Daily Times

How can Pakistan overcome her development challenges? What hinders us from following the trajectory of East Asian economies? Where does the difference lie? Should we leave larger questions to fate or can we turn the tide? Perhaps this is not all about investment and infrastructure. In the jargon of economists, there are some‘externalities’,which rarely figure in during policy deliberations. But they oftendecisivelyaffect the policy outcomes. One such important externality is the level of mutual trust among the people in any country.

The Nobel Laureate economist Kenneth Arrow says trust has high economic value. Every economic transaction requires some element of trust. Most of the economic backwardness in the world can be explained by its absence or deficiency.

The ‘End of History’ fame Francis Fukuyama considers trust as a critical element in difference in economic progress of nations. Japan, Germany and the United States are considered high trust nations which have demonstrated rapid economic growth and an ability to recover quickly despite devastation of wars.

In countries where societal trust levels are high, businesses initiated at the individual or family level usually often grow and become large-scale corporations

If trust is really such an important determinant of development then where do we stand? Social scientists and economists have recently focused on measurement of such apparently ‘immeasurable’ phenomena like human well-being or social capital including trust. According to World Values Survey in 2012, only 22.2 percent Pakistanis responded ‘yes’ when asked “can most people be trusted?” This indicates trust-deficit.

At macroeconomic level trust-deficit deprives governments of sufficient popular support to take major development initiatives. If we examine the history of mega development projects in Pakistan we can see how the element of trust-deficit often became a stumbling block.

Kalabagh Dam (KBD) project has become a textbook example of low-trust development syndrome. The project was originally conceived in 1950s and reached final design stage in 1984. Since then every Pakistani knows the fate of this project. I am not referring to the merits or demerits of the proposed dam. There is consensus on ‘no-consensus so the project has probably been shelved for good. The real damage is not the issue of getting through with KBD project but the precious decades lost in endless debate.

Lahore-Islamabad Motorway M2 project is another case study. M2 is a success story today, but from conception it became controversial and victim of political opposition. The project underwent uncertainty, halts and delays before its completion years behind the planned schedule. Today it is considered a much-needed complement of Grand Trunk road and an important link in the North-South CPEC. This is how absence of trust affects national development.

Recently the China Pakistan Economic Corridor (CPEC) has remained a subject of similar debate. In low-trust societies the cost of development projects becomes relatively high due to massive expenditure on monitoring of projects because of potential risks associated with compromises in quality if monitoring regime is not robust.

Apart from macroeconomic implications of trust, it has equally strong impact on private sector growth. In low trust societies enterprise and investment remain low because of higher risks and costs associated with getting legal securities. Every document is required to be attested. Entrepreneurs spend energy and effort in seeking securities rather than on innovation. The outcome is low productivity and quality which perpetuates balance of trade deficit trap.

Most businesses start at individual and family level. In countries where trust level is high in society, businesses initiated at individual or family level usually often grow and become large scale corporations. The World Values Survey, in 2012, reported that more than ninety percent people in Pakistan never participate in volunteer associational activities which enable people to learn how to work together and trust each other. This is visible in economic activity. We see ‘XYZ & sons’ type firms rather than gradual emergence of large scale corporations.

Higher litigation is a major indicator of trust deficit in any society. The high case load of courts is mostly related to civil disputes related to contractual obligations. The diaspora often expresses a reluctance to invest in productive ventures back home because of such insecurities. On the other hand, this causes capital flight to secure foreign destinations. In such circumstances people prefer to invest in relatively safe but in terms of employment generation least productive real estate sector.

What can be done to come out of this vicious situation? It is a fact that there is no ready-made prescription of such ailments. But we cannot afford pessimism and inaction. These social traits are outcome of historical processes. Particularly colonial policies to control large populations divide created deep seated cleavages. But such are the challenges which test true mettle of political leadership. We have examples of statesmen like Bismarck and Lee Kuan Yu who transformed the nations in a life time.

Socio-economic inequalities create and sustain mistrust. Recently the World Bank has reported an increase in inter-provincial gap in basic social development indicators like literacy and school enrolment. Educational inequalities intensify social polarisation. Education policies should not create a stratified pyramid of vastly literate and very little highly educated population. Everyone at a different rung of the social ladder looks above and below with suspicion.

Finally, legal mechanisms are important to improve at least contractual security. Fair decision processes at policy tiers and access to information can help boost public confidence vis-à-vis public institutions.

The writer works for the public sector and is a development policy analyst