruption, drug trafficking and tax evasion.” [Dr. Ikramul Haq]

The government, on the one hand, introduced laws to counter money-laundering, and, on the other, floated schemes to allow the whitening of black money. All the same, various governments successively introduced novel schemes to declare untaxed and illegal money. They used this ‘weapon’ to win political rivals, to please their allies and to strengthen their rule. “. . . why the government has floated schemes, which provide an easy way for whitening black money, is the fact that many individuals belonging to the party in power having amassed lot of money need to whiten it. In this backdrop such money laundering schemes come handy to the members of the ruling party and their associates.” [Ijaz Hussain, Legal Control of Corruption and Money Laundering in Pakistan]

Also, “CBR (Central Board of Revenue; responsible for the collection of federal taxes) has never bothered to unearth laundered money, rather always joined hands with the tax evaders and money launderers by providing them unprecedented concessional schemes to whiten their ill-gotten wealth. These schemes were announced by the governments on the recommendations of CBR’s wizards in the name of improving tax collection!” [Dr. Ikramul Haq]

In its early years, Pakistan was not considered a favorable center for money-laundering. But “certain developments in the recent past have contributed to a climate conducive for money laundering. The first one was the presence in the 1970s of a large expatriate community exceeding one million, particularly in the Middle East, who relied on non-formal banking facilities to remit their foreign earnings to Pakistan.” [Ijaz Hussain]

The other developments, according to Ijaz Hussain, are ‘the burgeoning drug addiction, an almost non-existent problem in the late 1970s, which emerged into a major one with alarming figures of 3.1 million drug addicts out of which 1.5 million were heroin abusers; the introduction of schemes, which provided opportunities and facilities to do so without much fuss; the promulgation of the Economic Reforms Ordinance 1992 which aimed at attracting foreign exchange into Pakistani banks; the introduction of yet another scheme under which any Pakistani citizen can buy government-owned real estate auctioned by a government agency and no questions as to the source of funds will be asked from the buyers of plots as per decision of the government.’

Thus, Pakistan turned into a heaven for money-launderers.

The process of money-laundering is the distancing of the money earned through illegal activities from its original source. At the first stage, ‘Placement,’ the launderer introduces his money into the financial system; at the second stage, ‘Layering,’ the launderer engages in a series of movements of the funds to distance them from their source; and, at the third stage, ‘Integration,’ the funds are merged in the legal economy. [Sam Vaknin, Money Laundering in A Changed World]

The other principal methods used for money-laundering in Pakistan are as follows: [Ijaz Hussain]

i) Hawala/Hundi. Mostly used by expatriates to remit money to Pakistan.
ii) Bearer Investment Schemes. In existence for the last two decades providing an attractive opportunity for money-laundering.

In addition, the money to be laundered is mostly invested in real estate. Various other methods in vogue are: over/under invoicing of imports and exports; bogus imports/exports; double invoicing; currency smuggling; money declared as proceeds of agriculture (since the agricultural income is exempted from tax)/poultry; and bank loan methods. [Ijaz Hussain]

The sources and magnitude of money-laundering

The underground economy is the main source of black money. It consists of illegal business and financial activities such as drug trafficking, smuggling, insider trading, illegal arms sale, organized crime, bribery, embezzlement, extortion by force, computer fraud schemes, etc. “In Pakistan, the banks, insurance companies, non-banking financial institutions, investment companies, money transmitters and real estate agents are all targets of money launderers. The financial institutions, inadvertently or otherwise, support money laundering by providing means to convert cash into different types of financial instruments, to convert the currency of one country into the currency of another and to transfer funds to other financial institutions. [Observations of the Chairman, Securities and Exchange Commission of Pakistan quoted by Dr. Ikramul Haq]

The latest turn in the process of money-laundering is the replacing of gemstones as a tool for laundering money. The “Western intelligence community has claimed that some very powerful terrorist groups are engaged in using gemstones, diamonds, tanzanite, and other commodities to store and launder money for terrorist activities across the globe.” [The News International Lahore Edition June 26, 2004]

According to US Drug Enforcement Administration March 2002 Brief, “Pakistan is not considered a major center for international money laundering activity. However, Pakistan-based traffickers are extensively involved in the production and transportation of opiates and hashish. This suggests that drug proceeds are laundered within the country.” [http://www.usdoj.gov/dea/index.htm]

And, a 1996 estimate of the International Monetary Fund reveals that ‘money laundered annually amounts to 2-5% of world GDP (between 800 billion and 2 trillion US dollars in today’s terms). The lower figure is considerably larger than an average European economy, such as Spain’s.’
[Sam Vaknin, Ph.D., Money Laundering in A Changed World]

Another study estimates that ‘approximately $ 2 billion are transferred each year through the Hundi system alone.’ According to the UNDCP report, the domestic heroin market in Pakistan is around Rs.35 billion (1994 figures) per year and turnover of the heroin industry is 5 % of the 1992-93 GDP and 20-25 % of the total estimated “parallel” economy. [Quoted in Ijaz Hussain]

