Wednesday, September 21, 2016

It's political reform, stupid!

Can fundamental economic reforms be adopted and implemented without political reforms? Our experts' answer is an unequivocal no. Without political reform in a society economic reform cannot be sustained. Period!
The institutional structure of a society is composed of constitutions, laws and rules that govern the society, its government, its finances, economics and politics; written rules, codes, and agreements that govern contractual relations and exchange and trade relationships; and social norms governing human behavior. In most of these counts, sadly, former colonies, which make up the bulk of the third and 4th world countries, are failing miserably. There are no checks and balances, but only despotism or autocracy under the name of democracy. Under the name of parliamentary form of democracy what we have in most of these countries is obscene majoritarian rule in which the voices of the opposition are not only stifled but also made sure that they are not to be heard in the next election. Thus, in a failed or illiberal democracy, contracts and permits are issued to vendors/contractors/ supporters of the ruling party who help the politicians to get elected materially, empowering a highly problematic and unavoidable vicious cycle where crime and corruption become the norms and not exceptions.
For economic success, what are needed are - a legal system that is fair and just, where all citizens are equal before the law; sound business regulations, their monitoring and enforcement; the protection of private property; contract enforcement; a tax system that is accepted as fair and is universally enforced; and transparency in public decision-making. But if you apply the above criteria to many of the illiberal democracies the contradictions are quite obvious. Only a very small percentage of law abiding people are paying their taxes while many filthy rich don't pay taxes (they have learnt to dodge the system through accountants and/or paying bribes to tax collectors). These tax payers, unfortunately, are pushed to pay a hefty tax every year, which only goes up, to pay for the extravagance of the government (thus, forcing many to dodge the system by bribing, for instance).

Here it may be worth while sharing experience of a close relation of mine. He owns a property which is rented to a hostel management company in Chittagong that provides lodging and food to young women college/university students and professionals. The monthly rent he collects is 50,000 taka. However, the city corporation has imposed a yearly tax of Tk. 700,000, which is Tk. 100,000 more than the gross income of the owner (note: the maintenance and other expenses are not even included). What motivation would the owner have to rent his property for a good cause? With such an irresponsible tax imposition, the owner must now bribe Chittagong Municipality Tax officer to lower the tax burden.  At the end, the tax payer is victimized while the tax collector collects a hefty bribe and government gets its share of tax. Any reasonable businessman would probably shut down the hostel so as to minimize his tax burden!

The above scenario, however, is not unique to Bangladesh but can be found in most of the post-colonial countries of Asia, Africa and Latin America. There the citizens are living in an environment of absence of effective institutions to support thriving societies that are fair and beneficial for all. What they are, thus, left to is economic stagnation or strangulation of the compliant few. Millions of  youths remain unemployed, some of whom can even fall under the spell of extremist messages in the internet and a small fraction of this disgruntled youth may even be willing to die and kill for a higher cause.
Thus, where should one start? It's political reform which must be that important step before economic reform is tried.
Professor of Hossein Askari has written an important article on the subject, which should be read by those interested in this subject. He concludes, "For the required economic institutions to develop, be nurtured and be effective, they must be accompanied by fundamental political change."

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