Daily Times

The Industrial Revolution created a transformative critical juncture for the whole world during the nineteenth century and beyond: those societies that allowed and incentivised their citizens to invest in new technologies could grow rapidly. But many around the world failed to do so – or explicitly choose not to do so. Nations under the group of extractive political and economic institutions did not generate such incentives.

They not only neglected to encourage economic progress but also took explicit steps to block the spread of industry and the introduction of new technologies that would bring industrialisation. Absolutism is not the only form of extractive political institutions and was not the only factor preventing industrialisation.

Inclusive political and economic institutions necessitate some degree of political centralisation so that the state can enforce law and order, uphold property rights and encourage economic activity when necessary by investing in public services. Political centralisation is resisted for the same reason that absolutist regimes resist change: the often-well-placed fear that change will reallocate political power from those that dominate today to new individuals and groups. A major impact of these developments was negative in the context of prosperity and poverty of nations. The question arises can we engineer prosperity and alleviate poverty.

These engineering attempts come in two flavours. The first, often advocated by international organisations such as the International Monetary Fund, recognises that poor development is caused by bad economic policies and institutions, and then proposes a list of improvements these international organisations attempt to induce poor countries to adopt.

These improvements focus on things such as macroeconomic goals such as a reduction in the size of the government sector, flexible exchange rates, and capital account liberalisation. They also focus on more microeconomic goals, such as privatisation, improving the efficiency of public service provision and perhaps suggestions as to how to improve the functioning of the state itself by emphasising anticorruption measures.

This approach is not problems free. An international institution such as IMF may get an incorrect perspective that fails to recognise the role of political institutions and the constraints they place on policymaking. Attempts by international institutions to engineer economic growth by hectoring poor countries into adopting better policies and institutions are not successful because they do not take place in the context of an explanation of why bad policies and institutions are there in the first place, policies are not adopted and implemented, or are implemented in name only.

Moreover, countries, such as Pakistan do not have financial experts of their own to talk to IMF with greater confidence and professional competence of Fiscal and Monitory policies. Lack of economic stability, political pressure, and resulting inflation do create further instability and uncertainty. Politicians around the world were spending more than they were raising in tax revenue and were then forcing their central banks to make up the difference by printing money.

Since the development of inclusive economic and political institutions is key, using the existing flows of foreign aid at least in part to facilitate such development would be useful

Another approach to engineering prosperity recognises that there are no easy fixes for lifting a nation from poverty to prosperity overnight or even in the course of a few decades. Instead, it claims, there are many “micro-market failures” that can be redressed with good advice, and prosperity will result if policymakers take advantage of these opportunities, which, again, can be achieved with the help and vision of economists and others.

This may apply to the way markets are organised, education systems and health care delivery etc. But the problem is that these small market failures may be only the tip of the iceberg, the symptom of deeper-rooted problems in a society functioning under extractive institutions. Just as it is not a coincidence that poor countries have bad macroeconomic policies, it is not a coincidence that their educational systems do not work as well. These market failures my not be due to ignorance.

The policymakers and bureaucrats who are supposed to act on well-intentioned advice may be as much a part of the problem, and the many attempts to rectify these inefficiencies may backfire precisely because those in charge are not grappling with institutional causes of the poverty in the first place.

In complex organisations, men analyse problems and seek solutions. They have problems of their own, including trained incapacity, and biases as well as needs. Internal and external environment injects positive and negative forces that cause success or failure. Impact of negative forces can be reduced considerably by planned deliberate efforts to strengthen positive forces. This is the way forward to success and goal achievement.

Two important points to note here are: First, foreign aid is not a very effective means of dealing with the failure of countries around the world today. Far from it, countries need inclusive economic and political institutions to break out of the cycle of poverty. Recognising the roots of world inequality and poverty is important precisely so that we do not pin our hopes on false promises.

As those roots lie in institutions, foreign aid, within the framework of given institutions in recipient nations, will do little spur sustained growth. Second, since the development of inclusive economic and political institutions is key, using the existing flows of foreign aid at least in part to facilitate such development would be useful. Structuring foreign aid could help in use and administration and bringing groups and leaders otherwise excluded from power into the decision- making the process and empowering a broad segment of the population. Poverty has to be alleviated for prosperity and March forward to progress and development.

The writer is the former director of National Institute of Administration (NIPA), Government of Pakistan