The same report estimates that ‘most of the foreign exchange in the “parallel” currency market was utilised to import foreign goods and for flight of capital during the 1980s. Unofficially funded imports or smuggled goods (through the Afghan transit trade, baggage rules, and diplomatic bonded warehouses among others) constitute 10 % of the official imports. Revenues generated from the sale of illicit drugs were estimated at $ 1.5 billion in 1992. Drugs earnings averaged $ 1 billion per year during 1985-91.’ [Quoted in Ijaz Hussain]

According to a conservative estimate, ‘Rs.600 billion is generated every year by the parallel economy. Add to this, the black money generated through smuggling in goods and narcotics trade that is between Rs.300 billion and Rs.500 billion. This makes a whooping Rs.1000 billion.’ [Dr. Ikramul Haq] And, according to ‘official and independent experts, ever-growing black money is Rs.1.8 trillion, about 70 % of the total economy.’ [Quoted in Dr. Ikarmul Haq]

These rough estimates suggest the sheer volume of laundered money in Pakistan.

The state of legislation regarding money-laundering

Since its inception, the Pakistani state has been infected with corrupt practices. Hence, the laws were also enacted to deal with it. The question is: are these laws sufficient to counter money-laundering as a form of corruption? As to this, two views exist. The first one is that there is no need of further legislation; what we need is the political will to implement these and not to use them for political gains. The second view is that we need further legislation.

Ijaz Hussain is of the view that ‘the survey of legal control of corruption and money laundering . . . shows that Pakistan is not deficient in laws and regulations, which purport to combat and eradicate the twin menaces of corruption and money laundering. In fact they are quite numerous and comprehensive.’

He himself poses the question why then ‘Pakistan has failed to make real headway in effectively dealing with the twin menaces.’ He explains this failure in the following way:

“One problem with laws relating to corruption is that they apparently propose to create independent institutions to deal with the problem but in the ultimate analysis invest the real power with government bodies. . . Another bane of the accountability laws on corruption is the selectivity with which they are applied. The government in power uses these laws to ruthlessly pursue its opponents but when it is a question of accountability of the members of the party in power, these laws do not seem to exist.” [Ijaz Hussain]

His conclusion is that “it signifies that there is nothing wrong with the laws but the manner and the method with which they are applied is defective. The only way is to apply the laws even-handedly and impartially.”

This shows the need and importance of the rule of law in Pakistan.

Other writers highlight the need for new legislation. “Our country is passing through the worst crisis of resource mobilization manifesting it in the huge budgetary deficits. Revenue has to be collected and all measures both stringent and persuasive have to be taken in that direction. The government has, therefore, to plan in terms of a well-thought-of anti-money-laundering cum asset seizure legislation to draw upon the huge reservoir of the drug and untaxed money.” [Dr. Ikramul Haq]

In another place, Dr. Ikramul Haq writes that “in the context of the prevailing grave challenge to combat terrorism, coupled with money-laundering crises, and the problem of ever-growing black money, there is an urgent need to launch a well-thought for anti-money laundering law to block this huge money becoming a lethal weapon in the hands of Mafias who now control the economy as well as governments.”

Another writer addresses the problem in the following way:

“A great deal can be done to fight money laundering. This includes increasing awareness of the phenomena — both within the government and the private sector — and then to provide the necessary legal or regulatory tools to the authorities charged with combating the problem.” [Kashif Mateen Ansari, Dealing with organised financial crime]

He suggests the following tools:

0 Making the act of money laundering a crime;
0 Giving investigative agencies the authority to trace, seize and ultimately confiscate criminally derived assets; and
0 Building the necessary framework for permitting the agencies involved to exchange information among themselves and counterparts in other countries.

He also suggests that ‘financial institutions must play their role in dealing with the problem. This involves establishing financial transaction reporting systems; customer identification; record keeping standards; and, a means for verifying compliance.’

It’s clear that all this requires more and more regulations and legislation endowing the government with more and more free hand to control the already heavily controlled economy.

After the gory events of September 11, 2001, the government of Pakistan too has given extraordinary importance to the task of countering money-laundering. The State Bank of Pakistan, Securities and Exchange Commission of Pakistan, and other financial institutions are paying more and more attention to the issuance and implementation of rules and regulations to stop the laundering of money.

But, the overall situation in this regard is not satisfactory. Dr. Ikramul Haq points out that “the SECP (Securities and Exchange Commission of Pakistan) and Governor State Bank of Pakistan, perhaps, are not aware of the fact that even today when the Pakistani government, under tremendous pressure from the US and other states, is introducing anti-money laundering law, the CBR is committed to giving a free hand to money launderers assuring them that no question would be asked if they remit their ill-gotten money from outside through banking channels and surrender the foreign currency to the state and get Pakistani rupees as encashment.”

In this regard, the evidence quoted by Dr. Ikaramul Haq is conclusive: “The CBR in its letter no. F4(34)/ITP/2002 dated 29-02-2002 reaffirmed that “the Department would adhere to its policy of not probing the foreign remittance” brought into Pakistan by any “person.”

