The economic logic of the independence movement during the Raj was that the structure of the colonial economy kept most of the people poor because it siphoned off a large part of the fruits of their labour to the ruling elite abroad. Indeed essential to the promise of the Pakistan movement was the idea that independence would enable a just and equitable society within which poverty could be overcome and the material conditions of civilized life provided to all citizens. Pakistan’s ruling elite has failed to fulfill that promise so far, and this failure saps the vitality of both state and society. The challenge of building a future different from the past, requires identifying and overcoming the major constraints to achieving a process of sustained growth with equity. This article is a humble contribution to this effort. We begin by proposing that economic equality is necessary for sustaining growth. We locate the problem of sustaining growth and the endemic inequality and poverty in the very model of governance adopted in post independence Pakistan. We then examine the structural and institutional constraints to sustained growth. Finally the latest research findings of the New Institutional Economics (NIE) are brought to bear in identifying some of the necessary institutional conditions for undertaking a new process of economic growth which would be sustained by its very equity: such a process of growth by people living in freedom, would be fueled by the enterprise and innovation of the many rather than the few.
Inequality adversely affects both the sustainability of growth as well as its capacity for poverty reduction. Consider. Elite power structures in Pakistan exclude the majority of the population from high quality education and access over capital, land and labour markets. This severely restricts the base for actualizing the human potential, through which entrepreneurship, investment, innovation and productivity growth can occur to sustain growth. At the same time the poverty reduction capacity of growth is constrained by the institutional environment of the state and the economy: The poor face a structure of state power, markets and public institutions, which discriminate against their access over resources, public services and government decision-making.
It can be argued that both the failure to achieve sustained high growth in the past as well as inequality is located in the governance model itself. In Pakistan’s governance model (adopted essentially unchanged from the Raj), power has been historically constituted by accessing state resources for arbitrary transfer as patronage to selected individuals. During the pre independence period resource gratification within this governance model was conducted to win loyalty for the Raj. After independence state resources granted within a structure of dependency was undertaken to build individual domains of political power. (see my paper: Poverty, Growth and Governance in South Asia). Within this model an individual could become rich simply by entering into a patron-client relationship with the government for rent seeking. Therefore there was no incentive for enterprise, innovation, or savings, which drive growth in a modern economy. At the same time within this governance model since patronage could only be acquired by the few, the majority were deprived of access to resources. Thus endemic poverty and the inability to sustain economic growth became the hallmarks of Pakistan’s economy.
The awarding of licenses, government contracts, subsidies and loans have been some of the typical forms of granting rent to favoured individuals and groups. Dr. Nadeem ul Haque in his penetrating analysis of Pakistan’s growth model has counterposed these “licensee businessmen” with those in the informal sector facing both uncertainty and high costs resulting from the government’s exclusionary policy and concludes: “It is no wonder that indigenous enterprise does not grow and wealth remains concentrated in the hands of those the government favours” (See, Nadeem ul Haque, Rethinking Pakistan’s Growth Strategy).
Let us now examine the four structural constraints to growth sustainability emanating from Pakistan’s governance model indicated above:
The first structural constraint to equitable growth, areasymmetric markets for inputs and outputs. In the UNDP, Pakistan National Human Development Report 2003, I have argued that local elite power structures in rural areas distort markets in favour of the rich and against the poor. The poor peasants face input and output markets where they have to pay a higher price for their inputs and get a lower price for their outputs compared to large farmers. The study showed that the poor peasants are losing as much as one third of their income due to asymmetric markets.
The second constraint to growth and equality is unequal access to markets for land, labour and capital. The highly unequal distribution of land ownership in Pakistan together with wide spread tenancy, is a major structural factor in rural income inequality. This is further reinforced by distortions in the land market arising from inadequate documentation of land rights and lack of access over credit for purchase of land. Consequently, the tenant has neither the ability nor the incentive to increase productivity, thereby further accentuating income inequality.
