Growth Week 2011: Country Session 11 - Pakistan

Pakistan Tax Research AgendaIGC Growth Week

Henrik Kleven, Johannes Spinnewijn and Mazhar Waseem

London School of Economics

September 21, 2011

Kleven,Spinnewijn&Waseem (LSE) Pakistan Tax Research September 21, 2011 1 / 8

Research Plan

Analyze impact of tax policies and incentives on individuals and firms

how do tax policies influence the tax base:⇒ capture effi ciency cost of tax policy.⇒ key for determining revenue-maximizing tax policy.other responses: tax evasion, registration/incorporation, spill-overeffects.

Preliminary results, but research agenda seems promising.

unique access to administrative tax data.policy features and changes inducing compelling variation.largely unexplored, also in developed countries.


Value-Added Tax

Modern broad-based tax, praised for enforcement and administrationproperties

VAT is argued to be self-enforcing. Conjectures have never been tested.

Pakistan introduced VAT-type system in 1990.

expanded gradually to different sectors.substantial variation in exemptions, zero-rating and tax rates.

Main goals:

estimate firms’responses to VAT (tax base, registration, evasion...).analyze spill-over effect across the VAT chain.


Spill-over Effects: Gradual Expansion

In 1996, VAT was extended to the textile sector. In 2000, VAT wasextended to all services & utilities.


Tax Base Response: Zero-rating

In 2005 reform, 5 major export sectors became zero-rated, includingthe textile sector. However, ginning was already zero-rated.


Corporate Income Tax

Similar goals as for VAT, analyze firms’responses to CIT (tax base,incorporation, ...).

Again, underexplored in the literature. Some recent reforms andparticular features of the Pakistani system provide the requiredvariation.

In Pakistan, corporate income is taxed at a standard rate of 35%.However,

(advantageous) minimum tax applies as long as corporate income isbelow a threshold.small corporations are treated differently, depending on the year ofincorporation.


Notched Schedule: Minimum Tax

If 0.01∗ turnover > corporate income tax, a minimum-tax appliesequal to 0.005∗ turnover.


Cohort-Based Reform: Small Corporations

A tax rate of 20% applies for small corporations who incorporatedafter 2005.


Livestock Related Interventions in Punjab's High Poverty Districts:

Design and Evaluation

Imran Rasul [UCL] IGC Growth Week 2011

Pakistan Country Session

http://www.ucl.ac.uk/

http://www.theigc.org/

PEOP • The Punjab Economic Opportunities Programme

(PEOP) 2010-15 • Worker skills and livestock based interventions • Targets four of the poorest districts in Punjab:

District Population

(Census, ‘98, ‘03)

Poverty Headcount

Ratio Poor (Total) Out of which

Rural Poor

Bahalwalnagar 2,322,116 51.3% 1,249,763 84% Bahawalpur 2,831,590 55.1% 1,577,479 80% Muzaffargarh 2,912,319 51.7% 1,762,535 88% Lodhran 1,172,000 50.4% 627,840 87%

Total 9,238,025 - 5,217,617

IGC countries with similar HCR in these years: Bangladesh, Ghana, Kenya

Gov. of Punjab DFID

Pak Rs Equivalent of £25 million

£25 million

PEOP Programme Coordination Unit (PCU)

Punjab Skills Development Fund

£25 million (50% GoPunj & 50% DFID)

£25 million (50% GoPunj & 50% DFID)

Livestock & Dairy Development Department of Gov of Punjab

Technical

Assistance (£5 million )

* Baseline, RCT (by CERP)

* Advisory support for skills and L&D * Poverty focused research for pro poor policies and regulations

* Capacity building and institutional strengthening for PSDF and L&D

PEOP Organization

- Marginalized farmers and non-farmer women and men

- Suppliers of skills, livestock and dairy services and facilities

£5 million

Agriculture in Pakistan • Sixth most populous country in the world, with annual population growth

of 2% • Agriculture constitutes 45% of total employment (72 million individuals) • Yet contributes only 11% of GDP

• Within agricultural sector:

– livestock related production contributes around 50% of total value of output

– 12 million farming households

• Interventions targeted towards this sector can have large impacts on welfare and growth: can we asses the potential for growth?

Intervention Target 1: Raising Productivity

Potentially large misallocation of resources: better documented for manufacturing sector comparing US to China/India [Hsieh and Klenow 2009], potential TFP gains 30-60%

PEOPs intended beneficiaries

Intervention Target 2: Market Linkages

Overconsumption?