He further points out that “in the Income Tax Ordinanace 2001, promulgated on the dictates of IMF on 13 September, 2001, a special provision [section 111(4)] has been inserted giving a free hand to money launderers, that no question will be asked to them if they remit (laundered is more appropriate term) their ill-gotten money from outside through banking channels and surrender the foreign currency to the State Bank of Pakistan and get Pakistani rupees as encashment.”

Why do people resort to money-laundering?

On the face of it, people resort to money-laundering because they are forced to do so just like they are forced to evade tax. It is obvious that people indulge in drug trafficking, smuggling, insider trading, illegal arms sale, organized crime, bribery, embezzlement, extortion by force, computer fraud schemes, etc. Of course, some of them are crimes against property and person; their nature won’t change in any society be it a free or an unfree society.

But, when people are unjustly stopped from doing business with one another, and thereby an incentive for more profit is created in that particular area, as in production and trading of drugs, arms, and across the borders trade, they start taking risk to earn higher profits. In case, there is no illegality is involved, for example, in drug-trade, the rate of profit in that trade would remain at a normal level; this would discourage people treading that path anymore.

Thus, we may say that the lower the volume of ‘black economy’ under a government, the lesser the amount of money laundered. It means that the freer the people to pursue their businesses, the lower the volume of black economy, and consequently, the lesser the amount of money laundered.

Part-III

The legality or illegality of tax-evasion and money-laundering

The legality or illegality of tax-evasion or money-laundering is determined by the nature of relevant legislation means that a thing or an act that was legal or ‘alegal’ yesterday, after the legislation becomes illegal today. For example, years before when VCR (Video Cassette Recorder) came to Pakistan, owning it was neither legal nor illegal; then, it was made that without obtaining a license owning a VCR was illegal. Or, as it is today in Pakistan, to own a Television Set, one needs to pay an annual license fee.

The question is: is the determination of legality or illegality of a thing or an act in this manner itself legal or illegal? Asking this means: what is legality or illegality? As we who believe in the self-ownership of an individual assert that no legislation repugnant to the ‘inalienable rights’ of the individual citizens can be made; we do believe that this is how the legality or illegality of a piece of legislation regarding a thing or an act is determined.

Thus, the acts of evading tax and laundering money are illegal since the collectivist anti-individualist legislation makes them so. In the absence of such legislation, they were/are not legal or illegal. Thus, in a free society, where there is generally no restriction, for example, on producing and using drugs, the businesses related to it will not be illegal; and, consequently, there will be no incentive for the people to earn higher profits.

Tax-evasion and money-laundering from the perspective of a free society

In a free society, the nature of tax-evasion and money-laundering would be quite different from what exists now and here. There would be no exorbitant taxes and not many taxes also. And, of course, there wouldn’t be many things declared illegal also. But, we must remember that as there would be taxes though too lower and too less in number as compared to the present tax-scenario; the occurrence of tax-evasion in that society cannot be ruled out.

Same is the case with money-laundering. Though, we believe that so many things due to the nature of existing legislation presently considered ‘criminal’ wouldn’t be treated as criminal in a free society; for instance, the use of drugs, ‘illegal’ trade, owning arms for self-defense, etc. However, there may be something which would be treated as illegal in that society. In such cases, the act of laundering money may happen and require some legislation to countering it.

But, these are mere surmises. What we know for sure that in a free society there would be crimes such as organized crime, bribery, embezzlement, extortion by force, computer fraud schemes, etc. People who earn money in these ways would try to launder it; so, we do have to deal with them for which we would need legislation.

As we believe that in a free society people would be free to create and produce, to do business and to transact when and where and with whom they happen to choose; thus, there would be little scope of anything to be declared illegal but encroaching upon other people’s freedom, or in other words, the crimes against property and person.

Concluding remarks/Recommendations

A government that tries to control many things, resultantly, comes to have less and less control of many other things. Perhaps, that was why Ronald Reagan had to say: Government is not the solution to our problem; government is the problem.

And, probably, this is why a limited government (in the words of Thomas Jefferson) is considered best because it governs the least. It does not extort money in the name of this or that tax from the people; and, thus, forces them to evade tax. It does not declare this or that thing or act illegal in the name of propriety, morality, equality or welfare of the poor; and, thus, turns them to resort to impropriety, immorality, inequality and continuing willful poverty. It does not stop them from doing business with the people of their choice in the name of localism, nationalism, or patriotism; and, thus, converts them to regionalism, internationalism, and cosmopolitanism and declare these as crimes. Finally, it does not make them launder the money earned through the ‘illegal’ ways.

What such a government or Pakistani government needs to do is to keep the rates of taxes low, number of taxes reduced, and the tax net broad-based. As regards, income tax, a far better strategy is to have a flat tax system. And, of course, there should be no exemptions and tax holidays since this is what is used in the interest of the privileged and powerful groups of the society at the cost of other sections of society.

But, from the perspective of a free society, also, the issues of tax-evasion and money-laundering need serious deliberations. This acquires more significance when we see that the transition from an unfree society to a free society wouldn’t be instantaneous; rather it would be gradual and painful. There would be hurdles and reversals, progression and regression.

