How nations fail?

Policy making is dominated by those committed to serving their own interests, not caring for the society at large.

One answer to the question ‘how and why nations fail?’ comes from the authors of a powerful new book Why nations fail, that has become the talk of the development community. In it the authors — James Robinson, a political scientist teaching at Harvard University and Daron Acemoglu, an economist teaching at MIT — suggest that for a number of poor and struggling countries, the future looks grim. In most developing societies what they call “extractive institutions” dominate the landscape and prevent the emergence of “inclusive institutions” without which development cannot and will not occur. Should we apply this idea to today’s Pakistan?

Pakistan has been shaped by ideas. Some of these were developed by those within the society. Some were borrowed from abroad. The two-nation theory evolved from the thinking of Muhammad Iqbal and Muhammad Ali Jinnah. The idea behind it was simple but powerful. These two leaders of the Muslims in British India were convinced that their community will not get a fair deal from a political system that was dominated by the Hindus. They argued for the creation of a separate homeland for the Muslims in which they will they will be able to lead their lives according to their beliefs.

In the area of economics in which Pakistan had initially few thinkers of its own, there was a great deal of borrowing of ideas from the world outside. In the 1950s and the 1960s, economists believed that countries remained poor because they lacked capital. The solution was to augment their meager domestic savings by providing them cheap money. This led to the adoption of plans by the world’s rich nations to transfer 0.7 per cent of their total incomes to poor countries as aid every year. The rich also set up institutions such as the International Development Association, IDA, as an affiliate of the World Bank to provide concessional assistance to poor countries that lacked creditworthiness to tap the financial markets. This approach to development resulted in creating dependence of the poor on the rich.

Pakistan’s geography made it possible for those who dominated politics to trade it off with foreign flows of capital. In taking that route they made the country a slave of those who had the money to give. There were growth spurts in the 1960s under General Ayub Khan, in the 1980s under General Ziaul Haq and in the early 2000s under General Pervez Musharraf. The high rates of growth became possible  since easy money became available from the United States in return for supporting the latter’s strategic interests in the area in which Pakistan occupied an important place. The fact that this always happened under military rule is easy to explain. Army rulers could turn Pakistan around without worrying about peoples’ reaction.

This dependence on cheap foreign capital for promoting development did not always work and inevitably resulted in academics asking an important question: Does aid matter? The answer was that most of the time aid-induced development benefitted the rich and the “extractive institutions” rather than the poor. This was certainly the case in Pakistan. In the 1980s and the 1990s, a consensus developed that countries remained poor because of poor economic policies. This emphasis on policies led to the development of a framework that came to be called the ‘Washington Consensus’. It encouraged the developing world to pull the state back from managing the economy and to open domestic markets to both domestic and foreign players. Once, again Pakistan was at the forefront of allowing this idea to shape thinking on development. It was the Musharraf government under the influence of a banker who had worked in a foreign institution all his life that jumped on the ‘Consensus’ bandwagon with predictable results — a high rate of economic growth, increase in income inequality, domination of a few over the institutions of governance.

The situation did not change with the change of regime when the military was replaced by an elected civilian administration. Under the watch of the people’s elected representatives the economy slumped, the incidence of poverty increased, consumption by the rich grew but that by the poor declined, foreign aid declined and pressure on foreign reserves increased. There were negative developments on the political and social fronts as well. Karachi exploded with ethnic violence, the incidence of urban crime increased, while the quality of governance deteriorated. The country appears to be heading for a disaster. With these developments, Pakistan is sometimes called the world’s most dangerous place; sometimes a fragile state; and sometimes it is seen as a failing state. Why did this happen as the country was moving towards the establishment of a democratic system of governance? There was the belief that a democratic system was better at inclusive economic development by which economists mean the pattern of economic growth that provides for the poor and the disadvantaged. Why was that not happening in Pakistan?

Enter Messrs Robinson and Acemoglu to provide an explanation that is relevant not only for Pakistan but for dozens of similarly placed countries. They argue that there is a strong correlation between politics and economics. Causality can run in both directions. In open and democratic systems most changes occur following elections but elections don’t necessarily produce the institutions that provide for inclusive economic development. In the cultures dominated by narrow elites elections strengthen their position. The result is that instead of producing “inclusive” institutions, they develop “extractive” institutions. The latter type of institutions extract from the economy as well as society, for the benefit of the elites. The poor and the less privileged are left out in the cold. This is precisely what has happened in Pakistan in recent years. The making of policy is dominated by those who are committed to serving their own interests, not caring for the society at large. Such an institutional structure can be self-perpetuating and will ultimately lead to social, political and economic chaos. This is how nations fail. We seem to be moving towards that situation.

Published in The Express Tribune, April 16^th, 2012.