Raising Incomes and Wellbeing in the Livestock Sector: Individual Based Interventions

• Input availability and mix: – livestock breeds

• provision of livestock (goats) to households without animal assets • asset transfer: move away from exotic breeds • more controversially, selective culling of low yielding livestock

– improved knowledge and techniques related to inputs:

• fodder storage, fodder types, tying animals

– microfinance (low levels of penetration to date)

Traditional Patterns of Fodder Crops in Irrigated Punjab

Microfinance Penetration • As of June 30, 2011: % of active borrowers, savers and policy holders from

livestock and dairy sector by PEOP district:

• Of those with MF accounts, women more likely than men to be active borrowers [PEOP has some targeting focus on women]

Districts Active Borrowers (%)

Active Savers (%)

Bahawalpur 27.7 2.3

Bhawalnagar 19.7 2.0

Lodhran 8.9 1.4

Muzaffargarh 0.2 0

Community Based Interventions

• Common inputs: vetinerary services • prevalence of bacterial, viral and nutritional diseases that reduce animal

productivity • improved diagnostic facilities, timely vaccination • availability of artificial insemination techniques – promotion of cross breeds

• Method of delivery:

• network of vetinerary centres (raises issues for evaluation) • assignment of trained livestock workers to villages (first stage advertizing

intensity)

• Community level infrastructure for market linkages: – provision of milk chillers

• potential to compare public, NGO and private providers • evaluation: different bundles offered by provider types

– collective bargaining of farmers • requires cooperation across wealth classes

Comparison of Cow Breeds

Provision of artificial insemination that facilitates production of cross breeds can help raise productivity

Fatter milk commands higher price

PEOP Baseline Survey • Designed to provide information on

– who should be targeted in interventions – design of interventions on demand and supply side – baseline outcomes for RCT evaluation

• Types of surveys

– separate male and female household surveys – community survey and mapping exercise – employer and training providers surveys – livestock supply side survey

• Level of detail achieved by these surveys is far greater than in

existing household data sets for Punjab, or the agricultural census for example

Basic Outcomes for RCT Evaluation

• Core household survey modules cover: • household demographics • work and skills • household assets and consumption • livestock activities • skills, expectations and aspirations • perception of public and private services, health, time

allocations etc. • anthropometrics • [60 page + survey]

Livestock Module Detail • Ownership (including Shirikat – akin to sharecropping but for

livestock) • Rearing (trades/purchased) • Input availability, practices and prices (feeding, AI, livestock

tying, use of chillers etc.) • Milk production (morning/evening) • Egg production • Income expectations (from milk production, other livestock

rearing)

• Provides detailed descriptive evidence on livestock productivity, and input related constraints that interventions might loosen

Additional Outcomes for RCT Evaluation i. perception of public and private sector providers (important

because both the livestock and skills side are going to roll out the programme through a mix of public and private providers);

ii. attitudes towards community and civic life (important for the design of community based interventions)

iii. health (anthropometrics) of young children and females

iv. perceptions about gender equality (targeting women is important for both the skills and livestock interventions)

v. self confidence (important as an outcome but also important for targeting)

Sampling of HH and Community Surveys • Sampling split into two phases:

• Phase 1 : 6,130 households from 194 PSUs (villages/urban enumeration blocks) • community and household surveys

• Phase 2: approx 45,955 households from 667 villages/enumeration blocks • community and household surveys

• Within phase 2 we will have 150 “in-depth” surveyed PSUs. In these PSUs we will

conduct: • community surveys • short census to all households (average PSU size 350 hhs) • detailed household survey to 200hhs per PSU (slightly longer than surveys in Phase 1) • HH survey will place emphasize on network linkages between households in PSU

– 30,000 hhs in in-depth sample [+Phase 1 hhs panel: 2011-13-15] – 15,955 households in remaining 517 Phase 2 PSUs [panel: followed six monthly,

short survey instrument]

Immediate Timeline Year Month Activities 2011 Sept Start of baseline HH and community surveys (Phase-I)

Design of training providers’ survey Oct Completion of baseline HH and community surveys (Phase-I)

Start of baseline employers and training provider surveys Nov Analysis of data from Phase-I

Start of baseline HH and community surveys (Phase-II; to be completed by Mar-Apr 2012) Completion of baseline employers and training provider surveys

Dec Writing of baseline HH report for PSDF and L&DD partners (Phase-I) Intervention design for RCT-based evaluation and re-calibration

Jan Writing of baseline Employers and Training Providers’ report

Existing Evidence Base

• What priors do we have on the effectiveness of the kinds of individual and community based interventions discussed?