Moreover, this shows that though there are issues that are the creations of this particular government-controlled society, however, the issues of today, such as tax-evasion and money-laundering, do not belong exclusively to the complex of present unfree society. Actually, it is this society that possesses in its womb the seeds of a future free society. Instead of ignoring those seeds as being the negatives of a controlled society, we need to look after them, even during the transition period, to let them flourish into a free society.

————–

Bibliography

[In the preparation of this paper, following books, articles, etc. have been used.]

1. Ansari, Kashif Mateen., Dealing with organised financial crime, (The News International Lahore Edition August 29, 2004)
2. Gagné, Robert., Nadeau, Jean-François., Vaillancourt, François., Taxpayers’ Response to Tax Rate Changes: A Canadian Panel Study, CIRANO, Montreal, 2000 (http://www.cirano.umontreal.ca/publication/documents.html)
3. Haq, Dr. Imramul., Money laundering facilitated by tax laws, (The News International Lahore Edition February 8, 2004)
4. Haq, Dr. Imramul., Federal Tax Ombudsman: role and challenges, (The News International Lahore Edition November 24, 2003)
5. Hussain, Ijaz., Legal Control of Corruption and Money Laundering in Pakistan, in “Corruption in South Asia: India, Pakistan and Sri Lanka,” Edited by K. M. de Silva, G. H. Peiris and S. W. R. de A. Samarasinghe, International Centre for Ethnic Studies, Colombo (http://payson.tulane.edu/ices/Default.htm)
6. Iqbal, Zafar., Qureshi, Sarfraz Khan., Mahmood, Riaz.,The Underground Economy and Tax Evasion in Pakistan: A Fresh Assessment (Research Report No. 158), Pakistan Institute of Development Economics, Islamabad, April 1999
7. Kemal, M. Ali., Underground Economy and Tax Evasion in Pakistan: A Critical Evaluation (Research Report No. 184), , Pakistan Institute of Development Economics, Islamabad, 2003
8. Miles, Marc A., Feulner,Edwin J. Jr., O’Grday, Mary Anastasia., 2004 Index of Economic Freedom, The Heritage Foundation and Dow Jones & Company, Inc. 2004
9. Omar, Kaleem., The ins and outs of taxes, (The News International Lahore Edition July 5, 2004)
10. Shahid-ur-Rehman, Who Owns Pakistan?, Mr. Books (Pvt.) Ltd., Islamabad, 4th Edition August 1998
11. Tax System in Pakistan: A Critical Evaluation and Recommendations for Change (Report of Working Group May/June 1986), Institute of Policy Studies, Islamabad, 1986
12. Vaknin, Sam., Money Laundering in A Changed World (http://samvak.tripod.com/cv.html)

Civil Society Report on Climate Change

Governments should reject calls for a post-Kyoto treaty “Kyoto 2”

Civil Society Report says climate policy should focus on removing barriers to adaptation


Governments should reject calls for a post-Kyoto treaty “Kyoto 2”

Civil Society Report says climate policy should focus on removing barriers to adaptation

Lahore November 27, 2007: A new Report produced by a coalition of over 40 prominent civil society organisations from 33 countries says that governments should reject calls for a post-Kyoto treaty (“Kyoto 2”) with binding limits on carbon emissions. The report says a better strategy would be to focus on removing barriers to adaptation, such as subsidies, taxes and regulations that hinder technological innovation and economic growth.

From 3-16 December, government officials will be in Bali, Indonesia, for climate talks. They are set to discuss the establishment of a new treaty, dubbed “Kyoto 2,” which would require all countries to limit emissions of greenhouse gases.

The Civil Society Report on Climate Change concludes that such emissions caps would be counterproductive: they would undermine economic development, harm the poor, and would be unlikely to address the problem of climate change in a meaningful way.

“Kyoto 2 is the wrong solution. Such a treaty would harm billions of poor people, making energy and energy-dependent technologies, such as clean water, more expensive, and would perpetuate poverty by retarding growth,” said Dr. Khalil Ahmad of Alternate Solutions Institute, one of the 41 organisations who published the report.

“Given that nations are having trouble complying with the relatively small emissions cuts required under Kyoto, the economic and social consequences of a Kyoto 2 Treaty could be devastating,” added Dr. Khalil.

The Civil Society Report argues that adaptation is the best way to enable people to deal with a changing climate. That means:

  • enabling people to utilise technologies capable of reducing the incidence of disease, such as clean water, sanitation, and medicines;
  • deploying technologies – e.g. flood defences, roads, sturdier houses, and early warning systems – that reduce the risk of death from weather-related disasters;
  • removing barriers to the use of modern agricultural technologies, which would better enable people to adapt to changing conditions;
  • eliminating subsidies, taxes, and regulations that undermine economic growth – thereby enabling people better to address current and future problems.

