History’s influence on public policy
By Shahid Javed Burki
Monday, 15 Feb, 2010
ALMOST half a century ago when I was a graduate student at Harvard University, I learned why it was important to understand the influence of history on the making of public policy. I was taught then by Alexander Gerschenkron — by far the best known and widely read economic historian of our times.
He took me under his wing and instructed me how to study economic history and how to apply that study to the working of the state in the design of public policy.
According to him, the important question about the working of the state was not only to ask what needed to be done at a given point in time to improve the economic and social conditions of the citizenry. It was equally important to ask the question why certain things were done by the state in the past.
Choices the makers of public policy make at any given time are the result of their understanding of the situation they are addressing as well as the consequence of the influences under which they are working. What I learnt from the master economic historian then is as relevant today as it was when he did his pioneering work.
The problems Pakistan’s policy makers confront today are well known – in fact they have been known for a long time. The economy is in deep trouble now for many reasons. Among them the following four are particularly important.
First, the country is excessively dependent on external capital flows, having failed to raise resources from within the economy to finance needed investment. This dependence has created extreme volatility in the performance of the economy. The economy does well when foreign flows are large; it does poorly when these flows decline. This dependence has also subordinated Pakistan’s relations to the outside world to the need for financing the economy.
Second, Pakistan remains poorly integrated with the global economic system. It has failed to take advantage of the opportunities globalisation has opened up for emerging economies such as Pakistan.
Third, the country has not developed its large human resource. Pakistan today has one of the youngest populations in the world with the median age of only 18.2 years. This means that one-half of its population of 170 million is below that age. A significant proportion of the young is illiterate and, consequently, does not have the skills needed to participate in the modern sectors of the economy where wages and hence incomes are high. Being uncertain about their future, a large number of young people have been attracted to extremist causes. For many the likely economic rate of return from participation in these activities is higher from what they view is on offer from the economy.
Fourth, Pakistan has one of the most centralised systems of policy making among the countries of its size. The state is very distant from the people it must serve. One reason why the state operates in such a centralised manner is that it was dominated for a long period of time by the military which believes in a strong command and control system.
How should this situation be addressed? How should Pakistan raise more domestic resources to finance investment, get better integrated with the global economy, spend more on human development, and give more authority to the sub-national governments? In other words, the state should function very differently from the way it did in the past. This leads to the question Gerschenkron would ask: why is the Pakistani state behaving the way it does? We turn to history to answer the last question.
India and Pakistan emerged as independent states with the support of significant proportion of the populations that became the citizens of the two countries. The leaders of the two movements that created these two countries won mass backing having promised that the states they wished to create would better the lives of their citizenries. But this is where the similarity between the two movements ends.
The senior leaders of the Indian National Congress had clear ideas about the way the state should function to increase citizen’s welfare. Mahatma Gandhi believed in self -reliance and rule by the people in a highly decentralised system. Jawaharlal Nehru wanted a powerful state operating from the centre and occupying the commanding heights of the economy. Had Gandhi lived there would have been considerable tension between these two points of view.
After his assassination in January 1948, the ground was clear for Nehru to work for the realisation of his vision. The result was the “license raj” that produced the “Hindu rate of growth” for 40 years after the country achieved independence. The rate of increase in the Indian national income during this time was about 3.5 per cent a year, one half of the average for the following two decades and two-thirds of that for Pakistan during the same period.
In the case of Pakistan, once the Muslim League had created a state for the Muslims of British India, it had no idea how that state should function to increase the welfare of the citizenry. There was an ideological vacuum in so far as giving direction to the making of economic policy was concerned. This meant wide swings in the way the economy was managed.
Looking back at the way the policymakers designed economic strategies, we notice four broad trends. After the confusion that prevailed in the first decade after independence, General Ayub Khan, the first military president, was persuaded by a group of technocrats to opt for an economic strategy that focused on growth with considerable space assigned to private initiative. The result was a sharp pick up in the rate of GDP growth accompanied by an increase in regional and personal income disparities. This strategy led to the rise of the Pakistan People’s Party and the eventual separation of East Pakistan.
Under Zulfikar Ali Bhutto, the PPP implemented an economic agenda that was Nehruvian in content and scope.
The role of the state was radically changed and enhanced while the large private sector was punished through a series of nationalisations. Economic growth slowed down and the incidence of poverty increased. The turmoil that ensued bought the third military government in office that tinkered at the margin to introduce Islamic economic principles into the management of the economy.
The fourth ideological shift came with the first administration of Prime Minister Nawaz Sharif (1990-93) to occupy office. It once again placed its faith in the private sector and adopted some of the more important elements from the strategy that was known as The Washington Consensus. This approach was kept in place by the military administration headed by General Pervez Musharraf.
The return of democracy in 2008 with the PPP governing from the centre and sharing power in Sindh while the Pakistan Muslim League is ruling Punjab has created another ideological vacuum in the making of economic policy.
The role of the state remains undefined as is the strategy that needs to be followed to put the country back on a sustainable trajectory of high rates of growth. What the present rulers need to do, therefore, is to first reckon how they wish to run the economy.