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Old Wednesday, March 18, 2009
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Through the economic prism

Wednesday, 18 Mar, 2009
By Shahid Javed Burki

IT pays politicians to look at politics from the prism of economics. This is precisely what Barack Obama did while he was campaigning as a candidate for the US presidency.

In September 2008, when the first of several meltdowns that have affected the US economy occurred, he concluded that what the people wanted was a calm handling of the rapidly worsening situation. He kept his cool and gave his responses in highly measured terms.

On the contrary, his opponent John McCain responded hysterically. He suspended his campaign for a few days, flew to Washington to assume the leadership of the Republicans in the US Congress, and tried to persuade the lame-duck administration of George W. Bush to take action. These two different approaches were seared in the minds of the US electorate and helped Obama score a landslide victory.

What was true for the US last year is true for Pakistan now. There is much hysteria in Pakistani politics today. This, too, must be affecting the way people look at the politicians in general and at different politicians in particular. The uncertainty created by a charged political atmosphere has an economic cost. I do not believe this has been fully comprehended by the politicians active in the field today. Ultimately, the side that keeps it cool and exacts a smaller economic price from the way the crisis is handled will benefit at the polling booth whenever the people are invited to elect their representatives again.

It does not need all that much elaboration to underscore an important point about the current economic situation. The country is in deep crisis, perhaps the worst it has experienced in the 60-plus years since its birth. A significant part of the cost is being borne by the poor and their situation will get worse if the countryís economic situation continues to deteriorate. But that will not happen for as long as the political situation remains highly uncertain.

It is sometimes useful to calculate the economic cost of political agitation to convince politicians that hysteria may force their followers to look in a different direction. If that were to happen in Pakistan, and if the mainstream political parties choose to fight it out in the streets, those who are economically stressed as a result of political machinations may opt for something different. They may choose extremism.

The other day a politician active in one of the two major parties told me with great pride that he and his followers were able to put 100,000 people in the streets of Punjabís major cities. That assertion led me to do some simple calculations.

Encouraging a person to take to the street costs that person at least Rs300 if he is fully employed. Getting 100,000 people to agitate means a loss of income of Rs30m. The cost to the economy is perhaps three times as large since the income forgone has what the economists call a multiplier effect. In Pakistanís case the gain or loss of one rupee of income means at least the gain or loss of three rupees to the economy. We are, therefore, looking at a cost of more than $1m to the economy. Who bears this cost?

Perhaps a good part is met by the political organisation that has ordered its followers to come out on the street. The money that the party spends may come from the savings of

its well-to-do leaders. This amount could be deployed in more productive enterprises than political agitation. Or if it comes from corruption, it produces serious distortions in the economy.

It is well recognised that in most developing countries political expenses are paid from the funds not legitimately collected from donors but from the money solicited from beneficiaries of services provided by those who are in power. This increases the cost of the service provided to the beneficiaries. Those who pay political bribes will pass on the cost to the consumers of the service or the product that is being procured from those who, because of the power they wield, are able to provide either or both of them.

There is another cost associated with the politics of agitation that produces an even greater economic burden for societies where this kind of political behaviour is prevalent. Agitation rather than the use of legitimate means for settling disputes according to the law of the land becomes the norm in those places where the institutional structure is weak. This is certainly the case in Pakistan.

Over time, institutions in Pakistan have weakened to the point at which people have lost confidence in the political system to deliver in legitimate ways. National and provincial assemblies donít settle political disputes. Courts do not dispense justice. Bureaucrats do not implement decisions taken by policymakers or laws passed by parliaments. Scores are settled by resort to the politics of the street. This results in a vicious cycle. But this is not the only vicious cycle that is taking Pakistan down to unknown depths.

It all began in Pakistan in 1954 when an authoritarian and unelected head of the state dismissed the Constituent Assembly because the latter had begun to assert what was its legitimate right. The governor-generalís action was legitimised by the judiciary. Even after half a century that vicious cycle has continued to define politics. There is an urgent need to break into it.

The economist Douglass North won the Nobel Prize in his discipline by suggesting that economies will not modernise and grow unless they also develop the institutional base that provides the foundations on which the country and society must rest. Northís definition of institutions went beyond organisations that underpin economies. He included in institutions the ways, both formal and informal, in which all human beings interact with one another. These interactions should support the modernisation of economies and societies. Over time, the forms of interactions should move forward from the formal to the informal.

The politics of agitation is by its very nature an informal way of achieving ends that should be pursued through formal means. Doing political business through informal means is disruptive and costly. It may produce immediate results for those who choose to go along this path but it does incalculable harm to society and the economy over the long run. It is imperative that the leaders of Pakistan abandon this path in favour of doing business within an established institutional framework. By bypassing institutions they will bring not only economic ruin to the country. They will also pose an existential threat to the state of Pakistan.
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