Other conclusions in the Civil Society Report on Climate Change include:

  • Over the course of the past century, deaths and death rates from weather-related natural disasters have declined substantially. It appears that the main drivers of this reduction have been improvements in wealth and technology.
  • Mortality from extreme weather events is far more strongly affected by the technologies deployed by humans – such as the construction of houses, roads, and dams – than by climate.
  • Human ecology and human behaviour are the key determinants of the transmission of infectious disease. Obsessive emphasis on climate is unwarranted because, given suitable economic circumstances, straightforward strategies are available to ensure the public health.
  • If adaptation is not unduly restricted, production of food and other agricultural products, as well as forestry products, will keep pace with growing human demands.
  • Foreign aid is being used as a ‘carrot’ to induce poor countries to restrict their emissions. But aid has mostly been wasted or even counterproductive. While there is a case for refocusing aid on projects that have a stronger chance of providing net benefits, increasing aid would do more harm than good.
  • Finally, the stick of trade sanctions have been threatened as a means of enforcing the global cap – yet such sanctions harm both parties; a clear lose – lose scenario.

Download the Report (PDF)

BACKGROUND INFORMATION

Parties to the UN Framework Convention on Climate Change meet in Bali, Indonesia, from 3-16 December 2007. They will discuss a successor to the Kyoto Protocol, which expires in 2012.

About the Report
Civil Society Report on Climate Change
Multi-author
Produced by the Civil Society Coalition on Climate Change
Published Tuesday 27 November 2007
ISBN 1-905041-15-2
100 pp.

About the Civil Society Coalition on Climate Change www.csccc.info

The Civil Society Coalition on Climate Change seeks to educate the public about the science and economics of climate change in an impartial manner. It was established as a response to the many biased and alarmist claims about human-induced climate change, which are being used to justify calls for intervention and regulation. The Coalition comprises 41 independent civil society organizations from 33 countries, who share a commitment to improving public understanding about a range of public policy issues. All are non-profit organizations that are independent of political parties and government.

For more information, contact info@asinstitute.org

Civil Society Coalition on Climate Change to Challenge IPCC Report

In advance of the release of the latest alarmist report from the Intergovernmental Panel on Climate Change (IPCC), a group of 26 civil society organizations has formed a new global coalition. Alternate Solutions Institute is part of this coalition which seeks to offer more rational approach to the issue based on independent evaluations of the evidence and assessments of the policy options.


In advance of the release of the latest alarmist report from the Intergovernmental Panel on Climate Change (IPCC), a group of 26 civil society organizations has formed a new global coalition. Alternate Solutions Institute is part of this coalition which seeks to offer more rational approach to the issue based on independent evaluations of the evidence and assessments of the policy options.

As the interest groups exaggerate the threat of climate change in order to support their call for urgent global and national regulation of carbon emissions, governments, intergovernmental bodies and even supposedly objective academies of science reinforce this by issuing alarmist reports – such as the UK Government’s ‘Stern Review’ and the IPCC’s much hyped Fourth Assessment Report. While many of the proposed policies are likely do more harm to society than the climate changes they are intended to control, there is a great need for more rational thinking on this issue – which is what the Coalition intends to provide. The CSCCC aims at challenging the unjustified alarmism and promote rational debate.

The Civil Society Coalition on Climate Change seeks to educate the public about climate change issues in an impartial manner. It has been established as a response to the many biased and alarmist claims about human-induced climate change, which are being used to justify calls for urgent action by governments.

The Coalition currently comprises 26 independent civil society organisations from 23 countries who share a commitment to improving public understanding about a range of public policy issues. All are non-profit organizations that are independent of political parties and government.

For more information, contact info@asinstitute.org

Coalition members:

Alternate Solutions Institute
Pakistan

Alabama Policy Institute
USA

Bluegrass Institute for Public Policy, Kentucky
USA

CEPOS
Denmark

China Sustainable Development Research Centre, Capital University of Business & Economics
China

Fraser Institute
Canada

Free Enterprise Institute
Peru

Free Market Foundation
South Africa

Frontier Centre for Public Policy
Canada

Fundacion Atlas 1853
Argentina

Ecuadorian Institute of Political Economy (IEEP)
Ecuador

Imani
Ghana

Initiative of Public Policy Analysis (IPPA)
Nigeria

Institute for Liberty and Analysis of Policy in Government (INLAP)
Costa Rica

Institute for Free Enterprise
Germany

Institute of Economic Analysis
Russia

Instituto Liberdade
Brazil

Institute for Market Economics
Bulgaria

International Policy Network
UK

Istituto Bruno Leoni
Italy

Jerusalem Institute for Market Studies
Israel

John Locke Foundation, North Carolina
USA

Liberalni Institute
Czech Republic

Liberty Institute
India

Lion Rock Institute
Hong Kong

Tennessee Center for Policy Research
USA

Ideas for a Free and Responsible Society

“Ideas for a Free and Responsible Society” is a collection of writings published on a CD. The CD contains a selection of contributions by some of the most important scholars and thinkers, both historical and contemporary, which explain the general intellectual concepts, some of the challenges, and some applications to public policy issues.


Ideas have consequences. They influence the political, economic and social systems that govern our actions and thereby affect the way we live our lives. Ideas have inspired many of the political and economic arrangements that have existed at different times in different places.

Some of these arrangements have promoted creativity, innovation, peace and prosperity, leading to improvements in quality of life and enabling people to fulfill their myriad needs and goals. Other political and economic arrangements have undermined creativity, inhibited innovation and lead to civil unrest, oppression, starvation, poverty and misery.

