A framework for economic growth?

The Planning Commission looks to open up a new terrain for policy thinking and public action.

The Planning Commission has announced a new “Framework for Economic Growth in Pakistan”, prepared under the able leadership of Deputy Chairman, Dr Nadeemul Haque. It opens up a new terrain for policy thinking and public action by shifting the focus of development policy from economic sectors and projects, towards institutions and incentives. However, it cannot be called a “Framework for Economic Growth” given the absence of a conceptual much less empirical integration of the objectives of this “Growth Strategy”, and lack of a time bound implementation mechanism. In this article, we will indicate four missing elements in the Planning Commission document (PC Doc).

1. The strength of the Planning Commission document lies in the fact that it draws upon the literature of the New Institutional Economics (NIE) to raise new issues, although, in a superficial and partial fashion. Its weakness is that it neither identifies the central postulates of the new science nor applies them to the specific features of Pakistan’s political economy. For example, the PC Doc correctly argues for liberating markets from the government’s direct participation in agriculture, storage, transport and construction, but makes the heroic assumption that this will necessarily lead to increased investment and efficiency through private sector involvement. This argument ignores the central postulate of the NIE that markets are not necessarily always efficient: whether markets are efficient or inefficient depends on the institutional structure within which they are located. Instead of providing research on Pakistan’s markets and specifying which set of institutional changes will make them function efficiently, the PC Doc simply invokes traditional market ideology.

2. The PC Doc proposes quite correctly that increased competition, greater innovation and productivity will lead to greater efficiency and faster growth, yet fails to tell us how we can get there. This simplistic articulation of axioms ignores the second major postulate of NIE: the prevailing institutional structure — in undeveloped countries like Pakistan — systematically restricts competition precisely as a device for generating rents for the ruling coalition of elites. This exclusivist institutional structure persists because the restriction of competition enables the elites to maintain power, by configuring markets characterized by selection based on nepotism, corruption, provision of subsidies and protection for a dependent private sector characterized by inefficiency, low productivity and lack of innovation. This persistence of a rent based institutional structure is called Path Dependence in the NIE. Analysing the specific nature of “path dependence” in Pakistan would be a prerequisite for proposing policies for institutional change. The PC Doc demonstrates a charming innocence of this requirement of rigour.

3. My own research shows that not only are markets located in a specific institutional framework, but this institutional framework is in turn configured by the power structure within which it is embedded. Therefore, a credible policy document which propounds institutional change must necessarily examine the dynamics of Pakistan’s power structure and how it maintains a rent based institutional structure. The PC Doc side steps this intellectual obligation.

4. The PC Doc which purports to focus on institutional change, ignores another major contribution of the new literature on institutional economics, namely the concept of ‘social order’. The ‘social order’ combines institutions and organizations within the economic sphere with those in the political and ideological spheres. The central development challenge for public policy and action is to initiate a process of change that would shift Pakistan from a ‘limited access social order’ (restricted competition and rent-based) to an ‘open access social order’, characterised by broad based competition, efficiency, innovation, productivity increase and sustained growth. The PC Doc by focusing exclusively on the economy ignores the changes required in the rules and norms of the political, military and ideological spheres. Institutional changes in these spheres are a necessary condition for institutional changes in the economy, which would place Pakistan on a new path of sustained growth.

Published in The Express Tribune, July 25^th,  2011.