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Elite capture

The pre-budget seminar season has begun early. The SDPI and the FES brought together key economic ministers, economists and parliamentarians in Islamabad. The main takeaway was the elite capture of the state. Mercifully, the seminar was held on the 2nd of April, otherwise the whole affair would have been deemed as a figment of all-fools’ imagination! No. It was for real. Hafiz Pasha fired the first salvo. His latest book has a chapter full of counter-capture ammunition. Before him in 2011, Ishrat Husain had given similar warnings in his book Pakistan: The Economy of an Elitist State. Fifty years of development had benefited a small class of the elite. Who is in here? The World Bank, no more happy about Papanek’s “Gentlemen at Work” in the 1960s, identified four groups in Pakistan@100 report — landlords, industrialists, bureaucracy and the military establishment. At its launch last month, Ishrat Hussain re-asserted that neutralisation of the elite was necessary for a transition to real reform. Speaking at the same event, Finance Minister Asad Umar agreed that the economy was a victim of elite capture. Buoyed by Hafiz Pasha’s discourse, the Finance Minister went further, as reported by Shahbaz Rana in this newspaper: “The central issue for Pakistan’s economy is the state capture by the elite… I also feel the heat of the elite capture due to the onslaught launched by the civil-military bureaucracy against a particular decision.” Come budget, he promised to review most of the tax exemptions enjoyed by the elite. The budget documents would not just outline revenues and expenditures but also the quantum of tax expenditures, the technical name for the gains captured by the elite.

Hafiz Pasha adds to the World Bank count commercial banks, urban real estate developers and parliamentarians. Last year, the PTI government’s spokesperson on economy blamed the Charter of Democracy signed in 2006 for laying the foundation for the elite capture! His guestimate was of a thousand families out of the 30 million Pakistani families, just about the number of MNAs and MPAs who captured most of the state resources. An important omission in these counts are the emerging conglomerates of business/private universities/media houses.

Tax expenditures are, however, not the only route to elite capture. Public expenditure, especially on development, is as important. The elites influence development process to force their own priorities and appropriate public resources for private gain. Such captures fall under the definition of corruption. The areas of moulding public policies and regulatory framework to the advantage of the elites were not covered either in the seminar. Research indicates that community-based development and decentralisation of power and authority are also prone to elite capture. A study in India shows how elite capture takes place at the lowest tier of rural local government.

Short of a revolution, how do societies deal with the elite capture? Counter-elite or capture-elite approaches are said to be too disruptive. A flexible combination of counter-elite and co-opt-elite approaches may deal with excessive rents, but runs the risk of gradual re-capture by the elite. Academically, it is not established whether elite capture is the result of government failure, market failure or both. But it is well-understood that elite capture is the main reason of vast disparities in income distribution. It would be interesting to watch how the next budget deals with these dilemmas. Might I say that the return of wealth and inheritance taxes and the end of a significant amount of tax expenditures will be enough of a leap forward.

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