An interview with Dr Asim Ijaz Khwaja, Professor of International Finance and Development at the Harvard Kennedy School

Dr Asim Ijaz Khwaja is the first Pakistani hired by Harvard as professor. He is the Director of the Center for International Development and the Sumitomo - Foundation for Advanced Studies on International Development Professor of International Finance and Development at the Harvard Kennedy School, and co-founder of the Centre for Economic Research in Pakistan. His areas of interest include economic development, finance, education, political economy, institutions, and contract theory/mechanism design. His research combines extensive fieldwork, rigorous empirical analysis, and microeconomic theory to answer questions that are motivated by and engage with policy. Dr Khwaja also serves as the faculty co-chair of a week-long executive education program, "Rethinking Financial Inclusion: Smart Design for Policy and Practice," aimed primarily at professionals involved in the design and regulation of financial products and services for low-income populations. He has been published in leading economics journals, such as the American Economic Review and the Quarterly Journal of Economics, and has received coverage in numerous media outlets, such as The Economist, The New York Times, the Washington Post, the International Herald Tribune, Al-Jazeera, BBC, and CNN. The Prime Minister Of Pakistan appointed Dr Asim Ijaz Khwaja as a member of the Economic Advisory Committee back in August 2018 but he stood on his principles and resigned in protest after religious extremists prevailed in the country and forced Dr Atif Mian to resign from the Economic Advisory Committee. Dr Khwaja’s research work can be viewed on his website, “ https://khwaja.scholar.harvard.edu/ ”and his views can be viewed via his Twitter Account. He tweets @aikhwaja

Policy Making :

Q - Covid-19 has been dubbed as one of the greatest challenges the world has ever faced – even more so for developing countries with limited resources. What are the key lessons for policymakers while making policies during this crisis and how can Pakistan make the best of the situation?

Dr Asim Ijaz Khwaja - I have been working on a smart containment and active learning (SCALE) model that can help respond to the Covid-19 crisis. The essence of the idea is that we should have an active learning model in how we respond to Covid. What we mean by an active learning model is if you think about the issue with Covid, what is the problem that we’re being presented a world over, not just in Pakistan. You have two choices; you either lockdown or you open, and the issue with that sort of simple dichotomy is that it’s kind of a binary curve, both are bad. Both have benefits but both also have costs so that’s one problem.

The second problem is that we tend to think of that opening and closing as two extremes, when in reality there’s lots of in between options Think of it in three main ways :

1- In between in the sense that you don’t have to fully close maybe or you have to fully open so partial closing or partial opening

2- The second is that whatever policy you come up with, you can vary the policy severity spatially, say, in terms of closing based on a particular region so you don’t have to do the policy at the national level or even the provincial level. You can run policies at the level of each village, each mohalla (neighbourhood) and each city so you can go very low geographically, meaning that some areas may have stronger lockdowns than other areas. That’s what we are doing already and are beginning to do in other countries as well.

3- The third is changing policy overtime, so even though something may work this week, you might want to do something else next week. Now, it’s necessary to use data and analytics to make policy this nuanced and this where the active learning part comes in. It’s critical and unfortunately, this is not really happening as well in Pakistan despite our efforts. We’re continuing to try and work with some governments. In order to do this, you have to build all these policies on a regular flow of data. You can’t just decide that, I’m going to open or close. You have to be measuring things and right now our measurement is not as good as it can be. There have been attempts: for instance, we’ve been working with the Government of Punjab. They have made some pretty good attempts at measurement but there are always challenges; there are financial challenges, political challenges, and there’s just bureaucratic challenges in continuing with that policy. I would say we need to measure three things continuously, every 2-3 weeks and in every region, you need to be measuring:

(i) Prevalence of Covid – this is something that could potentially improve via a lockdown but then you need to measure two other things which are potentially worsened because of the lockdown and those are;

(ii) Other health outcomes – For instance if you lockdown, people then might not be getting proper treatment; women may not be showing up in hospitals to deliver and that’s going to create increases in maternal and child morbidities, so you need to be measuring other health outcomes regularly; and finally,

(iii) You have to be measuring basic economic outcomes – like food security, employment, income, earnings; those sort of things.

