The use of public office for private gain not only lies
at the heart of bad governance but can also play a major role in accentuating
poverty. As the new elected government begins its career within yet another 'democratic'
dispensation, it may be useful to examine the linkage between financial probity,
economic growth and poverty. In this week's article we will present a brief analysis
of how wide spread corruption by political leaders and government's officials
during the 1990s induced adverse changes in the structure of the economy that
resulted in slower GDP growth and greater poverty.
to an estimate by Hafiz Pasha and S.J. Burki, the cost of such corruption to the
banking sector alone was 10 to 15 percent of the GDP in 1996-97. They have estimated
that the overall cost to the country of corruption at the highest level of government,
during the second tenure of the Bhutto government, was 20% to 25% of the GDP in
1996-97, or approximately US $ 15 billion. Their estimate includes the losses
incurred due to corruption in public sector corporations such as the Pakistan
International Airlines, Sui Northern Gas, Pakistan State Oil, Pakistan Steel,
Heavy Mechanical Complex, the Water and Power Development Authority, and the Karachi
Electric Supply Corporation. The losses of these public sector corporations had
to be borne by the government and constituted a significant element in the growing
Prime Minister Nawaz Sharif also used
his public office to enlarge his already considerable private fortune. The device
of forcing state controlled banks to lend to family members or family owned companies
was persistently used. For example the Ittefaq group owned by Nawaz Sharif's family,
borrowed huge funds from a number of co-operative banks and then defaulted on
the loans. Similarly some of the industrial units privatized by the Sharif government
were handed over to "friends" on very favourable terms. Apart from this
a number of additional cases were brought to light by the press subsequently.
Occurring at a time when GDP growth had already begun to fall below its historical
trend rate, widespread governmental corruption may have been a significant factor
in intensifying the slow down in investment, increasing the economic burden on
the poor and perpetuating the inadequacy of basic services during this period.
It can be argued that widespread corruption in Pakistan
during the 1990s adversely affected investment and growth in at least three ways:
(1) The uncertainty and lack of transparency in government policy and the loss
of time and money associated with governmental corruption would create an unfavourable
environment for private sector investment. (2) Widespread corruption implied that
following an investment decision, the investor would have had to pay bribes at
various stages of project approval and implementation thereby raising project
cost. A significant proportion of private sector savings directed at new projects
would flow to corrupt government officials rather than into productive investment.
The consequent decline in the overall productivity of capital in the economy would
lead to lower GDP growth for given levels of investment. Evidence shows that such
a decline in the productivity of capital did indeed occur in the 1990s. Nomaan
Majid has estimated a time series of the total factor productivity in the manufacturing
sector and also decomposed it into changes overtime in capital productivity. His
estimates show that in Pakistan's manufacturing sector, the productivity of capital
has been declining since 1992-93. (3) Since banks and investment finance institutions
were being forced to lend on political grounds and there were substantial defaults
as a result, it is clear that a significant proportion of banking capital was
being transferred as rents to corrupt leaders. This would adversely affect private
investment in two ways: (a) There would be lesser credit available for investment.
(b) Due to the increased "transactions cost" of banks following defaults,
the interest rate for private investors would increase.
large scale corruption by political leaders and government officials during the
1990s not only slowed down investment and growth but also increased inequality
and the economic burden on the lower income groups. This happened in three ways:
(1) Increased corruption and mismanagement in government meant that for given
levels of development expenditure, there were fewer and poorer quality of public
goods and services. This was clearly manifested in the deterioration of the irrigation
system with lesser water available at the farm gate, as well as a reduced availability
and quality of health, education and transport services provided by the government.
(2) The total development expenditure (as a percentage of GDP) itself fell sharply
during the 1990s, partly due to budgetary constraints induced by low revenues.
The problem of the narrow tax base was accentuated by the massive leakage in the
tax collection system due to corruption. According to Burki's estimate this leakage
amounted to 3 percent of the GDP, about twice the level ten years earlier. The
consequent low revenues, combined with slower GDP growth and high levels of government's
current expenditure, led to unsustainably high levels of budget deficits. (3)
Since the government was unable or unwilling to plug the leakage in the tax collection
system, or reduce non development expenditure, it had to resort to increased indirect
taxation to deal with the fiscal crisis. Evidence on the incidence of taxation
during the late 1980s and early 1990s shows that the tax burden as a percentage
of income was highest at 6.8 percent for the lowest income group (less than Rs.700
per month) and lowest at minus 4.3% for the highest income group (over Rs.4,500
per month). Thus the burden of governmental mismanagement and corruption was passed
on to the poorest sections of society.