Beyond Public Finance: Towards Constitutional Poli…
The fifth part of this series examined how Pakistan’s strategic location, domestic privileges and recurring external assistance have produced a rent-based political economy. The state has repeatedly obtained temporary relief without undertaking the constitutional and productive transformation required for genuine economic independence.
Professor Ehtisham Ahmad’s proposed monograph, Can Pakistan evolve from a dependent “buffer state”? (shared with many including me), raises the right question at the right time. Unlike conventional reports that treat Pakistan merely as an under-taxed developing economy, he recognises the historical relationship between strategic rents, external dependency, fiscal weakness and recurring recourse to the International Monetary Fund (IMF) and other lenders. His central concern deserves serious engagement rather than routine approval or dismissal. This part is humble attempt to analyse his proposed monograph.
Ehtisham Ahmad argues that Pakistan’s geographic position has periodically enabled it to obtain external assistance as a frontline or buffer state. During the Cold War, the Afghan conflict and the post-9/11 period, strategic usefulness generated substantial inflows. When geopolitical support receded, the IMF and multilateral institutions frequently stepped in to fill the breach. His published study, ‘Political Economy of Tax and Digital Transformations in Pakistan’, similarly connects Pakistan’s stop-go aid experience with its failure to undertake sustainable domestic resource mobilisation.
This is an important advance over revenue-only analysis. Pakistan’s persistent dependence cannot be explained simply by weak tax administration, low compliance or insufficient technical capacity. External rents have reduced the immediate pressure to negotiate a durable fiscal settlement with citizens. They have also strengthened institutions positioned to manage Pakistan’s strategic relationship with external powers.
Ehtisham Ahmad is equally persuasive in identifying serious defects in Pakistan’s tax structure. He correctly criticises the conversion of value added tax (VAT) into a production excise, the proliferation of exemptions, the destruction of the invoice chain, cascading, excessive withholding taxation, nuisance levies and the absence of an arms-length administration. His insistence that taxation must be linked with growth, investment, distribution and political economy is entirely justified.
His criticism of digitalisation without comprehensive change management is also timely. Computerising defective procedures cannot cure the institutional incentives that produced them. Linking identity numbers, tax registrations, invoices and financial information may improve enforcement, but technology cannot decide whether the law will be applied equally. These insights substantially overlap with the argument developed in this series.
The difficulty arises at the next stage. Ehtisham begins with a powerful political-economy diagnosis but gradually returns to a largely public-finance remedy. Pakistan is first presented as a security-dependent buffer state; its continuing weakness is then explained mainly through the Government of India Act 1935, fragmented tax assignments, a split VAT, inadequate provincial own-source revenue and incomplete digital transformation. The analytical journey moves from geopolitics to tax architecture too quickly.
Pakistan is not dependent merely because it has a badly designed VAT or an inefficient division of taxing powers. Its tax system has itself been shaped by the distribution of political, institutional and strategic power. Exemptions, withholding taxes, petroleum levies, blocked refunds and arbitrary concessions are not accidental departures from an otherwise neutral system. They reflect bargains through which burdens and benefits are distributed.
Fiscal design matters greatly. It cannot by itself explain why successive governments have preserved arrangements that are demonstrably damaging to growth, documentation and equity.
Ehtisham assigns considerable importance to the Government of India Act 1935. The Act undoubtedly institutionalised a colonial distribution of legislative and fiscal authority. It divided functions between the centre and provinces while reserving decisive powers for the Governor-General and provincial governors. Its legislative lists influenced the constitutional development of both India and Pakistan.
Colonial inheritance, however, cannot become a substitute for analysing postcolonial responsibility. Pakistan adopted constitutions in 1956, 1962 and 1973. It experienced repeated military interventions, the dismemberment of the country in 1971, presidential centralisation, uneven National Finance Commission Awards, extensive constitutional amendments and decades of external security alliances. Each period involved decisions made by domestic actors possessing agency, interests and power.
The present Constitution of 1973 is not pari materia to “1972 Constitution”. The Interim Constitution operated in 1972, whereas the permanent constitutional settlement reached on April 10, 1973. The 1973 became operative from August 14, 1973. This is more than a matter of nomenclature. Pakistan’s fiscal federalism must be examined through the constitutional bargain consciously adopted after the catastrophe of 1971.
The Constitution (Eighteenth Amendment) Act, 2010 also cannot be treated simply as Pakistan “doubling down” on the colonial arrangements of 1935. It was a democratic response to prolonged centralisation and an attempt to restore parliamentary federalism, provincial autonomy and the original character of the 1973 Constitution.
Problems created by the division of sales tax on goods and services are real. Businesses should not be subjected to multiple registrations, conflicting interpretations, fragmented audits and unnecessary compliance costs.
A common base, harmonised definitions, integrated information, a clearing mechanism and coordinated administration are all necessary. Coordination need not mean re-centralisation.
Pakistan’s federation cannot be redesigned solely for the convenience of tax administrators. Fiscal arrangements must also preserve provincial autonomy, democratic accountability and the lessons of constitutional history. A technically elegant centralised system may produce serious political and constitutional costs if imposed without consent.
Ehtisham’s historical thesis requires similar caution. He suggests that the British deliberately sought to create a weak and dependent buffer state along the Indus to preserve strategic influence in the continuing “Great Game”. This is a significant hypothesis, deserving investigation through archival evidence. It should not be presented as settled history without fuller documentation.