For most of history, in most places the latter type of arrangements prevailed and as a consequence the large part of humanity was poor, oppressed and miserable. Beginning around 1500, the political and economic arrangements in some Western European countries began to shift – and improvements in living standards began to be felt throughout those societies.

Over the course of the past two hundred years, the number of countries with such beneficial political and economic arrangements has gradually increased. As a result, this period has seen rapid improvements in technology and economic conditions. Meanwhile, the number of people living in abject poverty has been declining in absolute terms for fifty years in spite of a dramatic rise in the world population. Nevertheless, over a billion people continue to live in miserable circumstances.

“Ideas for a Free and Responsible Society” is a collection of writings published on a CD. The CD contains a selection of contributions by some of the most important scholars and thinkers, both historical and contemporary, which explain the general intellectual concepts, some of the challenges, and some applications to public policy issues. This CD is designed for those who are interested in what these beneficial economic and political arrangements are that lead to economic growth and have the capacity to eliminate poverty. It does not pretend to provide a definitive answer but rather to point people in the right direction. The title of the CD, “Ideas for a Free and Responsible Society,” was inspired by the observation that the political and economic arrangements that seem to be most conducive to peace and prosperity are those that exist in free and responsible societies.

In such societies, there exist certain institutions that guarantee political, economic and social freedom, and those institutions are in turn underpinned by ideas. Such ideas have been explored by individuals from many different perspectives, starting with ancient Chinese, Roman and Greek philosophers and continuing to the present day. The reader will find that a rich intellectual debate about the nature of these ideas exists even among the authors of texts on this CD.

The contents are not intended to be a comprehensive review of the literature of the subject, which is enormous. Instead, the CD contains a selection of contributions by some of the primary scholars and thinkers who have developed ideas which relate to a free and responsible society. Their contributions explain some of the general intellectual concepts and challenges, and the application of these ideas to public policy. It is hoped that the selections included on the CD will inspire readers to consider the advantages of a free and responsible society, to further investigate the wide array of literature on these topics, and even to put these ideas into practice.

If you live in Pakistan and want to own the CD: Ideas for a Free and Responsible Society, please download and fill out the following pro forma, and send it to the following address via mail only. This pro forma will enable us i) to remain in contact with you and ii) to have feedback as to the influence this CD would be having on your ideas and thinking.

Released and distributed in Pakistan by
Alternate Solutions Institute
Email: info@asinstitute.org
Address: P. O. Box No: 933, GPO,
Lahore-54000 Pakistan

CD Request Form

FTAs – Do They Really Free The Trade?

Ausgust 25, 2009

In recent years free trade agreements have become fashionable. Thus, when two or more countries reach an agreement to allow free trade (because it is they which in the first instance imposed restrictions on free trade), it is publicized as a Free Trade Agreement. It is misleading and ridiculous! It’s not allowing free trade between the contracting countries, since there are more ‘strings’ here than the natural freedom allows!


By Dr. Khalil Ahmad

[This short paper tires to highlight some of the points of Free Trade Agreements that negate the very concept of Free Trade. It argues that governments do not need any agreement to promote free trade; that is a contradiction in terms. Agreements are reached between trading parties, not between the governments. In order to explain this, South Asian Free Trade Area agreement’s text has been used as a test case. This agreement was reached between Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka in January 2004.] *

Free trade means freedom to trade. Naturally, everyone is free to enter an agreement with anyone in a voluntary manner to sell or purchase anything no matter wherever they happen to live in this world. One cannot be restricted to transact with this or that person only. No doubt, it is political boundaries which have divided this human world into various regions and countries and withdrawn this freedom from people by force.

However, the fact is that free trading can flourish and bring benefits to the trading parties without disturbing these boundaries. What we need is to take this world of ours as one big market which it is; and not as compartmentalized markets serving special interests.

In recent years free trade agreements have become fashionable. Thus, when two or more countries reach an agreement to allow free trade (because it is they which in the first instance imposed restrictions on free trade), it is publicized as a Free Trade Agreement. It is misleading and ridiculous! It’s not allowing free trade between the contracting countries, since there are more ‘strings’ here than the natural freedom allows!

Let us have, as an example, a cursory look at the text of the Agreement on South Asian Free Trade Area (SAFTA). Sure, I am going to quote those clauses which nullify the spirit of free trade!

Article 3, ‘objectives’ clause b reads: “promoting conditions of fair competition in the free trade area, and ensuring equitable benefits to all Contracting States, taking into account their respective levels and pattern of economic development;”

Article 3, ‘principles’ clause c reads: “Safta shall be based and applied on the principles of overall reciprocity and mutuality of advantages in such a way as to benefit equitably all Contracting States, taking into account their respective levels of economic and industrial development, the pattern of their external trade and tariff policies and systems;”

Article 3 clause f reads: “The special needs of the Least Developed Contracting States shall be clearly recognized by adopting concrete preferential measures in their favour on a non-reciprocal basis.”