If you have these three outcomes: covid prevalence, non-Covid health outcomes and economic losses, then you can decide how good or bad your policy is. For instance, if you say that I am going to have one or two weeks of lockdown, you could see how much that improves covid prevalence and what the cost was from a non-covid health perspective or economic perspective —those kind of trade-offs that a decision-maker needs to consider. The role that an analyst has is to get this data available [to decision-makers] as cheaply as possible. We’ve already done this in Punjab; we started working with them to do pool testing. This means that if you test 10 people, you can reduce the cost by 60 to 70 percent of overall. That’s a huge cost saving and you get the same information. Those are the kind of innovations that an analyst can do, but ultimately the decision has to be a politician’s decision. It’s a political decision and we shouldn’t be weighing in. That’s a public decision and obviously politicians need to respond what the citizens want.

The other thing I really would like to emphasise is that it’s critical that you communicate these strategies to the public. This is a crisis that can only be resolved if we get every citizen behind it. If you shut down work places and schools, but people go home and start meeting with their extended family and don’t take basic precautions; by wearing masks or hand-washing then you don’t get any of the benefit; in fact, you bear the cost of shutting down the economy but you don’t reap any of the benefit of preventing the disease. You can’t force people, they should comply willingly. You can’t just order the people saying “don’t do this, don’t do that,” you have to make them understand that why it’s in their interest to do so and for that, you need a trusting relationship. You need to trust your local policymaker, your federal policymaker, your authority figure and the trust has to be earned. The policymaker can’t just say “Trust Me!” and hope that will happen. Trust has to be built up.

One way of earning trust is to be transparent with what’s happening. If you’re in a neighbourhood, people should know things, such as the infection rates in their neighbourhood, what is the policy being implemented, why is the policy being implemented, and what will it take for the government to change policies. For instance,if I know that if our prevalence rates go down, it’ll be easier to open shops and increase mobility. By doing this, there’ll be sense of responsibility in the community. It will be an impetus to put pressure on others. For example, if I see people around me not wearing a mask, I will question them and will tell them to wear a mask, or if I go to a larger gathering, I’ll object to the large number of people and say why are so many people gathered together. In Pakistan, people aren’t seen wearing masks properly and regularly. We need to spread the awareness that wearing masks isn’t a fashion statement but a necessity and for this the communication needs to be very strong in order to spread awareness.

Active learning and trust building are the two major things needed in this situation. Governments need to stay ahead of the curve and for this, data needs to be coming in. You can’t just wait , one needs to be preemptive while making the policies to prevent or mitigate the impact. At times, you aren’t able to prevent, but you can mitigate the impact. For instance, if you lockdown, you’ll know that it’ll lead to other health outcomes which will impact the masses especially the women, who already have their mobility restricted. For this you can organise telemedicine or similar measures. You can come up with compensating measures as well. For example, when the businesses and livelihoods suffer, maybe you look into measures such as online delivery. Consider retail businesses - if restaurants can get their food delivered via delivery organisations, why can’t a business with limited resources use the same method? That business would obviously not have the capacity to do it on its own, but the state could get involved and facilitate that business. Instead of shutting down businesses, we need smart ways of keeping them open so that a balance can be created. That’s what is needed, but for that you need to be ahead of the curve by being proactive. You also need to evaluate whether your strategy successful or not. Everyone has ideas, but if policies are made on the basis of drawing room conversations, then they are being made on the basis of influence of power a person has. That’s not the way to do policy. Policies are made after taking all the ideas into consideration, or maybe by testing all of them using a trial and error method. Collect and compare data from the results of each of the policies. The world is much more complicated, we need to experiment and look at all options. This is a very hard problem to solve and can only be solved via active learning because all it is about is experimentation. Some people say these ideas such as active learning etc are the things discussed by those who possess an elitist mindset. I say that it’s the opposite. Poor countries can’t afford to make mistakes by making decisions on the basis of arrogance. We don’t have resources so we must spend them very carefully.

