The path to real change

The present institutional structure breeds extremism, anarchy and can neither sustain democracy nor economic growth.


Dr Akmal Hussain October 24, 2010

Central to understanding the present crisis, is the fact that the institutional structure of Pakistan’s economy while it enriches a small elite, is incapable of providing the minimum conditions of civilized life to the majority of the people. Even after 63 years of independence, 77 per cent of the population is food insecure and 73 per cent is suffering from ill health. Yet most do not have access over quality healthcare or quality education for improved livelihoods. Most Pakistanis are systematically excluded from participating as active subjects (rather than as victims) in the process of growth and governance. Thus the present institutional structure, while it breeds militant extremism and anarchy, can neither sustain democracy nor economic growth.

The principal feature of Pakistan’s economic history is the failure to sustain high per capita GDP growth. Economic growth has occurred in spurts when large concessionary capital inflows have propped up growth, followed by low growth periods.

The distinguishing feature between the developed and undeveloped countries is that the former have been able to sustain per capita income growth over long periods of time, while the latter have been unable to do so.  Worldwide data on GDP growth rates for the last one thousand years proves this proposition. For example, the average per capita income in the year 1000 AD was $405 for what are today developed countries, and was slightly higher at $440 for what are today undeveloped countries. By 1500 AD however the average per capita GDP in the developed countries ($705) had outstripped that in undeveloped countries ($548). By 1998 AD the gap had widened — the figures were $21,470 for developed countries and $3,102 for undeveloped countries.

The New Institutional Economics, the cutting edge field in the subject, shows that the most important factor in sustaining long-term growth of a country is its particular institutional structure. An institution is a set of formal rules and informal norms, which together with their enforcement mechanisms structure human interaction. Rules embody incentives and disincentives for particular kinds of behaviour and are therefore crucial in determining economic performance.  The kinds of organisations that emerge, whether efficient like Microsoft or inefficient like some of Pakistan’s power sector companies, depends on the underlying institutional framework and the associated incentive structure.

The institutional structure in developed countries (Open Access Social Orders) is characterized by free access to firms, broad based competition and selection based on merit, hence, efficiency, innovation and continuous productivity increase that together sustain growth.

By contrast the undeveloped countries like Pakistan have an institutional structure (Limited Access Social Orders) where a small coalition of elites generates and appropriates unearned incomes (rents) by excluding the majority of citizens from the process of growth. Thus, such an economy is characterized by restricted competition, nepotism, widespread corruption, lack of incentives for efficiency and innovation, hence failure to sustain economic growth.

The central challenge for Pakistan’s development and democracy is to develop the institutional structure for a new trajectory of sustained growth. This new growth process would involve opening up investment and high wage employment opportunities to all of the citizens rather than a few. Such a growth process would be sustainable because the people would become both the subjects as well as the beneficiaries of growth. Thus the challenge of change for Pakistan is not musical chairs, but changing the institutional structure in which both society and state can prosper.

Published in The Express Tribune, October 25th, 2010.

COMMENTS (3)

Sana Astor | 12 years ago | Reply Dear Mr. Noor Nabi, You are a good example of the educated, ignorant, biased to the core, Pakistani. What you write in response to Dr. Akmal's lucid and very informative piece is way off the mark. All you want is an opportunity to bash Musharraf for things he did or did not do. And you give the impression as if Pakistan was ruled by angels prior to October 12, 1999. And why do you think those who ruled this country before 1956 DID NOT WANT TO GET RICH OVERNIGHT? That of course excludes Jinnah, Liaquat Ali and a few others. It is because of ill-informed people like you with skewed minds and no sense that this country is going to the dogs.
Mir | 12 years ago | Reply Dr Akmal, the problem with Pakistan is that since 1956, the country has been taken over by men, whose sole aim and objective is GET RICH OVERNIGHT, at the expense of the country, its people and its collective national interest. The interests of the man who heads the government have replaced the collective national interest. Musharraf gave approval to drones, because it benefitted him personally and if few thousand have died as collateral damage, so be it. He handed over thousands without any judicial process to NATO, because he benefitted from this deal. His Railway Minister procured 69 defective locomotives worth over $100 Million from a blacklisted firm in China, and than went ahead to give 141 acres of prime real estate belonging to railways for peanuts, because it suited him. etc etc. Shaukat Aziz placed all our FOREX RESERVES in a bank located in USA and nobody till todate talks about it. The present Government choses to instal Rental Powers that provide expensive electricity, while ignoring and politicising hydel power, because it benefits individuals and in the process if this country is starved of energy, so be it. Have we not seen the role of government in supporting the sugar cartels and those robbing state owned enterprises like PIA, NIC, PASSCO, KPT, RAILWAYS, WAPDA, OGDC etc. PIA lossses have mounted to Rs83.3 Billion as of June 2010. As long as this country is ruled by those who have no stakes in this country, it continue to bleed and die a slow painful death. This is not the concern of those who rule us, but should be the concern of 170 Million Pakistanis, whose fate and future has been mortgaged.
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