For the first time in half a century the idea of systemic change is beginning to grip the popular imagination in many countries of the third world stretching from Africa, South Asia, South East Asia and Latin America. The recent Arab spring in the Middle East has pitted mass movements against entrenched dictatorships. Two features define this widespread aspiration for change: first, replacing authoritarian as well as elite-based democratic systems with a participatory form of democracy. The aim for example in a number of South Asian countries engaged in building democracy is a decentralized institutional structure that systematically involves communities in governance decisions.
Second, a process of economic growth that addresses the structural basis of mass poverty and inequality and which gives opportunities to all of the people rather than a few, for economic and social advancement. The first feature is associated with reforms, the second with new concepts of inclusive growth and broadening traditional human development indices to include economic and social opportunities.

In Pakistan, too, the fragrance of a new spring is in the air. There is an emerging consensus across various strata of the population against dictatorship and for democracy. At the same time there is a demand that democracy must deliver in terms of good governance, provision of basic services and overcoming mass poverty. It is in this context that Imran Khan’s slogan of “change” acquires its potential for popularity as well as the danger that it may merely reproduce the status quo. It may be helpful therefore to articulate the meaning of change in the case of Pakistan.

Current political discourse regards the elimination of official corruption through honest leadership as the defining feature of change. Yet, it can be argued that removing corruption in the upper echelons of government is a necessary but not a sufficient condition for real change. Research in the New Institutional Economics over the last two decades shows that undeveloped economies such as Pakistan have an institutional structure within which rent-seeking by the ruling elites is endemic. Rent is defined as a rate of return on an asset (including skills) which is greater than the opportunity cost under competitive conditions.

Corruption though morally reprehensible is nevertheless only one form of rent generation for the elite. Other forms of rent that have prevailed in various stages of Pakistan’s history, though morally acceptable in this society are equally important in keeping the country undeveloped. These include the provision of evacuee property by the state to preferred individuals in the 1950s; commercial licenses; cheap credit, overvalued exchange rate, subsidies and import protection to entrepreneurs in the 1960s and 1970s; continued huge perks to the military and bureaucratic elites in terms of land grants, cheap housing, high value services in clubs at low prices, expensive vehicles and fuel at government expense, lucrative appointments in state owned loss making firms, and the facilitation of commercial enterprises such as housing schemes in which the elite have equity stakes. Rent is generated through an institutional structure that restricts competition to the elite and allows selection based on nepotism. By constraining competition, such an institutional structure results in low efficiency, low productivity and lack of innovation — thereby precluding sustained high growth.

A rent-based institutional structure is located in a particular limited access social order. This social order is a combination of the elite based economy and electoral process, an associated backward educational system, and a supportive dominant military, bureaucratic, and ideological apparatus. By contrast, an open access social order is characterized by an economy with a high degree of competition, efficiency, selection based on merit, innovation and hence sustained economic growth with poverty reduction. The associated political process is also competitive which allows incompetent and corrupt elements to be cleaned out through recurrent elections.

The challenge of change is to bring about a structural transformation of the institutional framework so that both the economy and the polity can function for the people and by the people.

Published in The Express Tribune, Monday, January 30th, 2012.