The State of Pakistan's Economy

Unstable growth & poverty
By Dr Akmal Hussain: Dawn, Feb 28, 2008

IN spite of the claims by the Musharraf regime that they had launched Pakistan’s economy on to a new trajectory of high growth, it has now begun to slow down. There are mounting pressures on the balance of payments, high inflation and severe shortages of energy and water. This clearly indicates that the brief spurt in GDP growth during the Musharraf period was unsustainable.

As the newly elected democratic government prepares to face the challenge of achieving sustained growth with rapid poverty reduction, it may be helpful to examine the roots of unstable GDP growth and endemic poverty in Pakistan.

The latest work of Nobel Prize winning economist, Douglass North, and his colleagues who have pioneered the New Institutional Economics may be relevant in addressing the challenge before the new government. North, et al have shown that in order for markets to function for sustained growth an underlying institutional structure in the polity and economy is necessary. These institutions provide equal access to all citizens on the basis of merit to compete in the economy and polity. The institutional structure embodies incentives for competition, hard work, efficiency and innovation through which GDP growth becomes sustainable.

In Pakistan unstable GDP growth and endemic poverty are located in an elite based structure of power which excludes the majority of the people from high quality education, health facilities, access to land and the high wage end of the labour market. Consequently most citizens of Pakistan are denied the opportunity of actualising their productive potential and thereby contributing to a growth process that is both sustainable and equitable. It is now widely recognised that inequality adversely affects both the sustainability of growth as well as its capacity for poverty reduction. Pakistan’s power structure and the inequality it engenders prevents most of the population from playing its full role in the economy. Those excluded are the poor, women, the illiterate, the inadequately educated, the semi-skilled and the unskilled. Therefore there is a constriction of the human potential through which entrepreneurship, investment, innovation and productivity growth can occur to sustain growth.

At the same time the poverty reduction capacity of growth is constrained by the institutional environment of the state and the economy: The poor face a structure of state power, markets and institutions, which discriminate against their access to resources, public services and government decision-making.

It can be argued that the failure to achieve sustained high growth in the past, as well as inequality, is located in the governance model itself. As I have suggested in my recent research work, within Pakistan’s governance model (originating in the Raj), power has been historically constituted by accessing state resources for arbitrary transfer as patronage to selected individuals. During the pre-independence period resource gratification within this governance model was conducted to win loyalty for the Raj.

After independence, whether in democratic or military regimes, state resources were granted within a structure of patronage to build individual domains of political power. Within this model an individual could become rich simply by entering into a patron-client relationship with the government for rent seeking. Therefore there was little incentive for enterprise, innovation, or savings, which drive growth in a modern economy. At the same time, since patronage could only be acquired by the few within this governance model, the majority were deprived of access to resources. Thus endemic poverty and the inability to sustain economic growth have become the hallmarks of Pakistan’s economy.

Let us now examine some of the structural constraints to equitable and sustainable growth emanating from Pakistan’s governance model indicated above. First, in many rural areas markets are asymmetric with respect to the rich and poor farmers respectively. My work for the UNDP, Pakistan National Human Development Report (NHDR) shows that the poor farmers pay a higher price on their inputs and get a lower price on their outputs compared to the large farmers. Consequently the poor peasants are losing as much as one third of their income due to such asymmetric markets.

The second structural factor is that the distribution of land ownership is highly unequal and there is widespread tenancy. The poor tenant suffers insecurity of tenure, loss of a large proportion of his income to the landlord and lacks access over credit. Consequently, the poor tenant has neither the incentive nor the ability to increase productivity. Thus the constriction of the productivity potential of the small farm sector constrains agriculture growth and generates inequality.

The third structural factor in endemic poverty is that in some landlord dominated areas where landlords control the local state apparatus as well as the credit market, the poor tenants are locked into a nexus of power and debt bondage to the landlord. The NHDR data shows that 51 per cent of the tenants get locked into debt dependence on the landlord, and out of these 57 per cent are obliged to work as wage labourers on the landlord’s farm without any wages while 14 per cent work for a wage below the market rate.

Thus, the structure of power and dependence systematically deprives the poor peasants of their actual and potential income. Consequently, poverty becomes endemic, inequality increases and agriculture growth is constrained. Fourth, a large proportion of the population lacks access to health, sanitation and safe drinking water. The NHDR survey data showed that due to inadequate diet and lack of access to safe drinking water and sanitation facilities, 65 per cent of the poor in the sample survey were suffering from ill health. Disease emerged as a major factor that pushes people into poverty, due to high medical costs combined with income loss due to absence from work. This constitutes a major structural factor that accentuates poverty, inequality and constrains GDP growth by constraining the productivity of the poor.

The fifth structural factor in endemic poverty is that the poor live in localities, which are inadequately policed. In case of theft or violence against their person, lack of access over the judicial system, accentuates the insecurity and economic deprivation of the poor.

Our analysis suggests that achieving a sustained high GDP growth and overcoming poverty will require the new democratic government to address the structural and institutional factors that perpetuate poverty and constrain growth. The challenge before the new government is to lay the institutional foundations of a democratic polity and economy that provides all citizens, not just a few, the opportunity to actualise their creative and productive potential. It is only then that our civilisation, economy and state can blossom and grow.

The writer is Distinguished Professor, Beaconhouse National University, and Senior Fellow, Pakistan Institute of Development Economics.