Why are you so ashamed to create a revenue ministry?: Birupaksha Paul

The following excerpt is from 'Zero Sum Game', a talk show hosted by The Business Standard Executive Editor Shakhawat Liton. The guest for this episode was Birupaksha Paul, professor of economics at the State University of New York. Six months into the government formed by February's election, he argued that Bangladesh's deepest weakness is fiscal — a chronic failure to raise revenue — and that the fix begins with institutions. He was scathing about the previous interim administration's decision to split the revenue division into separate policy and collection units, asked why the state is "so ashamed" to create a full-fledged revenue ministry, and warned that until revenue climbs towards 20-25% of GDP, the burden will keep falling on the central bank's printing press — and on inflation.

Six months on from the February election, how healthy is the macroeconomy?

It is a half-a-trillion-dollar economy now, growing at a little over 4%. Investment is sluggish, law and order has improved but not impressively, and household consumption has stayed largely stagnant because inflation has not been fully tamed. 

The single biggest positive is the election itself, held six months ago — it removed the uncertainty the interim government had allowed to linger, and uncertainty is deeply damaging to an economy. 

Reserves have risen and the remittance flow is healthy; and a party that has governed before does not have to introduce itself afresh, which is itself a reassuring message. Where this government is still confused is in the signals and the direction it sends, and that is the risky part for the macroeconomy.

Was this year's budget one of those confused signals, or a good one?

Not all the signals have failed — the budget was actually a good one. I wrote an article saying so: in its aim and direction it is very good, though weak in the numbers, because you cannot improve revenue overnight. 

And here is the irony. Every one of the interim administration's advisers had fiercely criticised the revenue incapacity of the Awami League years. Once in office, they made it worse.

How did they make it worse?

They broke up the revenue division — one unit to make policy, another to implement and collect. But it is the same bureaucrats: one set of them writes the policy, another set of them does the collecting. 

That is not reform; it is renaming. If you were serious about revenue, that is not the structure you would build. The very incapacity they had spent years denouncing, they deepened.

So what would you build instead?

Make the revenue department a full ministry and give it a minister. A minister can pursue the matter in a way officials cannot — raising it in the right forums, pushing it at every level, answerable for the result in a way a board chairman never is. 

Open a tax office in every upazila and widen the network so the state actually reaches taxpayers. Why are you so ashamed to create a revenue ministry? This is the one function on which the whole budget depends, and we treat it as an afterthought. Do that, and the pressure that now falls on the central bank begins to ease.

How far below its potential is revenue collection?

Far below. Our revenue should be climbing, gradually, towards 20-25% of GDP; that is where a country of this size ought to be. Revenue is the base on which everything else stands, yet we deny it the status we hand to far smaller functions. 

The deficiency does not stay contained in one department — it disturbs the central bank, it disturbs the entire economy. It is why we have not been able to fund a proper development budget.

Inflation has fallen across much of the world, yet ours has not come down. Why?

Because we have played a dual role. On one side we tightened monetary policy; on the other we kept printing money. It is like taking blood-pressure medicine and then eating a great deal of salt — the treatment cannot work. 

Our revenue should be climbing, gradually, towards 20-25% of GDP; that is where a country of this size ought to be. Revenue is the base on which everything else stands, yet we deny it the status we hand to far smaller functions.

The central bank appears to be tightening, but it is also printing cash and handing it to the government. Current expenditure — salaries and allowances — has grown so large that development spending becomes almost impossible, and the central bank is then forced to print. 

Running the household on borrowed money, in effect — and that is purely inflationary; it is the extra salt, and the pressure only rises. That excess printing comes straight from our fiscal incapacity. Fix the revenue side and the central bank stops carrying that burden.

You keep returning to signalling. Where has the signal been weakest?

Take central bank autonomy. The interim administration's finance adviser was himself a former central bank governor who, out of power, had complained endlessly that the bank lacked autonomy. 

In office, he showed no real sincerity about it; many ordinances passed, but central bank autonomy did not, and we are worse for it. 

Contrast Sri Lanka. Nandalal Weerasinghe worked in a genuinely autonomous way, turned inflation of 40-50% into deflation, and helped lift the country back towards upper-middle-income status. The signal you send has to be that strong. Sri Lanka managed it, the Maldives managed it; on this we have largely failed.

The IMF has been here for several years now. What does it keep pointing to?

The IMF is often called the doctor of the economy. It is the monetary fund, yet most of what it talks about is fiscal capacity. When I have faced them, I have said the report should state it plainly, and it always comes back to the same two weaknesses: low per-capita income, and fiscal incapacity — revenue mobilisation that simply is not happening. 

A doctor does not tell you how well you sing; a doctor tells you your cholesterol is rising and your blood pressure could follow. Pointing to these problems is the very duty of economics.

People say the rich simply do not pay tax. Is it that straightforward?

It is not enough to say the rich do not pay. Whom do I tax if business is not moving and there are no sales? Ask a rickshaw-puller what he earned today, ask a shopkeeper — if the money is not there, they cannot hand tax to the government. 

So even the Monetary Fund's work comes back to revenue generation, and revenue comes back to whether the economy is actually running — which is exactly the mobilisation the IMF keeps flagging. 

The state has to become stronger there, and there are real steps on transparency to be taken. Economists are not merely prophets of doom for saying so; naming the problems that are developing is our job.

Broadly, what are the major challenges ahead?

Institutions, above all — repairing them, making them move, making the law move, securing peace and order, sending a good signal, and building infrastructure. For two years we heard a great deal of narrative instead. The interim finance adviser has since claimed they avoided populist measures and worked for the long-term interest. 

They did no such thing. Long-term work, in one word, is infrastructure. I reached your studio from Uttara in about 40 minutes only because of the metro rail — yet it is already packed, and within a year or two, we are saturating what we built. 

That is a signal that we need far more of it, and that only a stronger revenue base can pay for it.

Why do economists and politicians clash so often?

It is the clash between the long term and the short term. Ask an economist a question and you will hear 'on the one hand, and on the other' — we show you both options, and we do not believe in short-term fixes. 

That is precisely why the roles meant to protect long-term interests, such as the central bank governor, are given to economists and not to political appointees. Before an election, a government wants monetary loosening, money printing, artificial jobs — quick popularity and quick votes. That is how Zimbabwe came undone, and even wealthy countries feel the same pull. You hear it in the throwaway line — one minister told us the economy was negative under the Awami League, zero under the interim government, and is only now turning positive. 

Politicians do not always speak responsibly, because for them there is no tax to reckon and no account to settle. The economist refuses to give ground, and that is why politicians so often do not care for economists.