Micro Economics and Big Data

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A great deal of analysis and discussion is currently centred around the CPEC ranging from economic, geostrategic to even the existential raison d’etre as well as the subsequent (inevitable) politicisation of the issue. Although these discussions are of great importance, but they have lead to a tunnel vision perspective of Pakistan’s understanding of China.

Much like missing the forest for the trees, a great deal of fascinating information can be gleaned from the radical transformation of this once underdeveloped nation into a vast economic powerhouse in the relatively short span of a couple of decades. In understanding the various factors that designed, fueled, enabled and streamlined this transformation as well as the unforeseen consequences, lies invaluable wisdom for developing nations to guide in tackling and avoiding many problems that seem to have snared their fragile and brittle economies.

Whilst many evangelists of CPEC herald it with a limited number of buzzwords such as ‘game-changer’ and ‘new era of development’, there needs to be an in-depth look at the monumental challenges faced by Pakistan in actually making effective utilisation of such alleged economic windfalls.

Key among the issues that Pakistan needs to address post-haste is the prevalent culture (or lack thereof) regarding taxation. This is an area in which Pakistan like numerous other developing nations have tried to make progress with little to show for results.

Pakistan’s taxation problem is directly linked to vast undocumented economy that operates with impunity in the country and renders most tax and economic reform redundant due to its relative opacity when it comes to data. One key factor in the resilience of this economy is the prevalence of a paper currency based society in Pakistan as well as the perceived simplicity of it.

Current figures put the Pakistan economy at the $250 billion dollar mark, with estimates by experts claiming that the black economy accounts for an astounding 36% of the size of the documented economy. To make matters even worse, later figures obtained through different methodologies by experts at the PIDE (Pakistan Institute of Development Economics) peg the informal economy at a shocking 74% to 91% of the formal, reported economy. This basically deprives the state of a sizable chunk of tax collection and renders most economic growth very difficult as the state implements dizzying levels of indirect taxation, toxic foreign loans and stagnating development projects to cover expenses. Often times, programs pertaining to education and human resource development are the first to get the axe as their disastrous implications require time to manifest themselves.

These are troubling statistics for a nation with a considerably lower than regional tax-to-GDP ratio hovering at 8-9%.  Similar conditions prevail in India, which recently tried a drastic measure to cut down this issue by removing large denomination currency from the system in a poorly implemented manner, much to the chagrin of the populace.

An interesting alternate approach has been tried by China. It is common knowledge that the ability of the Chinese government to impose its will on its populace effectively on a large scale is unparalleled. But in this situation, over time they honed their approach to be effective through convenience rather than coercion.

Using technology, and ubiquitous smartphones apps, the Chinese managed to turn the majority of their urban consumer and retail culture into a cashless, digital, app powered model. Applications such as WeChat and Alipay offer everything from simple payments, online shopping, purchasing of travel and tickets, online banking, to retail and utility payments as well as wealth management into one unified, safe, hassle free and fast platform that is ubiquitous. All of this is layered within the social media and communication features of these apps. Access to this level of detailed information is a data scientist’s dream (and Orwellian nightmare) come true.

Rather than force poorly implemented draconian measures (though that might also help), the Chinese used technology to leapfrog from paper to digital, cutting out for the most part the plastic (credit card) phase. The combined user bases and regular users of these apps are close to 1 billion. That is a sufficiently large portion of the population that is plugged into the system and prefers convenience over everything else. This is been so successful that tech giants of the west are also scrambling to implement something close to this system with initiatives such as Apple Pay and Samsung Pay.

Of course, it is understandable that this is just one aspect of a much more complex issue, but this is one approach that can be implemented the least painlessly and also enables other benefits with great future potential through vital data collection that was previously considered impossible on this scale.

These systems though do exist in some rudimentary form in developing countries such as India and Pakistan but it would be prudent to seek technical assistance in these matters from those that have successfully implemented them to avoid reinventing the wheel through trial and error.

It would be wise for Pakistan to see the true potential for assistance from its wealthier neighbour lies in learning from it, not depending on handouts.