Productivity :

Q - Everyone keeps talking about structural and productivity enhancing reforms but the broader audience often struggles to understand what economists mean by these. Can you shed some light on this and how they are different from traditional macro policies?

Dr AIK - The way to think about this is very simple. I’ll put in mathematical terms. Typically whenever we think about growth, we have a standard growth function; the growth output (Y) is a function of capital (K), labour/human capital (H) and productivity (A). The growth equation is Y = A*F(K,H). Even if we leave the equation at side, the intuition of this is that growth happens when you have inputs. The economy has two major inputs; capital (includes land, financial resources etc) and human capital (your work force). Productivity is how effectively you can mix your inputs. Imagine a chef and you say that the chef will be judged based on how good the food is. What determines good food is both the quality of your ingredients and the skill of the chef. If your ingredients are substandard, the food will obviously be bad despite any amount of effort on the chef’s part, and if the chef doesn’t know how to cook, no amount of fancy and top-quality ingredients can produce a good dish. A lot of countries say that is our problem of ingredients, but is it that the inputs that aren’t good, or is it an issue of us not knowing how to mix them together? Every country has a set of problems at times, but when you ask this question of a large number of people, their typical reply is that everything is a problem/I think that it’s incorrect and I think that one needs to take a clear stance. My sense of Pakistan is that the problem is mixing. It’s not the inputs that are the problem but it’s that we don’t mix them properly. In very simplistic terms, productivity enhancement is finding better ways of manipulating the inputs that you have and getting more out of them by enabling them to “mix” properly . Coming back to the example of the dish, that if you prepare a better recipe, the same ingredients will mix together and result in a dish that has a good taste.

Q - According to a report from International Labour Organisation (ILO), the per-worker labour productivity in Pakistan grew 1.4pc annually between 2000 and 2017 as opposed to 3.9pc in Bangladesh, 5.8pc in India and 8.5pc in China. Why is Pakistan lagging behind?

Dr AIK - This is the billion-dollar question: why are Pakistan productivity levels so low? You’ve talked about labour productivity here, which is one form of productivity. You can also think of capital productivity. One should work on both, but labour productivity is very important. More generally, we need to ask that why our mixing of inputs isn’t correct, why is our productivity rate so bad. I think that it’s a very hard question. At times in policy making, we we don’t rule in the right answer, but rather, rule out the wrong answers which are not good and don’t make sense. Let me tell start by ruling out things which don’t make sense to me,

(i) This is not a problem of Government A or Government B; our typical way of looking at things is that every government says that their predecessors were bad and we are good. However, what this presupposes is that this issue of low productivity rates is a problem from the last 5 years only. In reality, our productivity problem is going on for the last 40 to 50 years and it’s a chronic problem. A chronic issue means that every policy actor, regardless of their political or institutional background, has failed to solve this problem of lower productivity. One way to prove this is our exports-to-GDP ratio. Looking at exports doesn’t mean that we are obsessed with them. We may be able to sell our products domestically, even if they are of poor quality, because of the favourable treatment/excessive protection given to them. But if you’re competitive in the world, that means that your product is actually very good because the world buys your products based on their quality. Exports are interesting because not only do they improve your balance of payment or bring in valuable foreign exchange, but they’re also a signal of an economy’s ability to compete in the world. Pakistan has not improved in terms of our global competitiveness in the last several decades, so that’s why I describe our low productivity rate as a chronic problem.