Article 14 ‘General Exceptions’ deals the final blow. Its two clauses read:

“a) Nothing in this Agreement shall be construed to prevent any Contracting State from taking action and adopting measures which it considers necessary for the protection of its national security.

b) Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the similar conditions prevail, or a disguised restriction on intra-regional trade, nothing in this Agreement shall be construed to prevent any Contracting State from taking action and adopting measures which it considers necessary for the protection of:

(i) public morals;

(ii) human, animal or plant life and health; and

(iii) articles of artistic, historic and archaeological value.”

Article 15 ‘Balance of Payments Measures’ clause 1 reads:

“Notwithstanding the provisions of this Agreement, any Contracting State facing serious balance of payments difficulties may suspend provisionally the concessions extended under this Agreement.”

Article 16, its 7 clauses provide for ‘Safeguard Measures.’

In the final analysis, all these articles and clauses (and others) allow for doing anything on the part of contracting states as regards implementation of the agreement. Of course, there are limits to implementation such as what is not provided for in the agreement cannot be implemented; but, on the other hand, whatever has been provided for in an agreement implementation of that can always be delayed, obstructed or manipulated.

That doesn’t free trade, enslaves it though! For instance, the contracting states can go for measures to protect their local interests from foreign competition in the form of tariffs, quotas and subsidies; whereas these measures are considered inimical to the promotion of free trade.

Thus, under such agreements it remains in the hands of a state to determine how much freedom it is willing to extend. Or say, it remains with the state that what to import or export and from whom and to whom and how and under what conditions! It’s not free trade!

There are other things in this agreement that strengthen the contracting states’ tendency towards protectionism such as gradual reduction (or reduction under specified conditions) of tariff rates, Sensitive Lists. So, these so-called free trade agreements allow but for a restricted freedom to trade. They cannot achieve what free trade in fact offers.

As to the tag of ‘Regional’ attached to the free trade agreements, it is just like restricting one that you are free to move within a specified area. Thus, regional free trade agreements allow trading with contracting countries only and under definite restrictions.

In simple terms our argument runs thus: would we like anybody S (State) ordering or restricting us to do selling or purchasing with persons X, Y, and Z under conditions already decided upon by S. But on the other hand, under the circumstances this allows us at least freedom to transact with X, Y, and Z, under some specified conditions if not with A, B, and C and on our own conditions.

What is important here is the spirit with which government of a country implements the agreement! Thus, if conceived and implemented in good faith, Regional Free Trade Agreements may be the first step in the right direction. They allow something of freedom to trade than having no freedom at all.

* Presented at the Economic and Political Freedom Nexus Dialogue, Session I: Opportunities and Challenges of Regional Free Trade Areas, organized by Friedrich Naumann Stiftung and Federation of Pakistan Chambers of Commerce and Industries on March 30, 2006 in Islamabad.

[The writer is founder/head of the Alternate Solutions Institute, first free market think tank of Pakistan.]

Is Healthcare A “Human Right?”

January 02, 2010

Turning healthcare into an individual enforceable human right creates all kinds of legal complexities, undermines the rule of law and stifles political pluralism. Neither is there any evidence that “the right to health” has actually improved healthcare anywhere in the world – in some cases it has undermined it.


The idea that governments should be legally obliged to provide healthcare for its citizens is now an apparently uncontroversial idea. The “right to health” forms the basis of policy for the UN, many international NGOs and national development agencies, and exists in the constitutions of many countries.
However, the political and legal ascendance of the “right to health” is unwarranted and counterproductive, according to this new International Policy Network Report by Danish human rights scholar Jacob Mchangama.
Turning healthcare into an individual enforceable human right creates all kinds of legal complexities, undermines the rule of law and stifles political pluralism. Neither is there any evidence that “the right to health” has actually improved healthcare anywhere in the world – in some cases it has undermined it.
In reality, the rights which are really fundamental to improved healthcare are those which underpin prosperity and economic development – such as the right to own and exchange property. Such rights are denied to millions, yet are vital for creating the prosperity needed to pay for good healthcare.

The First Free-Market Think Tank in Pakistan

Pakistan’s first free-market think tank, Alternate Solutions Institute, has been launched in Lahore, a leading intellectual center of Pakistan. The motto of this new non-profit, non-political educational institute is “Welfare of the People By the People.” Its mission is to seek solutions to the challenges in the areas of economics, law, education and health in accordance with the principles of classical liberalism, and to promote the implementation of these solutions.


Pakistan’s first free-market think tank, Alternate Solutions Institute, has been launched in Lahore, a leading intellectual center of Pakistan. The motto of this new non-profit, non-political educational institute is “Welfare of the People By the People.” Its mission is to seek solutions to the challenges in the areas of economics, law, education and health in accordance with the principles of classical liberalism, and to promote the implementation of these solutions. In short, Alternate Solutions Institute aims at promoting the concept of a limited responsible government in Pakistan under the rule of law protecting life, liberty, and property of all of its individual citizens.

To achieve these ends, the Institute will engage in the translation and publishing of relevant texts from other languages into Urdu; preparation of original research, suggesting particular solutions to particular challenges; and conducting seminars, workshops and conferences to educate interested students, teachers, and journalists in the principles of classical liberalism. For more information, contact the institute at asinstitute@hotmail.com.

