Op-Ed: Imran Khan envisions a Pakistani welfare state. Is it possible?

This is an archived version of an article written for Dawn.com, published on Aug, 28th 2018. If you want to share it, please do so the version on Dawn.com. It was posted here 3rd Sep 2018 as a self-archive.

Pakistan has a new leader at the helm who, if his first address to the nation is to be considered at face value, is set to make a radical departure from the conventional trajectory we have taken as a nation to create what he describes as a Scandinavian-style Islamic welfare state.

Keeping aside the intellectual ambiguity of coupling liberal Scandinavia with Islamic theology, if Pakistan is to soberly contemplate such a goal, it is useful to critically engage the feasibility and the implications of such a proposal.

What makes a welfare state?

While welfare states vary in characteristics, the term is used to indicate a type of social contract under which the state undertakes extensive intervention in the society to protect or assist those it considers to be disadvantaged or going through some form of a shock.

In other words, providing a form of social protection.

In practice, this could be through a number of interventions. Providing free or subsidised education and healthcare is a common one. So is unemployment insurance for people who get laid off or providing pensions for the elderly.

Most countries, including Pakistan, already have some welfare policies. For example, the Benazir Income Support Program is a welfare programme for those living in poverty.

What makes the Scandinavian states unique is the breadth of these interventions. For example, Denmark spends 29 percent of its GDP on social welfare spending (this does not include education), while South Korea spends about 10pc.

The countries which make up the European Union generally have a high welfare spending. Cumulatively, they dedicate about one-thirdof their GDP on social welfare — the largest chunk on pensions and other forms of old-age benefits.

Here, most people spend their work life contributing to the welfare state, and once they retire or go through a shock, they benefit from it.

By whatever means you measure, this is a lot of investment.

What will it take to turn Pakistan into a welfare state?

The first thing which is common among the Scandinavian welfare states is they collect a large proportion of their GDP in taxes.

Norway collects 38pc, Denmark about 45pc, and Sweden about 44pc. This means that these states have a large and extensive tax infrastructure — and people pay a large proportion of their income in taxes. The rich pay more: in Denmark, the top marginal tax rate is about 60pc.

Compare this with Pakistan — we collect only 12pc of our GDP in taxes. Denmark spends over twice as much of its GDP on social welfare alone. After recent tax reforms in Pakistan, the top marginal tax rate is just 15pc — significantly lower than Scandinavian countries.

This means that, if we were to make a move towards becoming a welfare state, we would need to radically expand the tax system — not only taxing more people but also taxing more the (higher income) people who do pay taxes.

As welfare states require significant redistribution and government provision of public services, these tax revenues would be used to finance the growth in the size of the state, both by spending more on welfare services but also hiring more people to manage such a far-reaching infrastructure.

This is the opposite of austerity.

But, as those who have been at the helm before know very well, raising taxes is hard everywhere, but significantly harder in Pakistan.

This is because we have a cash-based economy with a large informal sector which makes it hard for the government to know how much exactly people owe. So, a large number of people are able to evade taxes, and evidence suggests that they do.

One way to solve could be to bank on some form of intrinsic motivation for them to voluntary comply. However, the evidence is unclear on how much taxes can be raised from the voluntary channel alone.

What is clear is that many people in developed countries, including most welfare states, do not have the opportunity to evade taxes.

This is because of third-party reporting of income thanks to high formalisation of the economy and a strong paper trail which makes getting caught likely, and costly.

So, in order to become a welfare state, Pakistan will need to raise a lot more taxes – which can be achieved in part by making it harder for people to evade them.

Along with taxes, what makes Pakistan different from Scandinavia is that they are significantly wealthier than us. The per capita income in Pakistan is about $1,500. In Norway, it is over $70,000.

Now, you can make the argument that what makes Scandinavia rich is its welfare infrastructure, or that Scandinavia being rich allows it to have a welfare infrastructure.

But, what is clear that their economy is far more productive and people are far wealthier than us which allows them to spend heavily on social welfare.

And, if Pakistan wants to have public services on par with theirs, it would need to drastically expand the size of its economy.

Take the southern European nations, for example. They set up extensive welfare systems, promising people gangrenous pensions, but their economies were not robust enough to back such a system. History is a witness to what happened next.

But setting up a welfare state is also more than taxes and income. It is about establishing a social contract. A contract between a person living in a farmhouse in Islamabad and a person living in a chaunra in Tharparkar.

It is about convincing people that their national identity trumps their affiliations with social class, creed or kin.

Consider this. Norway, Denmark and Sweden are by and large ethnically homogenous countries. That means most people share the same ethnicity which, evidence suggests, feeds into the social preference for redistribution.

People tend to be willing to help other people who look like them.

Pakistan is not a homogenous country, and has, perhaps as a consequence of that, strong informal networks. For instance, if a villager suffers from an illness they are often helped by people of that kin group – biradari.

It means that even when there is no formal welfare infrastructure, people tend to create pockets of an informal support network to help each other out.

But to convince people that a formal institutionalised welfare state is the goal would require to build an overreaching identity which triumphs local ties.

Demography, broadly, is also important. In many welfare states, an aging population is a big challenge — too few working-age people contributing to the state with taxes, and too many old people taking pensions and healthcare.

A Pakistani welfare state, however, is likely to have the opposite problem. We do not have an aging population but have a very young one.

Spending on education is likely to take a large chunk of social investment, and an increasing size of the population means that the welfare state would need continuous expansion to cater for a growing population.

This could be managed if the move towards a welfare state is combined with measures to control population growth.

So, is Welfare-istan possible?

Yes, if we can build an extensive tax infrastructure, a significantly more productive economy, a stronger national identity with preferences of redistribution and control rapid population growth to make this all feasible.

The pitfalls are also clear – if you expand welfare spending without improving the tax system, you might end up in a budgetary crisis (and end up taking debt to manage it).

If you fix the tax system, but the economy does not grow fast enough, you would not raise enough revenue and would end up promising people something you cannot afford.

This, as our new leader will learn soon, is easier said than done.

This is an archived version of an article written for Dawn.com, published on Aug, 28th 2018. If you want to share it, please do so the version on Dawn.com. It was posted here 3rd Sep 2018.

Shahrukh Wani is a graduate student at the London School of Economics and a researcher based at the International Growth Centre at the Blavatnik School of Government, Oxford. He tweets @ShahrukhWani

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