Four main features of Pakistan's economy and society are symptomatic of its underdevelopment. First, over 60 percent of the population lives in poverty defined in terms of an income of USD 2 per day per person. The future is marred by the fact that poverty induces 40 percent of the children to suffer from malnutrition. They are physically stunted in height, or underweight and their brains are incapable of fully absorbing education even if it were available to them. At the same time the majority of the population does not have access over the minimum conditions of dignified human existence: quality education, quality health care, affordable justice and physical security. Second, a continued critical dependence of the government on loans such that the accumulated stock of debt has become unsustainable, with debt servicing amounting to over 50 percent of government revenues. Third, a significant percentage of society due to ignorance and inculcation of bigotry in many schools, have acquired narrowed identities, become intolerant and are prone to violence against the Other. This has created divisiveness and conflict in society which the latest research has shown, is inimical to development. Finally, the political, social and economic arrangements are such that apart from a small elite, most citizens are denied opportunities to fulfill their human potential and bring it to bear to contribute to the development of society and economy.
The irony is that these features of poverty, deprivation and aid dependence, prevail in a country with the world's largest contiguous irrigation system, along with over 40,000 megawatts of hydro power potential in its main rivers alone; the world's largest deposits of copper; possibly the second largest deposits of gold; and as yet unquantified deposits of gas, oil and coal.
Perhaps the richest and most underdeveloped resource of the country is the over 60 percent of the population who are young, with a rich genetic structure evolved over seven millennia in this crucible of civilisations called Pakistan today. Over the last seven centuries folk cultures have emerged in each of the four provinces in the Pakistan area which carry one of the great intellectual traditions of the world: a tradition of universal spirituality, that seeks God through a transcendent journey to the heart, whereby a consciousness of love, tolerance and human solidarity is developed. After over four decades of teaching youngsters and three decades of dialoguing with poor communities, I can humbly testify, based admittedly on a small sample, that some of our youth are gifted and can be reintegrated with this great tradition of love and enlightenment. Many of them have consistently inspired me by the flowering of their talent and the quality of their humanity, when they are awakened.
It is time to identify the roots of Pakistan's underdevelopment and undertake public action to overcome it. New research by Douglass North, Acemoglu, Weingast, Rodrik and others has established two propositions: First, the distinguishing feature between developed and underdeveloped countries is that the former are able to sustain their per capita income growth over a long period, while the latter are unable to do so. It is not that underdeveloped countries do not have economic growth: they do, but they grow in spurts, so that the gains of the high growth periods are largely lost during periods of stagnation, or even negative growth in per capita real income. In such cases there is no substantial increase in per capita income or government revenues in the long run.
Second, the most important factor that determines whether a country achieves long term economic growth or not is the kind of institutional structure it builds. The developed countries have an "open access" or efficient institutional structure. This provides opportunities for open competition and associated incentives for selection based on merit, hard work, efficiency and innovation. Thus sustained growth is achieved. The underdevelopment of countries by contrast is rooted in an inefficient institutional structure which restricts competition as a means of generating rents for the elite. By rent we mean unearned income which accrues when a person gets a return on an asset (including skill) that is greater than what it could have earned (opportunity cost) under competitive conditions. Such a "limited access" institutional structure has incentives for selection based on nepotism and lacks incentives for hard work, efficiency and innovation. Consequently sustained economic growth in such an inefficient institutional structure is not possible.
Pakistan's pattern of stop-go growth is typical of an underdeveloped country. Central to the failure to sustain growth is that in Pakistan, political power of individuals is constituted through rents by establishing patron-client relationships. The ruling elites appropriate state resources for arbitrary transfer as rents to selected individuals and groups. The rent based model originated under the British Raj in the 19th century when resource gratification for the agrarian elites was used to garner political support. But this support was mobilised not to build power for individuals in the government but for British rule in general.
Post independence the governance model and the underlying institutional structure continue to generate rents, although in a variety of new forms and for a coalition of elites that emerged in the post independence period. This rent generation is achieved through the exclusion of the majority of the people from access over productive resources, capital markets and high wage employment. Consequently the process of investment is restricted to a small consumption oriented, state supported elite. An elite that has so far failed to generate adequate savings or sustained high investment for long term growth independent of foreign aid. The constrained competition characteristic of such an institutional structure while generating rents for the elite, creates disincentives for diversifying exports into high value added goods. Thus two key constraints to sustaining high rates of economic growth have emerged: (1) A low savings rate that has locked the country into aid dependence, and (2) A slow export growth that cannot keep pace with the high import requirements of a high growth trajectory. Thus every high growth period, (under Ayub Khan in the 1960s, Zia Ul Haq in the 1980s, Musharraf in the first seven years of the new millennium) has ended with a balance of payments crisis that forces down the growth rate.
Amidst this failure to sustain growth within a highly unequal distribution of both assets and income, mass poverty persists. At the same time the government faces perennial fiscal constraints that prevent it from addressing the problem of poverty and deprivation of basic services in any serious way. Poverty and inequality have in recent years fuelled militant extremism, placed stresses on the state and ruptured the cohesion of society. It is clear that if Pakistan is to break out of underdevelopment, reclaim its rich intellectual tradition and strengthen the state, it must change the institutional structure for a more inclusive and equitable economy. Only a growth process based on equality can be sustainable. Only then can all of the people rather than only a few have opportunities for actualising their human potential to overcome underdevelopment.