Economic ideas mean nothing if they do not acquire political legitimacy

 The question in ultimate analysis boils down to: Should we make best effort to nurture and promote these countervailing forces which can challenge the elites and the status quo of continue to breed despondency, cynicism and predict doom and gloom for the country. I confess I have very little empathy for those arm chair critics and chattering classes who fall in the latter category. I have chosen to associate myself with the small minority who are doing their best to make small, incremental changes in a dogged and steady manner …The World Bank offcial responds to the critique of his analysis.
 
 

    Mr. Akbar Zaidi, in his usual erudite and scholarly manner, has made a through reading of my most recent
analysis of Pakistani economy and has made an invaluable contribution to the on-going debate on this
important topic. While he is gracious enough to recognize the high quality of the analysis he has three
serious reservations which in his view has revealed the weakness in my way of thinking and
conceptualization. I wish to address each of his reservations.

1% vs 99%

(a) Mr. Zaidi believes that Pakistan has undergone serious economic and social transformation during the
past 50 years and this has affected not primarily less than one percent of population but a very large
majority of the country and growth has filtered down. I agree with him but the point which I have tried to
make in this book is totally different. This has to do with the basic income generation process in Pakistan.

Under a competitive market economy an individual or household or firm earns an economic return on his
capital, labor and land in proportion to his initial factor endowments. Leaving aside the economic jargon of
marginal productiveness equalizing the returns to the factors suffice to say that this is the "normal" level of
private income. Under a caring and benign state part of this private income is taxed above a threshold level
and in a progressive manner by the State to provide public goods and services which for the reason of
externalities create "public" income. This combination of "private" and "public" income therefore determines
the overall distribution of income in a given society.

The thesis underlying my work is that having achieved 5-6% annual growth rates of GDP over an extended
period of 50 years the Gini coefficients have worsened, inter and intra regional inequalities have widened,
social indicators and Human development index are among the bottom rung of developing countries not
commensurate with the level and rate of growth in income, physical infrastructure services have
deteriorated and created excess unsatisfied demand. The explanation which I provide for this paradox lies
in the way incomes are generated in Pakistan. Yes, it is true that 99% of the population does derive "some"
return on the factors of production they possess but I argue that these "realized" or "actual" returns to them
are below what undistorted and unrigged markets in factors and output would generate. The returns to this
large segment of the population are depressed deliberately and thus "transfers" are made by the rest of the
population to the better of segments of the population.

To illustrate this point let us take the agriculture sector. Small farmers pay unsubsidized prices for their
inputs, receive below world parity prices for their marketable output, have no access to formal credit
markets forcing them to pay excessively high rates of interest on their borrowings, are deprived of their
allocated share of irrigation water etc. Large farmers, on the other hand, are provided all kinds of subsidies
on the inputs, loans and credits at the concessional rates for purchasing tractors, tubewells, harvesters etc,
draw large quantities of irrigation water beyond their entitlement in connivance with the officials of the
Irrigation Department and pay below cost charges on the electricity etc. Furthermore, the incomes of these
large farmers are not taxed thus depriving society of a large avenue for redistribution of "public" income as
well as opportunities for advancement to those who deserve it on grounds of equity.

This particular process of income generation therefore results in "below normal" returns to small and
medium farmers and "above normal" returns or "rents" in the parlance of economists to large farmers. This
outcome has been made possible by the interaction between the extraordinary political and economic
power enjoyed by the farming elites to distort and rig the market and use the state apparatus to create
these "rents". The losers, of course, in this process are the majority of the small holders, tenants, share
croppers, wage laborers and landless.

This same pattern of income generation is equally applicable to non-agriculture sectors such as industry,
trade and transportation. The aggregate effect is that not only income distribution pattern is skewed as we
have observed but there is also a serious under investment and shortages of public goods and services. In a
scarcity driven environment these goods and services can be allocated through price or non-price rationing.
As the elitist class can pay the price for public goods provided by the private suppliers (private schools and
hospitals) or have the political connections and clout to use the discretionary powers of the public servants
to their advantage (licenses, plots and permits) the access to the rest of the population is seriously
constrained.

This is essentially the gist of the argument which I have offered in the book backed by an empirical analysis
of the trends in various markets and sectors. I concede that the number 1% is a pure guesstimate and
could be 2% or 5% but this does not detract from the basic argument that a small class of elites has
derived "disproportionately" large benefits from economic growth in Pakistan while the rest of the
population has paid for these benefits.

Muddling through, IMF and the World Bank

(b) Mr. Zaidi takes exception to my characterization of the democratic era of 1988-98 as "muddling
through" period and sees my true colors. I want to make it abundantly clear that there is no empirical
evidence of linkage between form of government-democracy, dictatorship, military rule etc and economic
performance. Personally I believe that a truly democratic and pluralistic form of government is a
pre-requisite for the kind of model which I am advocating in the book i.e. "shared" growth model.

Hopefully, this preamble should rest Mr. Zaidi's mind at peace about my political predilections. But I do
show that the policies of both Benazir Bhutto and Nawaz Sharif governments have been in the right
direction. What has been missing is the lack of consistency in their implementation and poor governance
which have created a crisis of credibility. This crisis, in turn, has undermined confidence in the economy
and seriously impaired investment growth by both domestic and foreign investors which has resulted in the
current stagnation in output, rising unemployment and lowering of the living standards of the majority of the
population including resurgence of absolute poverty.

The above strand of analysis and the conclusions drawn in the book about the period 1988-98 are
constantly echoed in the newspaper columns, reflected in the official statistics and the ratings of the
international credit rating agencies and allocation decisions of the Fund managers. My use of the term
"mudding through" may not be appropriate but I doubt if Mr. Zaidi would have serious quarrel with the
substance of my analysis of the economic events or management of this period.

