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Institutions, Individuals And The National Crisis
The 1990s: Misgovernance And The Economy (Corrected Version)
Dr.Akmal Hussain
Newspaper: Daily Times
Dated: Thursday, October 17, 2002

In the preceding article we analyzed the dynamics of political power during the 1990s. We indicated how successive elected Prime Ministers in their pursuit of individual power and wealth, induced a crisis of state institutions that triggered a military coup d'etat. In this article we will examine the impact of misgovernance during the 1990s on economic growth and poverty.

Economic Growth, Employment and Poverty

During the decade of the 1990s, political instability, historically unprecedented corruption by the top leadership, and the worsening law and order situation perhaps had a significant adverse effect on private investment and GDP growth. Yet these factors merely accentuated the tendency for declining growth that was rooted in structural factors, which were manifest even in the 1980s. The failure of successive governments in this period to address the deteriorating infrastructure and the emerging financial crisis further exacerbated the unfavourable environment for investment. For example, total investment (as a percentage of GDP) declined from 17.9% in the period 1988-92 to 16.4% in the period 1993-1997.

The sharp decline in GDP growth for such a protracted period in the 1990s though unprecedented in Pakistan's history, had nevertheless been predicted. In my book (Strategic Issues in Pakistan's Economic Policy) in 1987, I argued that the high growth experience of the preceding three decades may not be sustainable in the next decade due to structural constraints rooted in the deteriorating infrastructure, low savings rates and slow export growth: "…….if present trends continue, we may be faced with the stark possibility that high GDP growth may not be sustainable over the next five years….." (Emphasis added).

While GDP growth declined during the 1990s (from 6.3% in the 1980s to 4.2% in the 1990s), employment growth has continued to remain at a low level of 2.4% since the 1980s. This indicates that the employment problem persisted during the 1990s. At the same time the growth of labour productivity declined, which would be expected to push real wages downwards. The available evidence shows that this is indeed what happened in the 1990s. Nomaan Majid in his ILO study suggests that real wages of casual hired labour (which is the predominant form of hired labour in Pakistan) declined in both agriculture and industry, during the 1990s.

Employment elasticity is the additional employment generated by a marginal increase in output. An important indicator of the structural decline in the capacity to generate employment, is the declining employment elasticity of GDP growth during the 1990s. The evidence shows that the employment elasticity in the manufacturing sector declined sharply from 0.17 in the 1980s to minus 0.10 in the 1990s, while in agriculture it declined only slightly. This trend when combined with the evidence of declining output growth in these two sectors, is suggestive of the emerging crisis of employment and poverty during the 1990s.

A second important dimension of the dynamics of poverty creation in this period was located in the increased fluctuations in agricultural output which was pointed out in my ILO study in March 1999. The study indicates that under conditions of declining input productivity, when higher input/acre is required to maintain yields, the subsistence farmers with fewer resources are likely to suffer a greater than average decline in yields compared to large farmers. At the same time, due to lack of savings to fall back on, they are relatively more vulnerable to bad harvests under conditions of unstable growth. Consequently, slower and more unstable growth during the 1990s could be expected to be accompanied by growing poverty and inequality. The evidence shows that this is precisely what happened during the 1990s: The ratio between the income share of the highest 20% and the lowest 20% income groups of the population which was 5.5 in 1986-87, increased to 7.1 in 1996-97. Similarly the percentage of the population below the poverty line (calorific intake basis) was 17.3% in 1987-88, and increased to 32% in 1999-2000.

Individuals, Institutions and the Economic Crisis

In this series of articles we have traced through various political regimes, the dynamic interaction between the processes of deterioration in the institutions of governance on the one hand and the structure of the economy on the other. The purpose was to understand the systemic tendency for increasing poverty, loan dependence and slow GDP growth.

The Ayub regime was characterized by denial of political rights to the people and economic policies that induced acute social and regional economic disparities. The resultant political tensions exploded into a civil war and the emergence of independent Bangladesh. We saw how the mechanisms of rural poverty observable to-day, were rooted in the increased peasant dependence on the landlord, and asymmetric markets for inputs and outputs that resulted from a particular form of agricultural growth during the Ayub period. The analysis also showed how the tendency for the economy's loan dependence so manifest to-day, may have originated in the policies of the Ayub regime. The government by providing state subsidies locked the economy into an industrial structure which was dominated by low value added industries, incapable of generating adequate foreign exchange for the country.

The structural constraints to fiscal space were exacerbated as successive governments engaged in financial profligacy, and allocation of state resources based on considerations of political patronage rather than economic efficiency. Nationalization of industries during the Z.A. Bhutto period enlarged the domain of power and patronage for the regime. However the consequent growing losses of nationalized units laid the basis of subsequent fiscal haemorrhaging of the government. The sharply rising budget deficits during the Z.A. Bhutto period were accentuated by a huge increase in expenditures on the State apparatus as part of his attempt to build a personalized domain of power within the State structure.

General Zia ul Haq sought to establish dictatorial rule by means of an obscurantist and retrogressive version of religious fundamentalism. State resources were used for the first time to foster armed groups of religious extremists and to finance religious seminaries (madrassas) many of which, systematically indoctrinated young minds to hate and kill. The politics of the Zia period therefore laid the basis of the emergence of armed militant groups in society and sectarian violence which was to undermine the process of investment and growth as much as the institutions of governance. During the Zia regime State funds were directed to establishing a theocratic State instead of urgently needed investment in the maintenance of the irrigation system and technical training of the human resource base. Consequently, when the cushion of foreign financial assistance was withdrawn after the Afghan war, investment and growth declined, budget deficits increased sharply, and poverty intensified.

The decade of the 1990s was marked by democratically elected leaders seeking to build authoritarian domains within the State structure and using political power for personal financial gain. The massive misappropriation of State funds during this period accentuated the fiscal crisis. The widespread corruption during this period was an important factor in not only reducing private sector investment, but also reducing the productivity of capital, thereby sharply slowing down GDP growth. During this period the structure of GDP growth also underwent further adverse changes as both capital and labour productivity fell sharply, together with declining employment elasticities. A reduction in capital productivity led to slower growth, while reduction in labour productivity led to falling real wages. As both GDP growth and real wages fell, poverty tended to increase. Thus bad governance and associated adverse changes in the structure of the economy, in this period, laid the basis for a rapid increase in poverty and unemployment.

In Pakistan's history, from the outset, the military as an institution was relatively more developed than civilian political institutions. Therefore an abiding feature of Pakistan's pursuit of democracy was contention for a share of power between the military and civilian politicians. Achieving and the legitimizing the pre-eminence of a civilian democratic order within the power structure required that elected governments had to deliver on three counts: (i) Improve the economic conditions of the majority of the people. (ii) Provide security of life and rule of law so that citizens would have a stake in the system. (iii) Strengthen democratic institutions.

The fact that successive elected governments failed to deliver on these counts, led to a constriction of the space for democracy. Now once again, the wheel has come full circle: The prospect of an elected government functioning in the shadow of military power. (This time however military power has been institutionalized within the political system). Will the future be different from the past? Unless we learn from history, we are likely to repeat it.

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