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Wednesday Apr 15 2020


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Evgeny Pashukanis, is a name that does not come rushing to mind when Marxist thinkers or philosophers are recalled. Yet, this Soviet jurist attempted to construct a Marxist theory of law, a project that others of his ilk found unnecessary.

He was unique, insofar that Marxists preceding him simply looked at law as an instrument of the ruling class, without offering any detailed analysis of how that came to be. Pashukanis in 1924, posited a theory called ‘Commodity Exchange’, in which he identified contract law as the foundation of all legal relations between individuals. He argued, that the genius of law is that it is able to create an illusion of freedom between parties with unequal bargaining positions; such as a worker and employer, as it allows them to freely enter into contractual arrangements, whilst ignoring the substantive inequalities between them.

Capitalism, as Pashukanis argues, does not perceive any moral wrong in a contract that allows a business to summarily fire any of its workers, at any time, without providing any reason. The only way such termination could be challenged if there was a procedural infirmity in the contract itself, such as it being improperly signed, or not witnessed. The DNA of Capitalism is the freedom to contract in and out of any legal arrangement even if the same is compatible with great injustice.

In light of the economic devastation caused by COVID-19, Pashukanis’s hypothesis is useful in the backdrop of new schemes or laws introduced by states scrambling to protect its working class, who face certain unemployment and crippling poverty. Such schemes are deeply ineffectual when corporate systems’ default positions are commodity exchange, rent-seeking and profit maximisation, validated and immunised by the laws in force.

Consider, the recently introduced State Bank of Pakistan’s (SBP) Refinance Scheme, which allows banks to offer businesses loans up to Rs. 500 Million in order to finance wages up to three months, for their employees affected by the state-imposed lockdown. Ostensibly, the purpose behind the scheme is to incentivise businesses into retaining their employees.

It’s a well-meaning initiative, but that is all that it is.

Even in the most congenial of economic climates, banks are risk averse, and will only lend if a business demonstrates viable liquidity supported through audited accounts, and backed by immovable assets that can be collateralized as security for the loan.

For any arrangement involving lending to financial institutions, the borrower provides representations that it shall only utilize the loan for the purpose that is envisaged. Such a representation is easily forthcoming when a loan is given to businesses undertaking new projects or expanding their portfolios. However, envisage a scenario where a borrower avails the loan for an unrelated purpose and summarily terminates their employees. Banks are unlikely to treat such breach of contract by the borrower as an event of default, because their singular concern is repayment of the loan and not championing the cause of someone else’s employees.

Thus, the SBP Scheme is doomed to failure, because workers are low hanging fruit; easily dispensable in a credit crunch. An SBP Scheme shall not prevent employers from exercising their rights to terminate their employees summarily and swiftly, citing any reason under the sun, or none at all and banks shall simply not care.

Tellingly, the SBP Scheme shall bypass Small or Medium Enterprises (SMEs) that aren’t registered as private companies or have little or no collateral to offer, apart from their cash flow, which is stretched at the best of times. Even if the SME is able to cough up security for the bank, which is usually a mortgage on the owner’s personal property, the Securities and Exchange Commission (SECP) will not register such a mortgage, because the SME usually is a either a sole proprietorship or a family owned enterprise rather than a limited company. Since SECP only regulates limited companies, banks will want their security recognized by the SECP and thus, they will have little appetite to lend to SMEs.

Paradoxically, SME’s are entities whose employees are the most vulnerable and who may actually benefit from the SBP Scheme to keep their employees afloat, but will invariably miss out due to non-incorporation of a limited company, because corporate tax payments and increased regulatory control by the SECP in their businesses are headaches that they rather avoid.

Such trumpeted schemes would only make a modicum of sense if they are wholly or partly underwritten by the state. If the state assumes some of the risk of a defaulted loan or the SBP allows the bank to expunge it from its books, banks may take a leap of faith and lend.

Using a frame of reference, (and not a comparison), the United States commenced a $2 trillion “Paycheck Protection Program” stimulus package, which offers small businesses small interest loans, which the US government shall underwrite, provided that the borrower retains its employees. The proof of the pudding is in the eating though, and recent reports indicate that financial institutions in the US want more information on the ramifications of the Program, prior to committing to lending.

Consider also, a spate of protectionist notifications passed in Punjab and Sindh, in light of COVID-19, which demonstrate a numbing disconnect with laws on ground.

The home department of Sindh passed a notification where it purportedly exercised powers under the Sindh Epidemics Diseases Act, 2014, declaring that no workers shall be laid off (for an undisclosed period), their salaries shall be paid in full and anyone defying this would be subject to punitive sanctions. This is an utter eyewash because the notification is at odds with an existing piece of legislation; The Sindh Terms of Employment (Standing Orders) Act, 2015, where employers have the full authority to lay off workers in an epidemic, it subsists for more than fourteen (14) days.

Also, notifications such as those mentioned is considered subordinate legislation, which cannot override legislation created by the provincial legislature, in this case the standing orders.

The Punjab’s home department, not to be outdone in the battle for useless optics, passed a similar notification, in its exercise of nebulous powers under the Code of Criminal Procedure, 1908, that during the period of COVID-19 lockdown, no landlord shall evict a tenant forcefully or “without due process of law” for non-payment of rent.

Again, this notification is a non-starter, in the presence of the Punjab Rented Premises Act, 2009, which allows landlords to initiate eviction proceedings against tenants precisely for defaulting in rental payments. Due process is an intrinsic part of the 2009 Act, where eviction proceedings need to be initiated before a rent tribunal, who has to pass a reasoned order for the eviction itself. The notification is bureaucratic sleight of hand, and this is one trick that is fooling no one.

More than ever, provinces empowered by the autonomy of the 18th amendment, need to do more.

Staring from countering the economic consequences of COVID-19, half-baked notifications will not do. Provinces need to bring in emergency legislation, which amend existing laws which provide genuine relief; limiting the right to terminate workers, immunising tenants against early eviction, creating emergency relief funds or allowing companies to use provident or gratuity payments to offset cash flow issues.

These amendments can have sunset provisions incorporated in them, spanning the length of the lockdown or extinguishing when things become better. To achieve this though, ordinances need be passed or even better, provincial assemblies, through video-conferencing in light of social distancing, can introduce proper legislation in record time so that labourers, daily workers and employers have a genuine remedy before courts.

It would be churlish not to feel sympathy for the federal and provincial governments grappling with the enormity of this pandemic. States far more equipped than us, underestimated COVID-19 at their own peril.

Our greatest challenge is a sustained welfare program initiated in an indefinitely locked economy, riddled with debt and overstretching its budget. However, there may not be better time for the state to revisit its existing social contract, with its citizen, who has been short charged for so long, yet has no choice but to endure more pain.

It is always unwise to tempt fate, but it really cannot get much worse than this.

Ali is a barrister in Lahore. He tweets at @RezaAli1980