Daily Times

The criticism of the powerful institutions of Pakistan, such as the army and the judiciary, is quite common in the media reports in the recent past. Many arguments against the powerful institutions are drawn on the basis of inter-institutional power comparisons sometimes indicating a sense of deprivation among weaker institutions. In this context, it is pivotal to understand whether institutional inequality is good or bad for achieving long term development and economic growth in a developing country like Pakistan. Economic development is a complex process requiring multiple economic, political, social, institutional and policy interventions. Back in 1949, E. Hoover and J. Fisher identified five stages in the economic development process.

The first stage witnesses little investment and trade while population is located as per the natural resources distribution. At the second stage, improvements in transport take place resulting in better trade and local specialisation. At the third stage, agricultural modernisation takes place. The fourth stage experiences diminishing returns to agriculture forcing regions to industrialise. At the fifth stage, a region specialises and increases exports to less developed regions. As the process moves on, the associated power relations among stakeholders and policymakers keep changing mainly because of rising economic and institutional inequality.

In the literature, much has already been said about economic inequality that generally rises with the rise in economic growth. However, the unbalanced power relations among institutions, causing institutional inequality, appear to be under investigated and less discussed. Power among state institutions is like energy that, according to the Law of Conservation of Energy, can neither be created nor destroyed. However, it can be transformed from one form to another. The concentration and division of power among state institutions appears to be like the transformation of energy from one form to another. For example, the indigenous manufacturing of aircrafts, submarines and other relevant arsenal involve extensive research and rigorous efforts resulting in unique innovations by the armed forces. The applications of such innovations are not just confined to the manufacturing of the military equipment. They can, indeed, be replicated in the other allied industry and trade thus devolving a culture of research and innovation in other institutions. Similarly, a just and fair judicial activism strengthens the institutions, particularly dealing with property rights, thus improving the ease of doing business indicators pivotal for economic growth. This suggests that strong institutions naturally leave a trickledown effect on other state institutions with gradual passage of time. Institutional inequality is, therefore, not bad for achieving long term economic growth. Based on this argument, it is understandable that unnecessarily targeting and criticising strong institutions of the state, such as the army and the judiciary, is detrimental for achieving long term economic growth and prosperity.

The analysts criticising the army and the judiciary must realize and understand that the power of these institutions will indeed strengthen the power of other institutions. That means the power of the army and the judiciary is indeed the power of Pakistan’s economic system

It is because the very concept of power is slippery in nature. Power is like water. Water makes its own course and so does power. No single institution, or group of institutions, can afford to keep it for long time, else it will create political and policy fissures. Therefore, the comparability of power among state institutions needs a wider understanding of the concept of power, and its relationship with economic growth, beyond its mere exercise by the powerful state institutions. The people criticising the army and the judiciary, therefore, do not have a wider understanding how these strong institutions indeed strengthen the weaker institutions, through trickledown impact of power in the long run, ultimately increasing economic growth and prosperity for the nation. In other words strong institutions are economic assets of Pakistan that will strengthen the weaker institutions gradually.

Looking at the evolution history of institutions in the world, it may be noted that economic prosperity is a cyclical process that shifts its epicentre both geographically and institutionally. In a 2002 research paper, Acemoglu et al. note that the centre of economic power was way different in the past. Today’s affluent countries were economically poor in the past and vice versa. For example, the Mughals in India, the Incas and Aztecs in the Americas enjoyed the status of economic superpowers back in 1500. Furthermore, North America, Australia and New Zealand were economically backward at that time as compared with the present day Pakistan, India, Bangladesh and the ancient Incas and Aztecs empires. The reason for the rise of the backward nations, causing the ‘reversal of fortune’, was arguably because of strong institutions and geography.

As far as geography is concerned, Montesquieu, in his 1748 treatise ‘The Spirit of the Laws’, observes that hot and temperate climates make the people timorous, lethargic and lazy. The people in cold climates, on the contrary, are brave and industrious. Furthermore, another observation was that the countries’ per capita income increases with the increase in distance from the equator. However, back in 1500, the reverse would be the case as the Mughals, the Incas and the Aztecs were the economic superpowers. The Mughals, in particular, were living in the hot and temperate climates. This suggests that the geography argument is not robust enough to cause ‘reversal of fortune’ transforming the past affluent countries into present day developing countries and vice versa.

Strong institutions, however, are central to long term economic growth and prosperity. In this regard, the institutions can be bifurcated into economic institutions and political institutions. Economic institutions primarily deal with fiscal and monetary issues. Some of them, as per Acemoglu et al.’s findings, also involve the contract enforcement for the property rights and the rule of law. In Pakistan’s context, Federal Board of Revenue (FBR), State Bank of Pakistan (SBP), Provincial Revenue Authorities, Provincial Excise and Taxation Authorities and Military Land and Cantonment Boards are some of the departments falling in the definition of economic institutions.

Political institutions can be divided into two types. The first type of political institutions deals with the rule of the game, such as the constitution. Generally the parliament performs this function. The second type of institutions exercises power through force such as the judiciary and the armed forces. The research shows that these two types of political institutions indeed yield a trickledown effect to the economic institutions. That means the strength and power of the political institutions, such as the army and the judiciary, is indeed the power of the economic institutions such as the FBR, the SBP and so on. Therefore, strong institutions like the army and the judiciary indeed enhance economic performance of a country such as growth in per capita income and the future distribution of income.

It may also be observed that the political institutions and the distribution of wealth and resources are the two main state variables that strengthen economic institutions, alongside positively affecting economic performance and the future distribution of resources. The main reason for the rise of backward countries is the evolution of institutions causing the reversal of fortune. It is equally important to mention that there are three main conditions that can help emerge good institutions. Firstly, there needs to be an institutional check on the balance of power among different strata of the society through a democratic system of governance. Secondly, the enforcement of property rights, pivotal for securing investment, should be just and fair not meant at protecting the interests of the elites. Thirdly, there needs to be a strong institutional check on the rent seeking behaviour of the elites.

The past economic superpowers are now lagging behind the past developing nations because of their institutional superiority. The analysts criticising the army and the judiciary must realise and understand that the power of these institutions will indeed strengthen the power of other institutions. That means the power of the army and the judiciary is indeed the power of Pakistan’s economic system. As of today, there are clear indications that the cyclical process of the reversal of fortune is still going on. That means today’s developing countries are likely to be developed countries tomorrow and vice versa. Asia is going to be the economic capital of the world. The sudden rise of China and its ongoing trade war with the United States is reflective of the tensions associated with the cyclical process of the reversal of fortune. Despite Pakistan’s present economic woes, its strong institutions will dissipate their power to other state institutions paramount for enhancing long term economic growth and prosperity. Strong institutions are central to economic growth whereas institutional inequality is a relevant term lacking holistic approach in its perception of the inter-institutional power relations.

The writer is Additional Commissioner, FBR, holding PhD in Economic Planning from Massey University, New Zealand. The views expressed are his own. He can be reached at babarchohan21@gmail.com

Published in Daily Times, November 23^rd 2018.