I believe that the debate whether the structural adjustment policies recommended by the IMF and the
World Bank have failed in Pakistan because they were inherently flawed or because they were not fully put
in practice is a sterile debate. Neither I am an unbiased observer on this issue as my hands-on involvement
as well as research on African Adjustment case studies has led me to conclude that it is only in those
countries where there is broad domestic consensus and ownership of structural reforms backed by strong
political commitment that these reforms can have a positive and beneficial impact. In case of Pakistan and
other similar countries which are dominated by strong vested interests who stand to lose significantly by the
implementation of these reforms there is no way they can succeed irrespective of the fact whether they are
prescribed by outsiders or home grown. The ruling elites in these countries are quite happy to receive the
finances which accompany the IMF-Bank programs but are most reluctant to implement the measures that
come as part of these programs. No wonder, we have got ourselves in a debt trap in the last ten years
while the economic growth rates have declined, inflation has resurfaced, exports have stagnated and our
reserves remain at a paltry level of a few weeks of imports. I do not think any economist of any persuasion
or any international institution would endorse the way we have managed our economy during the last ten
years. I believe that the game of blame apportioning is neither helpful nor productive.

I would only submit that the caricature of the Structural Adjustment Programs as spreading of "free
market" ideology and doing away with the state has confounded and confused what can otherwise be a
very rich debate on the crucial, essential complementarities between the private-public-community
partnerships and the sequencing and phasing of reforms to minimize the adverse social consequences of
these actions.

Pamphleteering and Alice in the Wonderland

The most damning criticism of the book, in Mr. Zaidi's view, is the Agenda for Economic and Social
development which I have presented as the last chapter. To my mind, the purpose of articulating the
agenda has been served i.e. it has provoked a controversy and given rise to healthy debate. I did not find
any substantive objections which Mr. Zaidi has to the content of the agenda. But his main criticism is that it
sounds more like a pamphlet of a political party rather than a piece of solid scholarly reflection particularly
on who will implement it and how is it going to be implemented under the given political circumstances of
the country. This is a valid concern as I agree with him that the political leadership is itself responsible for
creating this rot and has vested interests in perpetuating the status quo and the present system. I will divide
my response on two parts-Why this agenda is presented and what can be done to push it forward.

The agenda has been derived by examining the characteristics of the "Shared" growth model as applied in
many parts of the developing world and adapting it to the particular social, cultural and political milieu of
Pakistan. There is nothing new or startling and most of the ideas and suggestions presented in the agenda
have in fact been drawn from a careful scrutiny of other analysts, observers and researchers in Pakistan.
The value added which I have brought to bear on this agenda is to assemble the best practices from other
countries and provide a semblance of order and priority to various competing demands faced by the
economy. The two filters which have been used in providing the phasing and order are the likely impact
and the results and the capacity to implement.

Mr. Zaidi is also right that this agenda could belong to any political party in Pakistan. In my view this in fact
is a vindication of my effort to propose a course of action which is so germane to the real problems of the
country but also so attractive politically that it can appeal to the politicians. Economic ideas and proposals
are of little meaning and value unless they find a favorable habitat among those who are eventually going to
implement. Let us face it. Power rests with the elected politicians and unless they are convinced and
persuaded and are then able to sell this agenda to the electorate there is very little chance that these ideas
will ever see the light of the day. It is only the political legitimacy which confers the authority to make these
changes. The agenda has been written with this consideration in mind.

It is true that the first 400 pages of the book are set in the tradition of scholarship and research and the last
chapter calls for action. The economist in me turns to the public policy activist and practitioner at this stage
craving for action and change. The only defence I can offer is that the agenda is solidly based on the
insights gained from the previous scholarly treatise but gets highly tampered with the test of political
feasibility. To a scholar interested in pure analytical description the book ends at Chapter 7. For an agent
of change the book begins at Chapter 8-the agenda for reforms in the 21st century.

The second question is more difficult to answer and I must confess I have no readily available answer. But
I draw comfort from other countries which have gone through a similar transition from "elitist" to a more
"shared" way of economic development. My reading of recent developments in Bangladesh, Philippines
and more recently Egypt do reassure me that this is a double proposition not in the short or immediate term
but over not too long a time horizon. The politics in Bangladesh, for example, is no different from what we
face in Pakistan. The constant political fights between Khaleda Zia and Hasina Wajid and the changing
allegiances of other peripheral parties parallels closely our own political spectrum. But it was the concerted
efforts of non-political leaders, community organizers, leading professionals and committed NGOs which
have initiated the process of bringing about slow and gradual but significant changes in the economic and
social landscape of Bangladesh.

In my book I have spelled out some countervailing forces--constant electoral process which eliminates
over time undesirable elements from the scene, a free and responsible press which acts as a watchdog on
the wrongdoings of all sorts, a decentralized and accountable system of local government, a vibrant class of
committed NGOs led by men and women of integrity and the professionals and their organizations which
make contributions outside their narrow confines. Most of these forces are incipient and yet to take firm
roots. All of them face serious opposition from the political and other vested interests. But if I look back at
Bangladesh under Ershad only ten years ago I find the same constellation of inhibiting factors which are
present in Pakistan today.

The question in ultimate analysis boils down to: Should we make best effort to nurture and promote these
countervailing forces which can challenge the elites and the status quo of continue to breed despondency,
cynicism and predict doom and gloom for the country. I confess I have very little empathy for those arm
chair critics and chattering classes who fall in the latter category. I have chosen to associate myself with the
small minority who are doing their best to make small, incremental changes in a dogged and steady manner.