The NHDR survey data shows that due to lack of access over the formal credit market, 51 percent of the tenants get locked into debt dependence on the landlord, and out of these, 57 percent are obliged to work as labourers on the landlord’s farm without wages, while 14 percent work for a wage below the market rate. Thus the structure of power and dependence creates distortions in the labour and capital markets, which systematically deprive the poor of their actual and potential income. The consequent inefficiency in the allocation of labour and capital resources constrains agricultural growth, increases inequality and engenders persistent poverty.
The third structural constraint to growth and equality is the poor health condition of the people. The NHDR showed that due to inadequate diet and lack of access over safe drinking water and sanitation facilities, 65 percent of the poor in the sample survey were suffering from ill health. The prevalence of disease amongst those who are slightly above the poverty line is a major factor in pushing them into poverty. Those who are already poor get pushed into deeper poverty as a result of loss of income due to absence from work, and high medical costs resulting from illness. Thus the unequal access over public health facilities and the relatively high prevalence of disease amongst the poor becomes a structural factor that further accentuates both poverty and inequality.
The fourth structural constraint is the lack of access over security and judicial services. The poor live in localities both rural and urban, which are inadequately policed and in case of theft or violence against their person the cost of seeking redress through the judicial system is in most cases unaffordable and where undertaken, the expenses in terms of time and money, lock the poor into permanent debt. This is another factor reinforcing inequality and constraining economic growth.
In taking Pakistan’s economy forward into a new trajectory of sustained growth with equity a change in the policy paradigm is required. The current and past governments have conceived policy within the paradigm of finance, resource generation through taxation, resource allocation through the budget, and selecting particular sectors of the economy for stimulation through direct and indirect subsidies. More recently these policy concerns, following the fashion of the season, are deemed to be supplements to the functioning of imagined free markets in the country. Yet this paradigm is now not only obsolete but has palpably failed to provide policy solutions to the central economic challenge of our time: sustained growth with equity. A new paradigm is now available for the efficacious prosecution of this endeavour: The New Institutional Economics (NIE).
The work of Nobel Prize winning economist Douglass North who pioneered NIE, and recent research by economists such as Acemoglu, Kuran and Grief have shown, that in order for markets to function for sustained growth an underlying institutional structure is necessary. An institution is constituted by formal and informal rules which embody incentives and disincentives for directing human behaviour. Broadly speaking under developed countries in the third world are characterized by an institutional framework where the incentives work in favour of rent seeking and create disincentives for new enterprise, efficiency, innovation, merit based selection and hard work. By contrast in developed countries the institutional framework provides incentives for new entrants to enterprise, innovation, efficiency, merit and hard work.
The single most important institution and one that has primacy over all others in determining sustained growth, is the polity. As Douglass North in his latest work has argued “it is the polity that defines and enforces the formal economic rules of the game and therefore is the primary source of economic performance”. Thus in this new connection between economics and politics, it is not the ministries of finance or economic affairs that can be relied upon to enable sustained growth. Rather it is the polity, the constitution and the rule of law which provide the fundamental basis of the economic performance of a country.
Inherent to the formation of Pakistan was the aspiration of the people for freedom and democracy. Therefore the economic pursuit of sustained growth can only be undertaken on the basis of equity and justice and within a democratic polity. The institutions for sustained growth that emanate from the polity include private property rights, contract enforcement, stable constitutional structures and a governance system that is both accountable and responsive to change. Equally important for sustained economic growth are norms and cultural values that underpin these institutions. The three popular mass movements in Pakistan that have articulated and consolidated these norms can be seen in the Pakistan movement before partition, the popular movement led by Z.A. Bhutto against the Ayub dictatorship and more recently the lawyers’ movement for safeguarding the constitution and establishing the rule of law.
We have argued in this article that the first step towards achieving the economic wellbeing of the people is to build a democratic polity and the rule of law. This alone can provide the framework for constructing the institutions that can actualize the potential of the people for building a dynamic and equitable economy.
Dr Akmal Hussain is Distinguished Professor of Economics, Beaconhouse National University. He has authored three books on economic policy and has co-authored/contributed to fourteen other internationally published books. His work can be accessed at: www.akmalhussain.net