In his seminal book, The Bottom Billion, Oxford Economist Paul Collier explains why, despite strong and sustained growth in the world economy and a sharp drop in the total number of poor in the world, about one billion people have not progressed out of poverty.
Collier identifies four principal factors which keep poor developing countries trapped in poverty: conflict, excessive amounts of natural resources, being landlocked and poor governance. Are any of these useful in explaining Pakistan’s poor economic performance? At first sight, two of the four — conflict and poor governance — appear relevant.
The war in Afghanistan brought us four million refugees, gun culture and drugs. It also brought terrorism which caused 65,000 deaths and economic losses of $70 billion. Over $10 billion of aid poured into the country with much of this going into the War on Terror. But this was more a hindrance as managing this inflow drew some of the country’s best thinkers and administrators who, instead of managing enterprises and policymaking, were handling security related issues. Certainly the direct and indirect costs were high. However, thanks to the strong action by our armed forces, the security situation has improved dramatically. One indication is that there were only around 200 terror-related deaths in 2019, as compared to over 11,000 in 2009 and over 6,000 in 2012.
Pakistan’s poor governance record is also well documented, Transparency International’s corruption perception index ranks us 120th out of 180 countries surveyed, significantly worse than fast growing Asian economies such as China and India. But does this matter given there are countries where corruption is worse than Pakistan, such as Bangladesh and Cambodia, which are performing better than us? There are some indications that we are getting better in some aspects of governance. For example, the World Bank’s Ease of Doing Business index ranks Pakistan 108th among 190 countries. Not great, but better than in 2018 when we ranked 136th.
It would appear that Pakistan has made major improvements in conflict and security and is maybe getting better in handling corruption. However, these have not yet transformed into significant improvement in economic performance. Nor has there been any accelerated progress towards addressing the different dimensions of poverty. Resultantly, we may fail to achieve the UN’s Sustainable Development Goals (SDGs), just as we failed to meet the Millennium Development Goals.
So why is Pakistan’s economy not responding to the improvements in security and corruption? Why are we ahead of all countries in passing laws, adopting policies and preparing programmes — we were among the first to adopt the SDGs through a unanimous act of parliament — and then fail miserably to implement them?
In Collier’s view, an abundant endowment of natural resources inhibits development. This contradictory phenomenon is partly explained by the fact that large natural resources result in an overvalued exchange rate. This makes production of all other commodities uneconomical — the Dutch Disease — a term coined after the discovery of large deposits of natural gas in the Netherlands drove up the exchange rate and led to the decline of its manufacturing sector. A second part of the explanation is that a high return from the natural resource creates a strong rentier class. This group uses their control of resources, and the money they make from such control, to perpetuate their own power and avoid any reform that would spread the wealth more equitably within the country — i.e. elite capture. This could mean directly taking over government and using this to control resources or state capture. Alternatively it could mean financing political parties in power, as well as opposition parties who have a chance to get into power.
Often this national rentier class is supported by the international community who are interested in buying resources at low prices. Countries caught in the classical natural resources trap include Angola, Equatorial Guinea and Nigeria, where strong currencies make imports cheap, exports uncompetitive and domestic production uneconomic. Meanwhile corrupt politicians grab and hang on to power while plundering the country’s oil or mineral wealth, in collaboration with foreign companies.
But the phenomenon is not restricted to developing countries, it can even be seen in Russia. After the fall of communism and the chaotic privatisation that followed, a small group of private businessmen managed to get control of most natural resources. Their wealth and power is used to maintain a “business friendly” government in power and crush all attempts at reform.
So what has this to do with Pakistan? At first sight we do not have any major natural resources. However, there are two things that we do have, both related to our geography.
The first is our geo-strategic position. We are located near China, Russia and the Middle East. This made us of great interest to the US during the Cold War era, and a critical partner during the proxy war between the US and the USSR in Afghanistan. Currently we are on the fault line between an emergent China and a declining but still powerful US.
Our strategic location is like a natural resource with value foreign countries are prepared to pay for. Whoever holds power in Pakistan has access to these funds — either directly in the form of bribes, contracts or scholarships for their children; or indirectly through loans to the government which are then diverted into personal coffers. Its foreign money for the elite in return for our strategic loyalty.
The second peculiarity relates to trade routes. Pakistan has a huge internal market but with very few entry points. Our land borders with India, Afghanistan and Iran are effectively closed and there are only two points of entry for bulk items such as petroleum, food and industrial raw materials: Karachi and Gwadar. This means that the government can effectively create a closed system where consumers do not have access to international markers and are forced to buy inefficiently produced domestic goods. The power to do this creates the potential for theft at a grand scale. Is it any wonder that we have sugar barons who sell expensive sugar, independent power producers that are paid to remain idle, and steel mills that provide this essential material for construction and industry at high prices?
The PTI appeal to voters, especially youngsters, was based on bringing a change to an inefficient and unjust system. However to actually get into power, it found it needed to make compromises and ended up hostage to a clutch of rich and powerful elites. These so-called electables have demanded and got their pound of flesh from the government. However, recent events such as economic chaos created by the spikes in food prices, the reports done by the Federal Investigation Agency, and, most recently, the Covid-19 crisis have shaken the political equilibrium. Will PTI be able to use these crises to rediscover its initial reforming spirit? One can only hope that with his back to the wall, the Kaptaan Sahab will find the courage to actually make some tough decisions.
Published in The Express Tribune, May 30th, 2020.
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