Political economy of tax regimes in South Asia: The Context By G. Shabbir Cheema Director Asia-Pacific Governance and Democracy Initiative East-West Center Honolulu, Hawaii Presented to The Workshop on Tax Systems in South Asia, held in Singapore August 8-9, 2010

I. INTRODUCTION Duality in South Asia --- growth, entrepreneurship and innovation; yet, high incidence of poverty, low levels of human development, and low levels of MDGs achievements The need for democratic and effective state to bridge the gap Tax regimes a key instrument for state formation and its capacity to survive to meet emerging challenges from the increasingly informed citizens (South Africa, Brazil, Malaysia with high tax collection as a percentage of GDP) An understanding of the processes of conflict and bargaining essential to assess taxation and institutional formation

Formal and informal lobbies and their political and economic interests Governance capacity for political management The extent and nature of lobbies influence over policy formulation and implementation II. Political Economy of Tax Regimes: Conceptual Framework Effective Tax Regimes Political factors affecting the policies and institutional arrangements for fiscal federalism and decentralization

III: Political Economy Components 1. Lobbies and their political and economic interests importers, exporters, consumer groups, merchants, land- owners, government officials, business leaders etc. The role of special interests to gain at the expense of the general population; narrow interest coalitions leading to the interests of a few benefitting, at the expense of equity; rent seeking through discriminatory application and its impacts on the legitimacy of the public institutions in the eyes of citizens political parties and their organizational capacity; power base of interest groups and classes in party politics

III: Political Economy Components 2. The extent and nature of lobbies influence over policy formulation and implementation? Influence over the design of policies and rules that are aimed at reducing opportunities for special interest and rent-seeking behavior of the political and administrative elite The need for governance autonomy from pressures of special interests Focus of policy-making process on short-term instead of long-term needs

III: Political Economy Components 3. Political factors affecting the policies and institutional arrangements for fiscal federalism and decentralization? Historical perspective including the colonial legacy as the starting point Role of political organizations that mediate conflicts between interest groups and classes large proportion of revenue through external sources i.e. overseas remittances, foreign assistance political obstacles as the root cause of low tax collection, autonomy as a contested notion

III: Political Economy Components 3. Political factors affecting the policies and institutional arrangements for fiscal federalism and decentralization? level of political commitment to reform by the political leaders and bureaucracy inadequate political mechanisms for bargaining among the competing interest groups Complexity of reform in federal systems with several levels of political authority; reforms in the system of intergovernmental transfers, decentralization to local governments, market borrowing by state government. new forms of decentralization and delegation to change powers among different levels of government.

III: Political Economy Components 4. Governance capacity for political management Capacity to manage political power in general and ability to design and implement tax system reform in particular through: the articulation of the need for reform consistency and clarity of national policies including coordination among agencies balancing competing interests mobilizing political support through alliances deliver services with transparency and accountability Administrative constraints: insufficient staff with appropriate skills and low wages; ill-defined tax laws; poor enforcement and corruption; weak information collection and tax-payer identification

IV: Summing up The impact of the above on reform efforts in South Asia, recognizing  Politics is the art of the possible  Need to push the envelope for change through governance capacity for political management and effective policies and institutional arrangements for decentralization, including fiscal federalism