Weak Fiscal and Trade Capacities

A copious amount of literature has emerged on weak states in the recent past. A weak state cannot enforce contracts cost-effectively and cannot raise sufficient amounts of taxes to meet its expenditures. The significance of taxation is discussed for the state-building. It is argued that the evolution of democracy and civic amenities owe a lot to taxation in developed countries. Fiscal capacities shape the taxation structure of a country. Data of various taxes is analyzed for the period 1990–2020 which shows that the taxation structure of Pakistan is highly regressive having implications for economic growth and poverty alleviation. Pakistan is reliant on import-stage taxes due to weak fiscal capacities. The high incidence of taxes on imports has negative implications for exports as well. These taxes for all practical purposes become part of the price and create an anti-export bias as exports do not remain competitive. Weak fiscal capacities also imply that a state is unable to raise taxes to invest in the health and education of its people. Further, low revenues increase dependence on foreign aid and multilateral institutions with all attendant harms for long-term economic growth. The stabilization programs of Pakistan are analyzed and channels like austerity-driven conditionality, erosion of policy sovereignty, and increasing debt are discussed to highlight the adverse impacts of stabilization programs on the long-term economic growth of Pakistan.