In Pakistan, a similar debate is repeated on a regular basis every few years: the establishment of new provinces. South Punjab, Bahawalpur, Hazara, Karachi, and suggestions about Gilgit-Baltistan adverts are portrayed as long-overdue redress to regional poverty and administrative overlooking. The ideology behind it is very straightforward and politically appealing: small provinces will be more efficient, and their growth will be faster. However, this opinion avoids a more fundamental economic truth. The solution to the difficult governance or development performance of Pakistan will not be achieved by creating new provinces unless the nation first corrects its fiscal federalism.

The key issue in Pakistan is not administrative geography, but a seriously misplaced revenue and expenditure appointment system. The tax system is one of the most centralized tax systems of large federations operating in the country. An annual report released by the Federal Board of Revenue reveals that over 90 percent of the total tax revenue is raised at the federal level, that is, in large part through income tax, sales tax on goods, and customs duties. The provinces, on the other hand, collect less than 10 percent of the entire revenues of their own organizations, even though they are constitutionally obliged to provide most of the public services.

This disparity has been embedded in the form of the National Finance Commission Award. The existing distribution of the federal divisible pool is that the provinces share 57.5 percent. These transfers are mostly unconditional, formulaic, and have weak connections with performance. The provinces are encouraged more through the size of their population as opposed to tax effort, service delivery results, and productivity gains. This can be expected to deliver the following outcome: provincial governments are opting to maximize transfers at the expense of growing their own tax bases.

This is not the only fiscal weakness that is peculiar to smaller or poorer regions. Even the most economically advanced and biggest province of Pakistan contributes a modest portion to its........

© Paradigm Shift