Self-perpetuating, extractive system
By Shahid Javed Burki
Monday, 12 March, 2012
THERE is now a nearconsensus among the economists who work in the area of development that political and economic progress interact with one another.
There cannot be movement in one without there being movement in the other. The most recent entry in this type of analysis is a book by two American economists, James Robinson and Daron Acemoglu.
Their book, `Why Nations Fail: The Origins of Power, Prosperity and Poverty` asks the following important question: Why are some societies democratic, prosperous and stable while others are autocratic, poor and unstable? They have a simple answer. Those that have been left behind usually have performed poorly in making political progress.
How should this finding be applied to the case of Pakistan? It is the case that Pakistan of recent years has moved in one right and one wrong direction. It has made some progress towards creating representative form of governance but has failed in moving forward its economy. Not only is the economy stagnating with the country growing at a rate one-half that of Bangladesh and one-third that of India. It has also seen a palpable increase in the incidence of poverty and as sharp deterioration inTHERE is now a nearconsensus among the economists who work in the area of development that political and economic progress interact with one another.
There cannot be movement in one without there being movement in the other. The most recent entry in this type of analysis is a book by two American economists, James Robinson and Daron Acemoglu.
Their book, `Why Nations Fail: The Origins of Power, Prosperity and Poverty` asks the following important question: Why are some societies democratic, prosperous and stable while others are autocratic, poor and unstable? They have a simple answer. Those that have been left behind usually have performed poorly in making political progress.
How should this finding be applied to the case of Pakistan? It is the case that Pakistan of recent years has moved in one right and one wrong direction. It has made some progress towards creating representative form of governance but has failed in moving forward its economy. Not only is the economy stagnating with the country growing at a rate one-half that of Bangladesh and one-third that of India. It has also seen a palpable increase in the incidence of poverty and as sharp deterioration inthe distribution of income and assets. In that context the country is moving against the trend in other developing nations. A report recently published by the World Bank reaches the surprising conclusion `that for the first time the proportion of people living in extreme poverty on less than $1.25 a day fell in every developing region from 2005 to 2008. And the biggest recession since the Great Depression seems not to have thrown that trend off course, preliminary data from 2010 indicate.
The progress is so drastic that the world has met the United Nation`s Millennium Development Goals to cut poverty in half five years before the 2015 deadline.` The world therefore has much to celebrate but Pakistan cannot join the celebration. It has bucked the trend.
Why? The answer comes from the Robinson-Acemoglu book.
They argue that only those political systems work to produce growth with poverty alleviation and improvement in the distribution of income that are `inclusive`.
Pakistan has developed what they describe as extractive systems.
They provide for the few not for the many.
In what way would an inclusive system work for Pakistani economy? It should aim to achieve at least the following three policy changes. Not only should there be a significant change in the government`s economic priorities,. some of the content of the policies need to be adopted should also change.
More imagination and politicalthe distribution of income and assets. In that context the country is moving against the trend in other developing nations. A report recently published by the World Bank reaches the surprising conclusion `that for the first time the proportion of people living in extreme poverty on less than $1.25 a day fell in every developing region from 2005 to 2008. And the biggest recession since the Great Depression seems not to have thrown that trend off course, preliminary data from 2010 indicate.
The progress is so drastic that the world has met the United Nation`s Millennium Development Goals to cut poverty in half five years before the 2015 deadline.` The world therefore has much to celebrate but Pakistan cannot join the celebration. It has bucked the trend.
Why? The answer comes from the Robinson-Acemoglu book.
They argue that only those political systems work to produce growth with poverty alleviation and improvement in the distribution of income that are `inclusive`.
Pakistan has developed what they describe as extractive systems.
They provide for the few not for the many.
In what way would an inclusive system work for Pakistani economy? It should aim to achieve at least the following three policy changes. Not only should there be a significant change in the government`s economic priorities,. some of the content of the policies need to be adopted should also change.
More imagination and politicalwill are needed than have been on display in recent years.
The first priority should be to improve the quality of governance by creating a system of accountability. A number of attempts have been made by several administrations in the past but did not serve the objective of holding elected officials and bureaucrats accountable to the citizenry. In fact, most of those attempts resulted in politicising the accountability structure.
In recent years the governments headed by Prime Ministers Nawaz Sharif and Benazir Bhutto and President Pervez Musharraf used the accountability apparatus that had been set up to settle political scores or to achieve political goals.
A new effort is needed. This should ensure full autonomy to an accountability system and thus prevent interference by the executive branch of the government.
One way of achieving this objective would be to appoint, say, a five-member accountability board (AB) to oversee the working of all branches of government-the executive, the legislature and the judiciary. AB should be appointed by the national legislature on the recommendations made by the executive branch. The chairman of the board as well as its members should serve terms longer than that of the legislature, perhaps eight years. Two members should be appointed every two years. The board should oversee the working of the investigative agency and the AB courts. It should prepare and present to the national assemblywill are needed than have been on display in recent years.
The first priority should be to improve the quality of governance by creating a system of accountability. A number of attempts have been made by several administrations in the past but did not serve the objective of holding elected officials and bureaucrats accountable to the citizenry. In fact, most of those attempts resulted in politicising the accountability structure.
In recent years the governments headed by Prime Ministers Nawaz Sharif and Benazir Bhutto and President Pervez Musharraf used the accountability apparatus that had been set up to settle political scores or to achieve political goals.
A new effort is needed. This should ensure full autonomy to an accountability system and thus prevent interference by the executive branch of the government.