The official Cabinet Mission statement of May 16, 1946 expressly declined to recommend the transfer of power to two completely separate sovereign states. It proposed a Union dealing with foreign affairs, defence and communications, while residuary powers would remain with the provinces and provinces could form groups.
The document may be interpreted in different ways, but its stated scheme was for a united, highly decentralised India rather than the immediate creation of a separate buffer state.
Claims that the NWFP (now Khyber Pakhtunkhwa) referendum was secured through ballot stuffing, that the Radcliffe Award was deliberately designed to ensure Pakistan’s permanent weakness, or that the Cabinet Mission Plan was principally intended to maintain Whitehall’s control require particularly strong evidence. They may be explored as historical propositions. They should not be converted into established facts merely because they fit a broader theory.
The proposed transition from a buffer state to a “South Asian Prussia” is equally problematic. Prussia may symbolise administrative capacity, discipline and state-directed development. It also carries the historical baggage of militarism, centralisation and the subordination of plural political society to a security-oriented state.
Pakistan has already experienced the consequences of excessive centralisation and security dominance. It does not need a new justification for them.
The required transition is from a rent-distributing security state to a constitutional, federal and productive democracy. Civilian supremacy, effective local governments, equal citizenship, competitive markets and investment in human capabilities offer a more suitable destination than a Prussian analogy.
A legal correction is also necessary concerning Articles 37 and 38 of the Constitution. These provisions contain important commitments regarding education, social justice, reduction of inequality and provision of basic necessities. They are, however, Principles of Policy and not directly enforceable Fundamental Rights.
Article 30 expressly limits legal action based solely upon non-compliance with the Principles of Policy. Article 25A, introduced through the Eighteenth Amendment, separately creates an enforceable right to free and compulsory education for children between five and sixteen years of age. The constitutional text must be read as it stands, however desirable stronger social rights may be.
Ehtisham’s emphasis on domestic resource mobilisation also requires qualification. A higher tax-to-GDP ratio is neither a constitutional objective nor a sufficient measure of state capacity. The decisive questions remain: who pays, from what source, at what economic cost and for whose benefit?
A state may raise more revenue through regressive consumption taxes, petroleum levies, coercive withholding, minimum taxes and blocked refunds. The resulting ratio may improve while investment, competitiveness, disposable income and taxpayer trust deteriorate.
Public expenditure is the missing counterpart. Pakistan’s debt crisis cannot be explained without examining debt servicing, state-owned enterprises, contingent liabilities, security expenditure, inefficient development spending and the distribution of public resources. Taxation should not be treated as an independent solution to expenditure structures that remain politically protected.
The treatment of the IMF exposes another tension. Ehtisham correctly criticises Pakistan’s dependence on external institutions. He also appears to approve the coercive “no VAT, no money” position reportedly adopted during an earlier programme.
A genuine VAT was undoubtedly needed. Reform imposed primarily through the threat of withholding external financing, however, cannot substitute for domestic constitutional ownership. The same external leverage criticised as a source of dependency cannot simultaneously become the preferred instrument for reconstructing Pakistan’s fiscal federation. Conditions may compel temporary compliance. They do not necessarily create legitimate and durable institutions.
Comparisons with China and Mexico are valuable for understanding how VAT reforms, transfers and digital systems can be coordinated. Their lessons should be used to identify necessary conditions rather than copied as ready-made models.
China’s unitary political structure and administrative capacity differ fundamentally from Pakistan’s federal, constitutional and political realities. Mexico’s history of federal bargaining and subnational finance also developed under conditions that cannot simply be transplanted.
Institutional context determines whether a technically similar instrument produces information, efficiency and accountability—or complexity, coercion and rent-seeking. The deepest limitation of the buffer-state thesis is therefore not that it is wrong. It is that it remains incomplete.
Pakistan’s dependency cannot be understood without examining the security establishment, geopolitical patronage, illicit finance, narcotics and arms economies, capital flight, regulatory capture, state-owned enterprises and the political coalitions that convert external resources into domestic privilege. The flow from strategic rents to weak taxation is mediated by institutions and power.
Pakistan is not dependent because its fiscal system is badly designed. Its fiscal system is badly designed partly because dependency and the prevailing distribution of power make distortion politically useful.
Professor Ehtisham has performed a valuable service by bringing history, aid dependency, taxation and institutional reform into one conversation. His diagnosis takes us well beyond the narrow prescriptions commonly offered to Pakistan. The next intellectual step is to move beyond public finance itself.
Better VAT design, coordinated administration, provincial own-source revenues and digital integration are necessary. They will not overcome dependency unless accompanied by constitutional restraints on arbitrary power, civilian democratic accountability, transparent public expenditure, genuine federal cooperation and the dismantling of domestic systems of privilege.
A buffer state cannot become independent merely by collecting more efficiently. It must first transform the political bargain through which resources, authority and accountability are distributed.
In the next part, we shall look beyond the modern Western canon and examine Muslim foundations of public finance and political economy—from Abu Yusuf to Ibn Khaldun—and why Buchanan and Laffer were not the first thinkers to connect taxation, incentives, justice and the rise or decline of states.
[To be continued]
____________________________________________________________________
Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds an LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.
