Tax-related ‘informality’ is a common dynamic of local bazaar economies in several developing countries. Umair Javed contextualises this practice — the non-payment of taxes by small-scale traders and retailers in Pakistan — in a wider context of the lack of resources and incentives for state actors alongside place-based power and patronage of traders’ networks.
Since 2007, Pakistan’s development trajectory has been precarious, with inconsistent economic growth, bouts of high inflation, weak progress on social development indicators, mounting government debt, and recurring balance of payment crises that require IMF bailouts and foreign loans.
A central issue linked to the country’s economic stagnation is the narrow fiscal base of the state. In the preceding two decades (2000–2020), Pakistan’s tax to GDP ratio has hovered around 10 per cent. For the current fiscal year (2023–24), interest payment obligations will consume more than 70 per cent of the projected revenue of the federal government. All other expenditures, including any development spending, will likely be made by taking on more debt.
A narrow tax base is an issue common to many developing countries. Most such states, including Pakistan, end up relying on regressive, indirect sources of taxation such as import duties, excise taxes and consumption taxes on major commodities such as fuel and electricity, which disproportionately impact poorer households. Other forms of surplus-generating economic activity remain undertaxed for a variety of reasons.
This phenomenon is closely tied to economic informality, which covers the domain of economic activity taking place (or being allowed to take place) beyond the remit of tax, labour and welfare regulations. In Pakistan’s case, tax-related informality — i.e., tax evasion and/or the absence of tax regulation — prevails across a variety of different sectors, but is most prominent in construction and real estate, wholesale and retail trade, and small-scale manufacturing. Expanding the tax base to cover these sectors and documenting the economy has been a (rhetorical) priority for Pakistani governments. Relatedly, it remains a key condition of all IMF bailout programs. Why then does informality persist across these sectors?
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Institutional explanations for persisting informality tend to focus on ‘governance failures’ or issues of weak state capacity. The simplest version of this argument is that tax collectors in Pakistan do not have the right resources, information and/or incentives to adequately capture economic activity taking place across a wide variety of sectors. Journalistic and political discourse increasingly point to the ‘absence of political will’ or ‘élite capture’ of policy-making that allows undocumented sectors to thrive.
These arguments are valid in so far as they illuminate select aspects of the prevailing political economic configuration in the country. Sociologically, they all point to a weakness of ‘infrastructural power’ of the Pakistani state, which is linked to a power imbalance between some groups compared to the state and, in turn, explains limited adherence to policy edicts.
However, we are left wondering about the micro-foundational dynamics and mechanisms that explains compromised state capacity. What explains the power configuration in specific sectors which allows them to bypass regulations?
To illuminate these mechanisms, I suggest that we understand informality as a ‘political outcome’ that germinates due to patterns of everyday interactions between economic sectors, state officials and a variety of other political and societal actors on a recurring basis. The case of informality in Pakistan’s burgeoning retail-wholesale or ‘bazaar’ sector is particularly instructive.
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The bazaar sector contributes nearly 19 per cent to Pakistan’s GDP, adds a third of all service sector value addition and employs 18 per cent of the labour force. The vast majority of its nearly 2 million enterprises operate as small-scale proprietor-run outlets, without hired labour, generating limited amounts of surplus. However, a small fraction of businesses (around 150,000), mostly in the wholesale/distribution sub-sector located in large marketplaces of major urban centres like Lahore, Karachi, Faisalabad, and Multan, remain a key surplus-accumulating segment.
Bypassing tax regulations, and retaining informality, is a central feature of accumulation practices for this particular segment. Direct taxes collected from large wholesalers and retailers amount to less than 2 per cent of total direct taxes collected, considerably less than their share in overall value addition. Recent estimates place the figure of income tax evasion in the bazaar sector at nearly US$1 billion (or roughly 1 per cent of the total collected) with the bulk concentrated in the largest wholesale and retail businesses.
Efforts to reduce informality among bazaar businesses have mostly been unsuccessful. Since 2001, there have been at least 6 documentation drives, utilising a number of survey-based, punitive or regulatory/technological measures to capture turnovers in large marketplaces. All of them have failed.
Drawing on 12 months of ethnographic fieldwork in a large wholesale market in Lahore, and several years of documenting the politics of bazaar trader associations, I argue that informality in this context is a negotiated outcome between an entrenched, organised class of trader–entrepreneurs who possess economic, political and place-based social capital, and the state at multiple tiers of governance.
Understanding the effective power of the bazaar requires an appreciation of specific, place-based dynamics. In recent decades, large traders and merchants have come to occupy prominent positions in the social life of urban centres. Part of this stems from locational specificity — businesses operate in the same space, for a prolonged period of time, forming dense networks of ties with each other, most commonly in the shape of trader associations or Anjuman-e-Tajraan.
These organisations, and their related apex entities such as the All Pakistan Anjuman-e-Tajraan (APAT), provide a perennial, mobilisational base for collective action efforts against unfavourable state policies. Resultantly, ‘shutter-down’ strikes of marketplaces and public protests have been frequently used against policy efforts to reduce tax-based informality. In the past eight years, there have been over a dozen province or country-wide bazaar strikes in response to changes in taxation policy.
The success of collective action rests not just on numbers mobilised and shops shuttered, but also on ties of reciprocity with local party elites from across the political spectrum, whose candidacies, election campaigns and mobilisation activities are financed by bazaar-based businesses. The reliance of parties on the bazaar for political intermediation offers an important route to backchannel negotiations with field-level bureaucratic staff from the tax authority, as well as officials, going all the way to the Finance Minister.
Such intermediation is a common occurrence, and one observed repeatedly during my fieldwork in Lahore as well. Upon their posting to a particular tax office, officers would often be hosted for large, public dinners (called zehraana) by local trader associations. These are held frequently, with local political figures, bureaucrats and police officers in attendance. Such events constitute a key site of fraternal networking that is underscored through gift-giving and occupational reciprocity.
With such ties being formed over extended time horizons, even when tax claims are occasionally sent by field offices to traders under pressure from regional or national level tax officers, these are contested and revised, often due to an intervention of local elected or party élites.
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This brief illustration of the micro-foundational mechanisms that sustains informality has strong parallels with Ijlal Naqvi’s work on modernisation of the electricity sector in Pakistan, which identifies governance compromises as a defining trait of the sector. In particular, the role of informal institutions, social relations of power and cultural norms are at work in shaping state–society relations across arenas otherwise dominated by technocratic policy-making. While policy-makers in Pakistan remain rhetorically committed to an agenda of documenting the economy, the success of such efforts ultimately rests on a recognition and reconfiguration of entrenched political economy dynamics that operate at the local level.
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Banner image © Umar Farooq, ‘People look around in a colorful market, somewhere in the Swat Valley of Pakistan’, 2021, Unsplash.
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