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Why nations fail

Some books should be made mandatory reading not just for Pakistan’s parliamentarians but its power elites.

Two relatively recent books deal with a theme I have touched upon extensively since I began writing this column two years ago — of how, without a stronger institutional framework and better “governance”, Pakistan’s economy will remain mired in stagnation.

Despite the fact that the pioneering work in the field of new institutional economics came from economists such as Mancur Olson and the Nobel laureate Douglass North over three decades ago, and has gradually become mainstream in the inquiry into the causes of the divergence in the economic well-being of countries with the work of later economists, the link between “institutions” and “economics” has received scant attention in Pakistan.

The development debate within the country has invariably focused on greater use of factor endowments, and the concomitant “big ticket” infrastructure projects, and only very incrementally has graduated to better use of these endowments, be it natural resources, capital or the population. In the latter, i.e. the improved productivity approach, lie the seeds of the institutional debate — what has prevented Pakistan from fully utilising its vast economic potential, while other economies with poorer factor endowments, and a much later start, have powered ahead?

While the title of this column suggests I will be covering Daron Acemoglu and James A. Robinson’s book of the same title that was released in 2012, and which deals with “the origins of power, prosperity and poverty”, I will actually be referring more to Niall Ferguson’s The Great Degeneration: How Institutions Decay and Economies Die.

Niall Ferguson’s book is based on the BBC Radio 4 Reith Lectures 2012 series, and despite its twist to the institutional view, should be more readable for parliamentarians than the academic work of Acemoglu and Robinson. The twist comes from the fact that Niall Ferguson is more interested in nations — today’s US in particular — that historically have had strong institutions which have led to unprecedented economic well-being, but which are now atrophying at the hands of a self-serving political class and system (and complex regulation brought on by big government).

In a sense this is the exact opposite of what Acemoglu et al are studying, which is why only some nations have developed strong “inclusive” institutions while most others are languishing with “extractive” ones that only benefit a small elite. Nonetheless, both the works converge pretty much at the same powerful point — that “good” institutions matter for widespread, and sustainable, prosperity.

A few illuminating extracts from Niall’s work follow. A passage on ‘The Stationary State’ from Adam Smith’s The Wealth of Nations:

“In a country too, where, though the rich or the owners of large capitals enjoy a good deal of security, the poor or the owners of small capitals enjoy scarce any, but are liable, under the pretence of justice, to be pillaged and plundered at any time by the inferior mandarins … In every different branch, the oppression of the poor must establish the monopoly of the rich, who, by engrossing the whole trade to themselves, will be able to make very large profits.”

On the ‘Rule of Law’, Ferguson quotes from the late Lord Chief Justice Tom Bingham’s book of the same name, in which seven criteria have been specified by which a legal system can be assessed, namely:

— The law must be accessible and so far as possible intelligible, clear and predictable;

— Questions of legal right and liability should ordinarily be resolved by application of the law and not by the exercise of discretion;

— The laws of the land should apply equally to all;

— Ministers and public officers at all levels must exercise the powers conferred on them in good faith, fairly, for the purpose for which the powers were conferred, without exceeding the limits of such powers;

— The law must afford adequate protection of fundamental human rights;

— Means must be provided for resolving, without prohibitive cost or inordinate delay, bona fide civil disputes which the parties themselves are unable to resolve; and — Adjudicative procedures provided by the state should be fair.

Most importantly from our perspective, the rule of law for elites is considered the first of three “doorstep conditions” to move from a basic natural state to a “mature” one which represents an “open access pattern” characterised by a fast-growing economy, decentralised government and a vibrant civil society (North et al).

What are the implications for Pakistan? First and foremost, that the elites will have to be subjected to the rule of law. They will have to be moved from a state of perpetuation and protection of their privileges, to the enforcement of their responsibilities. To do this, we have to lay the groundwork for an interlocking set of institutions that provide for political as well as economic governance. (Olson described a society’s transition in terms of moving from “roving bandits” to “stationary bandits”, i.e. autocratic, and perhaps dynastic, rule).

The precondition for economic development (and not just economic growth) is strong institutions. The precondition for democracy to work is the application of the rule of law, both prior to elections — in filtering those who can stand for public office from those who are ineligible under the law — as well as afterwards, in enforcing rules and boundaries on the behaviour and actions of those in power.

If Pakistan can make the transition to the rule of law, it will have virtually guaranteed a stronger economy and a better quality of life for its citizens.

The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.

Sakib Sherani, "Why nations fail," Dawn. 2013-01-11.