One way of achieving this objective would be to appoint, say, a five-member accountability board (AB) to oversee the working of all branches of government-the executive, the legislature and the judiciary. AB should be appointed by the national legislature on the recommendations made by the executive branch. The chairman of the board as well as its members should serve terms longer than that of the legislature, perhaps eight years. Two members should be appointed every two years. The board should oversee the working of the investigative agency and the AB courts. It should prepare and present to the national assemblyevery year a report on the state of governance in the country.
The second area needing attention is the mobilisation of domestic resources for running the affairs of the government and for making public sector investments.
Without adequate public revenues, high rates of economic growth will not be possible.
Resource constraint is not a n new problem. It is also the one that various governments at various times in the country`s history have worked upon but without much success. The tax-to-GDP ratio has now declined to 8.5 per cent, the lowest of any large developing country economy.
A number of previous reform efforts were made with the help of outside development and finance institutions particularly the World Bank and the IME. The former advised the governments in office to develop and modernise the tax collection system including the working of the tax collection agency now called the Federal Board of Revenue. The latter made increasing the collection of government revenues as one of the conditions for providing much needed assistance.
The last IMF effort was made in 2008-11 but was abandoned after Islamabad indicated to the agency that the reforms it was pushing were politically not feasible. In fact, it was the absence of political will that resulted in the collapse of the Fund programme. However, it remains critical to improve the government resource situation.every year a report on the state of governance in the country.
The second area needing attention is the mobilisation of domestic resources for running the affairs of the government and for making public sector investments.
Without adequate public revenues, high rates of economic growth will not be possible.
Resource constraint is not a n new problem. It is also the one that various governments at various times in the country`s history have worked upon but without much success. The tax-to-GDP ratio has now declined to 8.5 per cent, the lowest of any large developing country economy.
A number of previous reform efforts were made with the help of outside development and finance institutions particularly the World Bank and the IME. The former advised the governments in office to develop and modernise the tax collection system including the working of the tax collection agency now called the Federal Board of Revenue. The latter made increasing the collection of government revenues as one of the conditions for providing much needed assistance.
The last IMF effort was made in 2008-11 but was abandoned after Islamabad indicated to the agency that the reforms it was pushing were politically not feasible. In fact, it was the absence of political will that resulted in the collapse of the Fund programme. However, it remains critical to improve the government resource situation.A programme aimed at this objective could have the following four elements: (a) reforming the tax collection system, possibly by contracting it out to a consortium of private management firms based on carefully worked out targets following a time-line; (b) expanding the tax base by bringing in the excluded sectors into the tax net, (c) eliminating exemptions, (d) prescribing targets for provincial tax mobilisation.
Possible targets could be increasing the ratio by 1.5 percentage points a year at the federal levelA programme aimed at this objective could have the following four elements: (a) reforming the tax collection system, possibly by contracting it out to a consortium of private management firms based on carefully worked out targets following a time-line; (b) expanding the tax base by bringing in the excluded sectors into the tax net, (c) eliminating exemptions, (d) prescribing targets for provincial tax mobilisation.
Possible targets could be increasing the ratio by 1.5 percentage points a year at the federal leveland 0.5 percentage points for the provinces.
It has not been recognised by policymakers that by not raising enough resources for the proper functioning of the government, the country loses the space within which it can operate without foreign interference. Continuing reliance on foreign flows results in some loss of sovereignty. That this would inevitably be the result is now fully apparent as Pakistan relations with the United States continue to deteriorate. Washington is now Pakistan`s largest donor andand 0.5 percentage points for the provinces.
It has not been recognised by policymakers that by not raising enough resources for the proper functioning of the government, the country loses the space within which it can operate without foreign interference. Continuing reliance on foreign flows results in some loss of sovereignty. That this would inevitably be the result is now fully apparent as Pakistan relations with the United States continue to deteriorate. Washington is now Pakistan`s largest donor andit wants in return what the country cannot politically deliver.
These US demands could have been met when the administration was in the hands of the military. A government that draws its power from the people is naturally constrained by their wishes.
The third area needing attention is that of the development of the country`s abundant human resource. This has been neglected in the past and continues to be given low priority by a socially exclusive political system. Pakistan`s educational and health systems now have the involvement of considerable private initiative. Privately owned and managed schools, colleges, universities, clinics and hospitals serve the well-to-do well.
The rest of the population is left to the poorly performing public sector institutions. Pakistan has one of the youngest populations in the world. The median age is only 21 years which means that some 90 million people are less than that age. If the country trains and educates them, enormous economic and social benefits could flow. If not, the youth will become a burden hard to carry.
For moving the country towards inclusive social systems rather than continue to function as extractive economic and political systems, the citizens must put pressure on those who govern to adopt the types of policies described above. Extractive systems become self-perpetuating. Only the people can move them in the right direction.it wants in return what the country cannot politically deliver.
These US demands could have been met when the administration was in the hands of the military. A government that draws its power from the people is naturally constrained by their wishes.
The third area needing attention is that of the development of the country`s abundant human resource. This has been neglected in the past and continues to be given low priority by a socially exclusive political system. Pakistan`s educational and health systems now have the involvement of considerable private initiative. Privately owned and managed schools, colleges, universities, clinics and hospitals serve the well-to-do well.
The rest of the population is left to the poorly performing public sector institutions. Pakistan has one of the youngest populations in the world. The median age is only 21 years which means that some 90 million people are less than that age. If the country trains and educates them, enormous economic and social benefits could flow. If not, the youth will become a burden hard to carry.
For moving the country towards inclusive social systems rather than continue to function as extractive economic and political systems, the citizens must put pressure on those who govern to adopt the types of policies described above. Extractive systems become self-perpetuating. Only the people can move them in the right direction.
Self-perpetuating, extractive system | ePaper | DAWN.COM