The economy of an Elitist state

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EPW Reviews July 17-23, 1999
Pakistan's Economy: Problem of GovernanceSanjay KumarPakistan –
The Economy of an Elitist State by Ishrat Husain; Oxford University Press, Karachi, 1999; pp xiv + 451. “DEVELOPMENT requires good governance, meaning open, transparent, accountable public institutions”, wrote James Wolfensohn, president of the World Bank. Economic performance and social relations are shaped by the degree to which accountability and participation characterise governance. In 1950s and 1960s instruments of central planning and state-push were the order of the economic management thinking, but this did not lead to any gain for a majority of the developing economies. Subsequently, idealist concept of a benevolent state started giving way to re-evaluation of economic management thinking in favour of market superiority. ‘Free enterprise’ and ‘deregulation’ became the buzzwords. An effective and capable state combined with properly regulated and well-functioning markets in a competitive environment has started being considered to bring welfare to majority of people.Pakistan has been no different to this trend. What baffles however the economic managers is that there were certain advantages to Pakistan at the time of its creation in 1947 in terms of very fertile tract of Indus basin, a well-developed canal-irrigation system of the Indus, Chenab, and Sutlej, a prosperous machine-tool manufacturing small scale industries in Sialkot, rich industrial mineral sites of salt and limestone, and foreign exchange earner in the jute of East Pakistan (now Bangladesh) to boast of. But these advantages were soon lost. Ghulam Kibria in his book, A Shattered Dream (OUP, Pakistan, 1999) has given a passionate account of how Pakistan, which was a “viable state in economic terms” became unviable due to economic mismanagement. For reasons that the rent-seeking group gained political control, Kibria feels that the native genius of Sialkot and adjoining areas of Punjab involved in manufacturing surgical instruments, diesel engines and metallic components were not encouraged and they got obliterated over a period of time. Probably, as it is true of other developing economies too, where a conceptually benevolent state purportedly acting in the larger interests of the population is eventually usurped by a predatory state guided by an elite group for narrow and selfish interests. Pakistan also went the same way. The political stability was undermined, and there were a number of coups and change of regimes from democracy to military rule, which strengthened the elitism. This book by Ishrat Husain, who is presently a director on the board of the World Bank and has been a member of the elite Pakistan civil service, explores how the power and wealth got concentrated in the hands of a few.One of the reasons for this can be that though the present rulers came to power through elections, they have been trying to undermine judiciary and other institutions which are essential for democracy and a good governance to survive. The grip of the elite who benefit from these manoeuvrings has become so overpowering that over a period of time it has become so easy to undermine the democratic institutions in Pakistan. This book review examines in this context the above issues. Weak governance in Pakistan, which characterised every form of government, military, democratically elected or nominated, can be linked to political factors. At the time of creation of Pakistan, the state power was predominantly in the hands of the bureaucracy and the military. The leading political party, the Muslim League, was not able to organise itself at the grass roots and had to succumb to the dictates of the civil service and the army. Besides, the Muslim League was fraught with fratricidal war, which did not allow the party to take hold of the state machinery. Protracted negotiations on the constitution, erosion of popular mandate, and the growing chasm between the East and West Pakistan political leaders did not help the situation either. Martial law administration needed rationalisation of their regime, which they provided by clinging to the medieval concept of appealing to the reasons of religion. General Zia-ul-Haq’s regime found justification for continuing in power by Islamising the society through adoption of Islamic Shariat laws, establishing Shariat courts, enforcing zakat and ushr and abolishing riba. This state-sponsored pandering to the Islamisation created another powerful elite, the religious oligarchy, which has further played a decisive, and a divisive role in the country’s society and polity. The resulting elite formation and friction has engulfed the country and put brake on any modernisation of the society which has been witnessed in other two predominantly Muslim countries – Indonesia and Malaysia. Formation of elite groups which control and acquire publicly owned resources for private enrichment and also exclude majority of the population from the benefits of development, has further reinforced the inequities in the society, and skewed the distribution of economic and political power. This has further strengthened the feudal mindset and behaviour of the narrow class of ruling elite that moved in and out of power at various intervals and captured most of the rents for themselves. This class was attuned to the client-patron relationship. The economic rents created through import licensing, industrial permits, foreign exchange allocations, credits