IN an earlier article, this writer had argued that the widening inequality of incomes and wealth provides a more coherent explanation of the structural character of the large current account deficits, as indicated by the increased concentration of certain categories of imports. These inequalities were less stark and visible until the 1980s. They have acquired an intimidating and entrenched disposition over the last two decades.

What are the factors that explain this amplification in disparities? This article attempts to identify these and expose the state capture by the elites employing a distorted, biased framework of laws and regulations:

a) The rising share and pace of expansion of the capital and skill-intensive sectors of the economy, like finance, IT, telecommunication, energy and oil and gas, in which the less privileged sections of the population cannot participate meaningfully because the state did not provide them equal opportunity through quality education.

b) Policies that have promoted or reinforced crony capitalism through the provision of artificial crutches, to protect some industrial enterprises from competition (under the legislative cover of the much-maligned SROs). Moreover, the state has not only turned a blind eye to the hoarding and formation of cartels it has also backed off when facing resistance to the widening of the tax net by some groups like small traders.

The state has become a hostage to the perceptions of interest groups on how our political, bureaucratic and economic formations should be organised.

c) The institution of an unfair tax structure which has treated the same levels of incomes from different sources differently, reflected in light taxation (eg of capital gains in real estate and equities and a host of other commercial activities and sectors) and tax exemptions (eg the IPPs and the agriculture sector— in the latter case supplemented by subsidies on inputs like fertiliser, irrigation water and electricity for tube wells and support prices for wheat and sugar cane at higher than international prices).

d) Perks and privileges like free or heavily subsidised plots in key urban centres to state functionaries and similar handouts to allies by the political leadership. A rapidly growing population, complemented by the real estate sector serving as a haven for parking black money, the prices of these plots prices rose exponentially, aided by the continuing legality of benami-held property.

e) The non-transparent use of discretionary powers and authority with impunity by the political leadership whereby lavish gifts’ of ‘contracts and regulatory concessions’ (eg relaxation of building and zoning regulations) have been bestowed upon friends and supporters. By becoming direct or indirect (through payoffs) stakeholders in real estate development the political and bureaucratic elites have made untaxed fortunes.

f) The entry of a powerful lobby of commission agents and deal fixers of transactions involving public-sector corporations and agencies bred further corruption.

e) Some economic actors, allegedly abetted by public servants, acquired affluence from illegal/ criminal activities (trade in drugs, arms and ammunition, smuggling, misdeclaration of prices of imports and exports and the ‘hundi’ market for foreign currency, etc).

f) Rampant tax evasion of the resulting incomes and the protection of dysfunctional and tainted administrative systems reinforced the inequalities in favour of the segments of society mentioned.

The dominant ethos of policy favours and abuse of powers have triggered the creation of a political, social and cultural value system rooted in paternalistic and personal relations, nepotism and patronage and violation of laws. The state has become a hostage to the perceptions of these interest groups on how Pakistan’s political, bureaucratic and economic formations should be organised, resulting in venality and the misuse of powers becoming institutionalised, leading to further imbalance in income and asset distribution.

To grasp the nature and scale of inequalities, the following data would be instructive: i) whereas the ratio in shares of incomes of the top 20 per cent and bottom 20pc households was roughly five to one in 2000 it had risen to beyond eight by 2015-16; ii) While this ratio was, say, eight, the ratio of tax incidence between the two groups was below two, reflecting the regressive nature of the tax regime that has been pursued and greater reliance on indirect taxes for revenue generation; iii) the cheapest imported luxury car costs 20 years’ income of a household in the bottom 20pc!

These growing disparities have manifested themselves in the imports of luxury cars (and the resulting imports of parts and more petrol), designer clothes, expensive mobile phones, generators for domestic use, solar panels and food items, foreign exchange for financing foreign education and travel abroad for recreational purposes and deluxe-style pilgrimages.

The constitution and quality of economic growth as reflected in the items (goods and services) imported for consumption or to feed domestic production configurations has determined the composition and size of the economy and consumption patterns, and thereby the industrial structure, the production technology and the level and skill mix of employment. The free play of market forces has reinforced the inequalities.

Meanwhile, cheap external inflows (because of fortuitous international events at various times) have managed to keep the state afloat. This has enabled postponement of basic reforms, with short-sighted elites happy with the augmentation of their personal fortunes derived from the implementation of such a strategy, while the rest of the country continued to operate below potential.

To conclude, the emerging sectors of the economy and discriminatory state policies and actions that favoured certain interest groups and classes have exacerbated income disparities. And its worsening has not only been the key determinant of the outcome on the external front but has also exposed the sustainability of the prevailing model and pattern of growth.

The soft options of the past (concessional aid, remittances, bounties that became available from events like the Cold War, the Afghan war, 9/11etc;) that enabled the elite to postpone fundamental restructuring of this crumbling state and associated political-economic ties, are not likely to be available in such abundance in future. Therefore, addressing the economic issues stemming from the consumption demands of those with large disposable incomes will eventually require basic, structural reforms to remove the constraints to a more equitable and sustainable growth path.

The writer is a former governor of the State Bank.

Published in Dawn, October 7th, 2018