Economic Freedom Report 2008: Pakistan ranks 104 out of 141 countries

The 2008 edition of the Economic Freedom of the World report includes new research, examining the role of economic freedom in eliminating poverty with a particular focus on sub-Saharan Africa. Numerous studies have shown that countries with more economic freedom grow more rapidly and achieve higher per-capita income levels than those that are less free; therefore, it would seem that this growth should also help reduce poverty.


Economic Freedom Report 2008: Pakistan ranks 104 out of 141 countries

Judicial independence and integrity of legal system declines

Government spending and inflation increases

Rule of law and property rights weaker in Islamic nations

India inches up from 6.55 to 6.59; Hong Kong and Singapore rated best for economic freedom, Angola and Zimbabwe rank worst

Lahore September 25, 2008: The report ranks Hong Kong number one, followed by Singapore then New Zealand. Zimbabwe once again has the lowest level of economic freedom followed by Angola and Myanmar, according to the Economic Freedom of the World: 2008 Annual Report, released today by Pakistan’s first free market think tank, Alternate Solutions Institute.

“Weakness in the rule of law and property rights is particularly pronounced in sub-Saharan Africa, among Islamic nations, and for many nations that were part of the former Soviet bloc,” said James Gwartney, lead author of the report and professor of economics at Florida State University.

Pakistan ranked 104 out of 141 countries this year, after ranking 102 (out of 141 countries) in the last year’s report. In 2007 Report Pakistan scored 6.08 points out of 10; while this year its scored fell to 6.05. The areas that caused a decline in Pakistan’s overall performance are: size of government; legal structure and security of property rights; and, access to sound money. The areas in which Pakistan improved are: freedom to trade internationally; and, regulation of credit, labor, and business.

The annual peer-reviewed report uses 42 different measures to create an index ranking countries around the world based on policies that encourage economic freedom. The cornerstones of economic freedom are personal choice, voluntary exchange, freedom to compete, and security of private property. The report is produced by Canada’s Fraser Institute in cooperation with independent institutes in 76 nations and territories including the Alternate Solutions Institute in Pakistan.

Research shows that individuals living in countries with high levels of economic freedom enjoy higher levels of prosperity, greater individual freedoms, and longer life spans. This year’s report also contains new research showing the impact of economic freedom on poverty reduction.

“Economic freedom is one of the key building blocks of the most prosperous nations around the world. Countries with high levels of economic freedom are those in which people enjoy high standards of living and personal freedoms. Countries at the bottom of the index face the opposite situation; their citizens are often mired in poverty, are governed by totalitarian regimes and have few if any, individual rights or freedoms,” said Alternate Solutions Institutes’ Executive Director, Dr. Khalil Ahmad.

The full report is available here.

Pakistan scores in key components of economic freedom (from 1 to 10 where a higher value indicates a higher level of economic freedom):

• Size of government: changed to 7.01 from 7.26 in
the last year’s report
• Legal structures and security of property rights:
changed to 4.31 from 4.35
• Access to sound money: changed to 6.45 from 6.50
• Freedom to trade internationally: changed to 5.91
from 5.78
• Regulation of credit, labour and business: changed
to 6.56 from 6.49

Economic Freedom and World Poverty

The 2008 edition of the Economic Freedom of the World report includes new research from Gwartney and Seth W. Norton, professor of business at Wheaton College, examining the role of economic freedom in eliminating poverty with a particular focus on sub-Saharan Africa. They point out that numerous studies have shown that countries with more economic freedom grow more rapidly and achieve higher per-capita income levels than those that are less free; therefore, it would seem that this growth should also help reduce poverty.

Gwartney and Norton note that since economic growth is the driving force underlying reductions in poverty, countries such as Chile, Peru, Thailand, Malaysia, South Korea, China, and India have seen their poverty rates decrease in recent decades because these countries have achieved rapid economic growth.

“If a country adopts reforms supportive of economic freedom, will the wellbeing of the poor improve? Theory indicates that the answer to this question is “yes,” but substantial reductions in poverty are likely to take some time,” Norton said.

“It will take time for the new policy direction to acquire credibility, investors and other decision-makers to respond to the more attractive environment, and the rate of growth to increase. As the higher level of economic freedom is sustained and the more rapid growth persists, poverty rates will fall, and they will fall by larger amounts with the passage of time.”

The authors conclude that the institutions and policies of most sub-Saharan African nations are highly inconsistent with economic growth. The failure of the legal system to protect property rights, the roadblocks imposed by trade restrictions, and the heavy regulation and administrative costs imposed on business undermine economic growth because they stifle the gains from trade, entrepreneurship, and investment. Given that most of the sub-Saharan countries are relatively small, the high trade barriers are particularly damaging.

In order to encourage economic growth in Africa, Norton and Gwartney recommend that African nations reduce and eliminate trade barriers and business regulations; improve their legal system; and develop an interstate highway system through Africa.

About the Economic Freedom Index

This year’s publication ranks 141 nations representing 95% of the world’s population for 2006, the most recent year for which data are available. The report also updates data in earlier reports in instances where data have been revised.

To download the data sets, and previous Economic Freedom of the World reports, visit http://freetheworld.com

For more information, contact the Alternate Solutions Institute at
info@asinstitute.org