Institutional change

The writer is a researcher at the Pakistan Institute of Development Economics.By Idrees KhawajaAug 18 2016 (Dawn, Pakistan)THE ‘catch-up’ hypothesis in economics holds that per capita income in poor countries will eventually catch up with the per capita income of rich countries. Although China, some East Asian and Latin American countries have experienced a modicum of ‘catch up’ over the past half a century, a large number of states have been less fortunate. Research into reasons for the failure of ‘catch up’ suggests that poor countries remain poor primarily because their institutions, or systems, are poor. A narrative on how some of Pakistan’s institutions constrain the country’s economic growth follows.Idrees KhawajaTypically, candidates contesting national elections have to spend their own money on electioneering. This allows only the rich to contest. Having invested heavily, candidates are then induced to recover their investment once in power. Not only does this encourage corruption, it also severely shrinks the pool from which to select the best leaders. Both constrain economic growth.The importance of national preferences, emanating from the grass-roots level through the institution of local bodies, is well established. However, the dilly-dallying on holding local bodies’ elections in Pakistan, and the transfer of real power to these bodies, speaks of our averseness towards local government. To the extent that inclusiveness in agenda-setting encourages growth, we lack the institutions to achieve this sort of participation.The allocation of funds within provinces themselves is largely discretionary — some regions receive the bulk while others remain starved. Starved regions lack the resources to build the physical infrastructure and human capital necessary for economic growth. Moreover, skewed distribution contributes to poverty in deprived regions — the grievances and sense of injustice which arise then leading to conflict among regions. A whole body of literature on how conflict constrains growth exists, but one fact is particularly noteworthy — terrorist recruits usually come from deprived regions, and ‘sleeper cells’ or ‘safe havens’ are often located in such regions. The imbalance in resource distribution, therefore, constrains national growth in more than one way.Ample evidence suggests that smaller administrative units are conducive for growth. India has created 13 new states since its independence. We created none, despite strong demands. Why? What is the institutional difference in this context? In India, it is the Lok Sabha that decides on the creation of new states — the local state government from which the new state is to be carved out has no role in the decision. In Pakistan, the concerned provincial assembly must pass a resolution for the creation of new province. This is unlikely to happen, as nobody wants to cut down their own empire. Our poor institution for creating new provinces impedes growth.With regard to education, Pakistan’s education system in general and medium of instruction in particular is pro-rich; the rich go to private schools and the poor to public schools. Private schools focus more on developing proficiency in English and our job market is also biased in favour of those with better English proficiency. Consequently, the rich secure white-collar jobs while the poor must contend with blue-collar employment — the result of which is social inequality and conflict, well documented in relevant literature as prohibiting growth. Moreover, seeing little returns on education, the poor opt out of schooling. The pool from which to select quality labour shrinks. The negative impact on growth is obvious.The importance of knowing actual population statistics for public planning cannot be overemphasised. Nonetheless, successive governments have delayed censuses for political purposes beyond the mandated 10-year period. The absence of an institution that can force the government to hold a national population census constrains growth.Similarly, volumes can be written about how poor institutions that run throughout our bureaucracy — policing, judiciary, urban planning, land titling, healthcare, national bud­­­geting etc — impede economic growth. The list is endless.Emphasising institutional reform to boost growth has one significant advantage over other alternates — quite often it does not require much money. Neither addressing skewed distribution of resources, nor empowering local bodies in true spirit, are expensive exercises. We would not have to run around helter-skelter with a begging bowl.However, reforming institutions calls for political will. In the short term, this at times may be seen as shooting oneself in the foot, eg electoral reforms. A long-drawn advocacy, with pen and voice, can lay the groundwork for institutional changes. To understand the importance of advocacy, and the risk of ignoring it, one should examine the developments of the French Revolution and Egyptian revolution of 2011, both of which were deeply rooted in indigenous advocacy. One succeeded eventually, the other remains to be seen — but in both cases seismic institutional changes were long overdue and, once in motion, did not come about easily.The writer is a researcher at the Pakistan Institute of Development Economics.idreespide1@gmail.comTwitter: @khawaja_idreesThis story was originally published by Dawn, Pakistan