Inclusive institutions — Pakistan’s panacea

About 10 million people fell below the poverty level since 2018

Arbab Usman June 23, 2020
The writer has served as a former finance consultant for Verizon Corp and as a former finance analyst at Williams Companies, in the US

As per Einstein, “doing the same things over and over and expecting a different result is the definition of insanity”. Unfortunately, Pakistan has been run by the same system where regimes do change hands but the underlying theme remains the same. The main stakeholders have failed to realise the flaw in our system which is broken or at best weak institutions. This created a major void between the haves and the have-nots where a few live in an oasis that’s a far cry for most of the 220 million proletariats.

The weak economy, a broken political system, disenfranchised masses, unmotivated bureaucracy and an archaic judicial system can be directly or indirectly attributed to weak institutions of the country. Why has a country that sits on mega reserves of invaluable resources, oil, gas, precious metals, an untapped tourism industry, an envied human resource capital and a strategically strong geographic location in the region failed to evolve? The simple answer is a system that doesn’t support inclusive institutions.

As such there’s no formal definition of “inclusive institutions” but as established for centuries and especially in the developed world, inclusive institutions have been the basis for broad-scale socioeconomic development. The premise of inclusive institutions is based on universality, equal opportunity, fair representation, especially for the disadvantaged class, and equal access to resources. Irrespective of population demographics (age, gender, per capita income, education level) and resources, countries embracing and supporting the institutions have made significant strides economically and in human capital development.

In the book, Why Nations Fail, the authors compare South and North Korea. The two nations started with the same per capita income post-World War II but there’s a stark economic difference between them now, with South Korea having 12 times higher income per capita. The incentivised public and private sectors that encourage investments, innovation and exports are the key driving forces for South Korea’s economic evolvement. Furthermore, compared to Western countries, sub-Saharan, South American and Middle Eastern countries are glaring examples of systems that failed to develop inclusive institutions and have struggled economically.

As expected, there’s a strong correlation between strong institutions and countries that are on top of the global competitive index. An enabling environment, high ethical standards, accountability and transparency in the public domain have not only built trust in public representatives but have also formed an effective public-private-sector nexus in these countries. Year-over-year rich economic growth, a competitive private sector and sense of public ownership is driven by political, social, legal and economic institutions built in the countries.

Since inception and especially over the past 40 years, Pakistan’s economy has seen its worst. Except for a brief period, where the GDP growth hovered at 5%, overall, all the macroeconomic indicators have been trending downwards. The pre-Covid-19 fiasco GDP plummeting to about 2% is the most alarming state the country has faced. The governments’ failure to develop strong institutions to foster economic growth through an environment that supports the corporate sector and especially small businesses has brought the country on the verge of economic collapse.

Individuals and small businesses cannot progress in an environment where only the ruling elite, large corporations and well-networked people can make headway. This results in a corporate landscape that doesn’t support competition which in turn leads to costly and inferior quality products and services for domestic and foreign consumers. Pakistan’s dwindling exports are a testament of this. Further, this impedes the government effort to broaden its tax base to tax a large group of businesses at a lower tax rate instead of imposing taxes on a small group at a higher rate. To indicate the significance of small businesses, the United States, the largest economy in the world, has over 27 million small businesses that account for over 50% of GDP. Similar economic composition can be seen in most developed countries.

The current government’s focus to curtail the current account deficit (CAD) without improving the infrastructure to support the domestic industry has further deteriorated the economic condition. Though it could be argued that a large CAD stifles an economy and burdens a currency, however, without improving exports and enacting regulations that support a competitive business environment, lowering CAD alone is counterproductive. Industries are adversely affected, and unemployment increases for economies that rely on imports and that has, to an extent, enhanced Pakistan’s economic woes. This can be witnessed in the retail sector of the country where millions have lost their jobs and many businesses closed operations. In addition, about 10 million people fell below the poverty level since 2018.

Further, though Pakistan has mega oil and gas reserves, still one of its biggest imports for decades is oil. Pakistan’s oil imports have been over $10 billion for many years, reached over $13 billion in FY2018-19. The inability to tap into the reserves could mainly be attributed to tight government regulations that have not rendered a competitive environment to attract the private sector and especially foreign conglomerates. The limited production is either managed by OGDCL itself or the government has extended contracts to companies that have produced limited quantities of oil. Contracts may have also been granted to companies that have yet to commence production.

With the Covid-19 calamity that has further exposed holes in our system and financially debilitated the lower and lower-middle class, the time is now for the main stakeholders to get to the drawing board and devise short- (one-year), medium- (five-year) and long-term (20-year) strategic, out-of-the-box plans to steer the country out of the crisis and perhaps prevent a meltdown. The only obvious solution is to build strong institutions that foster ubiquitous public access, objective and transparent political and efficient judicial systems, strengthen domestic industry through incentives, competition and provide a favourable, business-friendly environment for foreign investors.

Published in The Express Tribune, June 23rd, 2020.

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