Institutional meltdown and its toxic fallout

If our institutions are weak, the state will collapse on itself.

KARACHI: Ever since Douglas North won a Nobel Prize in Economics in 1993 for his work on institutions, the importance of institutions in determining the historical evolution of economies has increased. According to North, “Institutions form the incentive structure of a society, and political and economic institutions, in consequence, are the underlying determinant of economic performance.”

Countless other academicians have worked on emphasising how institutions are important in determining why there is divergence in growth performance across nations. Moreover, institutions serve as a guide to policymakers in devising policies aimed at improving overall economic performance. I believe it is the state of our institutions which is the biggest reason why we are stuck in this quagmire today.

Pakistan’s economic and social predicament today is due to a complete meltdown of its institutions. Worldwide Governance Indicators, as compiled by the World Bank, reveal that Pakistan’s performance on this front has been consistently falling since 2006. These indicators comprehensively cover many aspects on the governance front: namely, political stability, government effectiveness, regulatory quality, rule of law, and control of corruption.

Take any institution in Pakistan – be it PIA, Pakistan Railways or the Higher Education Commission (HEC) – and a sob story follows. Why has institutional effectiveness rapidly declined in the past couple of years? In my opinion, an acute persistence of myopic thinking on the part of our political leadership is the primary factor behind the decay of these institutions and hence the economic trajectory that Pakistan is treading on today.



Political scientists explain two primary motivations behind short-sighted policy-making: the maximisation of the elite’s self-interest, and the maximisation of their power. The self-interest of those at the helm of power to achieve short-term gains is often in conflict with the long-term vision of the institution. When the principle of meritocracy fails and decisions are taken on the basis of personal whims, the institutional fabric is hollowed on many levels.

Take a simple example of an out-of-turn promotion of a skilled worker in an organisation. This causes workers to be de-motivated, raising many conspiracies of favouritism on the basis of ethnicity, language etc. This raises indifference and a casual attitude towards work, polarises the non-beneficiaries against the management, and, when things spiral out of control, results in a serious loss of credibility for the organisation. There are definite economic costs of this credibility loss which may not be felt in the short-term, but appear eventually on the horizon.



In fact, bureaucratic organisations similar to the ones mentioned above are embroiled in power politics, which cause the institution to not only stagnate, but, in my opinion, recede. This has been the sad story of the HEC. Our neighbours were impressed with the organisation to a degree of keeping their pride aside and asking for its blueprints to be replicated at home. And what have we done? We have attached little value to its achievements in the past few years and are fighting over whether its status should be dissolved and made into a provincial body. Look back into history and remember the time that the PIA trained Singapore Airlines, now amongst the top airlines of the world. What is the status of our national carrier now? A safe flight from Karachi to Islamabad followed by sighs of relief from passengers sadly reveals the situation it is in today. Similar is the case with the Railways, which has become an almost defunct service.

‘Regulatory quality’, one determinant of institutional effectiveness, has in Pakistan particularly worsened in the past couple of years. Stories of adulterated drugs, import of medically hazardous/low quality items, low fitness vehicles on the road, influx of branches of a certain bank when only few are allowed in the foundation year are only some of the numerous examples that we come across every day.

Corruption has become so endemic in our system that the concerned officers are ‘bribed’ into giving false reports or approvals so that business continues as usual. Institutions are not only at war amongst themselves, but also with others falling in a similar economic domain. Their complete failure results in every issue to be brought in the purview of the Supreme Court. This is not only a loss in terms of time spent on these litigations, but also inefficient since regulatory bodies directly responsible for it are present.

All of this is very depressing indeed. Institutions are living bodies, which, like a young child, have to be nurtured and only then they mature and become the models that we see in the Western world. The saddest part of all of this is that we never learn anything from history. History is replete of examples where our institutions flourish under an able and skilled manager, but the reform process is discontinued and new laws are added to serve personal interests.

To conclude, institutions are of supreme importance and must be given the due focus and time of the government that they deserve. If Pakistan is to be made economically strong, its institutional structure must be overhauled.

The time is now.

THE WRITER IS ASSOCIATED WITH THE BANKING SECTOR AND COMMENTS on MACROECONOMIC issues

Published in The Express Tribune, April 1^st, 2013.

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