Fawad Kaiser
2014 is a key transition year for Afghanistan, with the presidential elections in progress and the withdrawal of international security forces scheduled for the end of the year. In this context, Afghanistan’s security situation is likely to remain complex. The number of internally displaced people (IDPs) is currently estimated 
at some 600,000 and this figure may rise further in 2014. The withdrawal of the international forces is expected to have security implications, and therefore Afghanistan continues to be at the center stage of world’s largest migration operation. The unstable socio-economic and security situation in Pakistan can be further exacerbated by many Afghans migrating to towns and cities in Pakistan thus contributing to rising poverty and unemployment.
The complex challenges related to migration and economic displacement requires attention within broader management and planning frameworks. The main groups of people of concern planned for in 2014 under the Afghanistan operation are the Afghan refugees coming to Pakistan who are forced to flee because of conflict and general insecurity and those other foreign nationals who are seeking asylum in Pakistan.
As mass migration studies have revealed, refugees in Pakistan from Afghanistan 
were predominantly staying on without a permit and without being entitled to pursue regular work. It was further uncovered that many legal refugees carried out unregistered work in agriculture, building, housekeeping, street trading, small manufacturing firms and within urban services. The huge involvement of refugee workers in the underground economy is often seen as an indicator of an oversupply of refugees. The underground economy, however, has been well established in Pakistan for a considerable period and refugees from Afghanistan cannot be said to have brought it about, although they have doubtless contributions towards its continuation. Most refugees are employed in occupations which are at risk of being priced out of the market because of their high labour intensity and low growth in productivity.
The only means of reducing the labour costs is to employ workers on an irregular basis. Northern regions are close to full employment and in the southern areas most job seekers are educated youths living with parents who can support their wait for a suitable opportunity. The national supply of labour power amenable to giving up the guarantees of regular jobs thus has been exhausted necessitating the demand for immigration to Middle East and Europe. Migratory chains transmit an image of Pakistan being a country where it is easy to stay and to earn an income, even in the absence of a permit to stay and the presence of a significant underground economy means that Pakistan exerts a particular pull effect on those migrants and refugees particularly across the western border to become more prone to accepting irregular conditions.
The theoretical literature on the relationship between the tax system and the ‘underground’ economy examines that tax evasion is possible in one sector of the economy, but is impossible in the other. This proves that a rise in the tax rate increases (decreases) the number of agents in the sector in which tax evasion is possible if preferences exhibit increasing (decreasing) relative risk aversion.
There is a widespread notion that a substantial and enlarged share of transactions takes place outside the official economy. This stands, in particular, for developing and transition but also for high income economies. Such transactions are unrecorded by the system of national income accounting, which has become the accepted standard in all countries of the world. The existence and spread of an underground economy gives rise to three principle concerns. The economic and social conditions of individuals, household and countries are assessed in a biased way if one relies on the official statistics.
Thus, the official statistics of unemployed individuals may hide that an (unknown) share of them actually work and receive wage income. As a consequence, the macroeconomic policies are likely to be too expansive and social policy too excessive. A second concern is the loss of tax revenue as underground transactions escape taxation. Finally the third concern reflects the underground economy as an indicator of an unhealthy state between citizens and government. The taxpayers are disappointed with what public services they get for their contributions and seek to reset the balance by evading to the underground economy. It is the worry, that such reaction makes government unable to finance the public goods necessary for an economy and society. In contrast, opponents of government welcome such a development.
Tax scandals involving the rich and famous make eye-catching news headlines. They also are part of a significant and growing economic problem – the “shadow economy” that defrauds the government. Frank Cowell is one of the world’s leading contributors to the theoretical economic analysis of tax evasion. In his book he has systematically studied the underground economy to examine how certain types of economic analysis can be applied to tax evaders. He recommends measures that can be taken to counteract the problem. Cowell’s investigation reveals the shortcomings of applying standard economic models of crime to tax evasion. He developed an analytical framework that shows how the underground economy grows and suggests simple economic mechanisms that will induce the behaviour that leads to tax evasion.
Having laid the analytical groundwork, he observes that standard welfare-based arguments against cheating are “decidedly flaccid” and points the political economists toward a formidable policy that is informed by economic analysis, particularly in terms of scope and practicality.
At a time of tumultuous stock markets and fears of global meltdown, the world economy in 2014 is an uncertain and nervous place. Will more countries economically collapse? Will the stock market crash? Can recession, or depression, be avoided? In the third world countries, the concerns are less about lifestyle and more about life and death. What will be the impact of the current geo-political situation on growth in Pakistan’s economy? Will the hope of a better and prosperous life for ordinary people be negated or seriously searched by the political economists in the forthcoming budget?
This debate is increasingly focused on the big question. How will the money now be found to realise this ambition? IMF has concluded that the necessary money, and more, is already available – if only those who owe it would pay up. We are talking about tax.
This article attempts to analyse the scandal of cheating the system “the underground economy “that allows the richest to evade taxation and duck their responsibilities while condemning the poorest to stunted development and heavy burden of taxes. This is in part to do with super-rich individuals but largely to do with governments, including the Pakistan government, who have let this situation develop and persist. But it is mostly about the influential and the big wielding their enormous power to avoid the attentions of the tax man – with devastating results.
Dr Fawad Kaiser is Professor of Psychiatry and Consultant Forensic Psychiatrist with the Huntercombe Group in UK.
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