• Livestock research team have been involved in the evaluation of another large-scale RCT in livestock sector in Bangladesh

• IGC has facilitated knowledge transfer across these settings

Program Interventions • Bangladesh, we evaluated the Ultra-Poor programme, operated by

BRAC • Targets poorest 10% of households in rural Bangladesh

– recall HCR in Punjab of 50%

• RCT evaluation including 25,000 households (2007-9-11), with a small number of in-depth villages

• Intervention design: – Asset transfer (unlike in Pakistan, many HHs without livestock at

baseline) – Intense two year training period: training provided by BRAC workers – proposed alternative for Pakistan: assignment of trained livestock

workers to villages – No interventions related to market linkage in Bangladesh: in Pakistan

we want to try and compare different provider types

Lessons Learned 1: Transformation of Occupational Choice

Lessons Learned: Transformation of Occupational Choice

Lessons Learned 2 • Increase in annual hours worked • Household income rises significantly • Increase in scale of livestock related activities: either

thought land rented/owned, or purchase of animal sheds etc.

• PCE increases by 10%, price per calorie rises by 5% • CBA analysis reveals program yields a high RR than

equivalent cash transfer • Program replication in 10 countries yielding cautiously

optimistic results in short run

Factors To Build into PEOP Design and Evaluation

• Heterogeneous effects across HHs depending on the activities they specialized in at baseline – Optimal set of households to be targeted – Interplay with skills interventions

• Detailed intervention design:

– separating importance of assets, from other input uses/practices, from output prices

• Spillover effects onto other poor non-beneficiary households – Changes in occupational structure of other poor households

• Do networks matter (in-depth PSUs) and what is the role of the

community (identifying the poor, conflict resolution) in making effective interventions?

Organisation of Production and Innovation in Pakistan’s Electrical

Fan Sector Theresa Thompson Chaudhry And

Christopher Woodruff

The Fan Sector • Nearly all firms located in Gujrat and Gujranwalla

(Punjab) • 450 firms

– Of which only are 4-6 large scale • Industry output of around 10 million units/year • Exports have more than doubled over last 5

years, to around $40 million - Markets include: Bangladesh and Middle East

• Fan quality generally superior to Chinese fans: Metal vs. plastic; New vs. recycled metal

Organisation of production • Production in even the largest firms in Pakistan is

organised as batch production rather than assembly lines. – A series of steps, with inventories of semi-finished

goods held between each step. • A Coasian factory: A significant role for the

ustaad, or foreman. – All work performed at factory, using equipment

owned by the firm. – Contracts:

• Payment to Ustaad: Payment per piece for packing, winding assembly, painting; contract given to ustaad who puts together teams and pays them. (Determines rate? Hiring / firing?)

• Payment to Team Members (based on pre-decided shares): Again piece rate – fixed shares to people on a team. Ex. 15% to ustaad, etc.

In the largest firms:

• For each part of the production process, there are two or three teams. – Number of units assigned to team depends on team size

(which can vary for same process), experience of ustaad, etc.

• Apparent advantages: – Foremen, ustaads, and production workers mostly

originate from same village. Foremen use these relationships to try and reduce absenteeism

• Question: Does the decentralisation limit managements capacity to provide incentives to workers?

Quality Control

• Re-work rates are fairly high in some processes – winding of the motor – painting

• Piece-rate quality control workers (firm’s own, not part of production teams) do quality checks (for example voltage) at different points of production process

– Teams not paid for defects, but otherwise no penalties

Machinery Breakdown and Rejection issues

• Breakdown: – Machinery breaks down excessively – Team of technicians responsible, but also production

teams are not informing about poor performance • Rejection:

– The motor is susceptible to damage (particularly the copper wire) as it moves from workshop to workshop.

– Also, the units are stacked up on top of each other in front of each worker or on the floor, waiting to be moved/worked on.

– An assembly line would help with this…

Issues with assembly line • Workers satisfied with piece-rate, like the flexibility of

batch – Work for a number of days each month, take off other days

to do other jobs – Can take breaks (tea/smoke) during the work day at their

leisure – Batch skills are transferable between firms

• Would require re-building of factory, which is currently a series of rooms or process specialized “workshops”

• Electricity - frequent outages – In batch work, workers can switch to manual processes

during outages – In the summer, when outages frequent and long,

electricity may be rationed between shops

Changing habits

• Thinking about an RCT which would Increase measurement, provide stronger incentives for quality, attendance, etc. – Are just beginning to assemble and analyse the

data on quality and production by work group.

• We should be optimistic that improvements can be made

Step by step, or a leap?

• But…will the incremental improvements be sufficient? – Production lines vs. batch production – Vertical integration vs. standardisation

• Will these large transitions be required to remain productive? – If so, green field or brown field?

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Growth Week 2011: Country Session 11 - Pakistan

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