by the government banks, tariff concessions, subsidised agriculture credit, tax evasions were some of the tools for the elite society to thrive. Studies have shown that the lowest 20 per cent of the population in Pakistan received 7.3 per cent of the income whereas the highest 20 per cent received 44.5 per cent of the income. This further helped in the formation of the elite. Pakistan in its present form emerged as a separate entity only after 1971, when East Pakistan became a separate nation as Bangladesh. During 1947-58, though domestic savings were low in the aftermath of partition and displacement, Pakistan’s GDP grew at an average rate of 3.1 per cent per annum, ahead of population growth rate. Foreign inflows at that time were almost insignificant, and were mainly for technical assistance. The decade of 1960s experienced impressive growth rate of 6.8 per cent. This period saw an upsurge of foreign investment with domestic savings also contributing significantly. This was partly due to liberal policies followed by the Ayub regime. But this period can also be characterised by paradoxical combination of high growth rates and large increases in income inequality, inter-regional differences, and the concentration of economic power.Separation of East Pakistan in 1971, however, saw a fundamental change in economic philosophy of Pakistan, which resulted in low GDP growth, averaging between only 3.9 per cent during the decade of 1970s. This could have been worse if there was no liberal policy of manpower exports to Middle East, which at that time was seeing a boom in the economy due to petrodollar. This period essentially saw roll back of liberal policies followed in the 1960s. Nationalisation of industries and financial institutions during the period changed the ground rules of economic management, and were largely responsible for slower growth rate and low investments.The effect of policies of 1970s and short objective of getting foreign assistance in 1980s resulted in contraction in the economy. The period saw Pakistan posing itself as a frontline country fighting war against communist expansionary policy. The purpose behind that was to get foreign assistance, which came in big tranches from the western world. Though the GDP picked up during the period, it also impaired the country’s long-term capacity to generate sustainable growth, reduce poverty, and achieve equitable income distribution. This had economic and social costs. As a result, today Pakistan ranks a poor 120th in the human development index of the UNDP. The savings are also very low, and half of the external resources are required for meeting the debt burden, a situation close to debt-trap. Following the developments in May 1998 and the subsequent bilateral sanctions and suspension of new non-humanitarian assistance from international financial institutions, the balance of payments has further deteriorated significantly. Effective implementation of reform measures envisaged under the structural adjustment programme (SAP) has also been adversely affected. The government’s ability to address these structural problems is hampered by the institutional decay extended over several years. The erosion in the effectiveness of public institutions and poor governance has significantly contributed to the situation. Recent efforts to increase transparency, enforce the rule of law, and rebuild public institutions and public trust are seriously undermined by the grease-pole action of the Nawaz Sharif government, which has tried to destroy institutions of judiciary and other law enforcing and regulating bodies.Achievement of Pakistan’s medium-term objective of annual GDP growth of 5-6 per cent is predicated on rapid structural reforms, which can reinvigorate private sector-led and export-oriented growth. In the near term, policies need to concentrate on restoring macro-economic stability and balance of payments viability, but over the medium term, attention needs to shift toward increasing savings and investment, development of social sector infrastructure and enhancing the efficiency of capital for sustained high rates of economic growth. Governance problems impair the effectiveness of public expenditures and contribute to poor economic performance, low investment, and inadequate social services. Politicisation of routine decision-making has weakened the civil service and diverted expenditures to lower-priority activities. In this connection, attention will have to be given to ensuring that Pakistan has a professionally strong and independent government. The government is fully aware of such need for a fundamental change toward greater respect for the rule of law. To achieve this objective, the government began implementing during this fiscal year the prime minister’s agenda for instilling good financial governance in Pakistan. In addition to promoting a permanent change to a culture of financial discipline, these efforts should set the stage for stronger public and private institutions with much better financial prospects for the future. But much depends on how the government achieves the objectives set before itself. This book has raised very relevant issues for the Pakistani economy. The issues of governance and institution building have always been at the core of all the issues. But to address these issues one has to bring in political and social reforms, which may be another chicken and egg story. The effort of the OUP to bring out four books on the Pakistani economy is commendable. I just wish they had been a little more incisive.