(ii) The second thing is that when you think of this problem of mixing, you have ask yourself why such a problem exists. One way to think about this is in terms of frictions. An economy can be thought of as a group of interacting actors. We’ve talked about inputs, but behind inputs, there’s a human who’s a decision-maker. That human can either be a labourer, a businessman, a trader, a bureaucrat, a politician, a civil society activist, etc. All of these are actors, so the way to think about productivity is to think of all the relevant actors within a sector of an economy. For example, take the education sector which is something on which I’ve worked extensively. In education, the relevant actors are parents, children, teachers, school owners, education department officials, and educational intermediaries (textbook makers, carpenters who make school furniture, writing book makers, teacher trainers etc). The way to think about productivity is to focus on frictions that prevent actors from engaging with each other . It’s the frictions that create a productivity loss. For example, a student wants to study, what is preventing them from learning? Is it due to the teacher not being able to teach well? Even if it’s a teacher who wants to teach well, what is stopping them from teaching well? Or for a school entrepreneur, what’s stopping the banks from lending them money to grow their school? There are so many frictions that stop us from improving. Often we can think of them as exchange frictions where there’s a buyer and a seller on one side of this market. The student will be the buyer of learning and the school or teacher may be the seller of learning. The school can also be a buyer who wants to borrow money from the bank, who would be the seller. In any of these transactions, think of the buy and sell side and ask yourself —is this transaction being done easily or are there hurdles/frictions in between. If there are frictions, we need to reduce them. The work I’ve been doing with Tahir Andrabi and Jishnu Das, on the LEAPS (Learning and Educational Achievement in Pakistan Schools) work. This work has been going on for two decades and while working on this, we have discovered that when you address the frictions (such as informational friction, labour market frictions, financial frictions) time and time again, you see improvements in both productivity and performance.

I think that it’s very easy at some level to realise firstly that it’s a sustained and chronic problem and secondly, that you have to address the frictions thar stop the actors from interacting together.

(iii) The third thing I would say is that there’s an elephant in the room over here which is labour force participation for women which is an obvious missing piece. I will respond to this in more detail below.

Overall if we take these two ideas that address frictions and think of this as a sustained problem, I think that we can get a lot of powerful solutions which are already happening just by applying these two criterion.

Q - What do you think of the emphasis on labour productivity, even though other firm level inputs are unstable as well and act as binding constraints for firms?

Dr AIK - I think the answer is to take the frictions approach where you address every actor who’s facing frictions. The actor can be a firm, an individual etc. We focus on labour productivity because there’s an obvious elephant in the room. We know that half of our workforce = i.e. women - isn’t effectively deployed. When you look at Bangladesh’s success story, it’s clear that women are a key driver behind it. There’s a great paper on this by Ahmed Mushfiq Mobarak who’s a Professor of Economics at Yale University and he has a great Twitter thread on this as well . In that story as well, there are cultural issues. Frictions aren’t just economic frictions but there are social frictions as well. For instance, we have a paper in which we show that women in Punjab had a really hard time in accessing a vocational training program because they couldn’t leave their village. In the research, we found out that there was a much higher enrolment if the training is done within the premises of the village, but if we go even one mile outside the village’s premises, the enrolment dropped by half. This suggests that there are huge barriers women face. We already knew this but this paper documents how severe those barriers are—we refer to them as “glass walls.”. A lot of these frictions are driven not just by economic reasons, but by cultural reasons. I’m not saying that you should set aside your beliefs, but there are ways to work with our beliefs remaining intact. Again, Bangladesh is a Muslim country, it’s not that they don’t have issues with women going out, but they have identified ways to do it which are culturally and religiously feasible and I think that’s what we need to expand on the ways to create space within our belief system. We just have to push them a little because that’s how they’re changed. Changing beliefs via revolutions is very difficult—instead, we tend to change our beliefs gradually, so we need to bring that gradual change in our mindset. We need to justify it as well, for example, instead of saying that should educate your daughter just because you’ve received foreign aid, we should explain that if your daughter gets educated, she’ll benefit you by supporting you, your house affairs, your grand-children. If you are worried that people will have issues with her working, let’s figure out a way for her to work without that happening, such as a way that’s consistent with your values. Your values would obviously not include that your daughter should not prosper or not support you or that your wife isn’t able to school your children well, so we need to engage with people in a positive way.

Reforms :

Q - What should be the state’s role in allocation of resources in a country like Pakistan?

Dr AIK - In terms of reforms, you’ve asked about allocation of resources in a country like Pakistan. Often the state is in direct delivery of services and you know that there’s a debate on this; obviously some people want a bigger state, some want a smaller state, but I just want a well-functioning state. I don’t care about the size per se, but I want a state which helps citizens, but doesn’t always do everything for them. Just like while nurturing your child, you don’t always do everything for the child because the child won’t learn. So just as a good parent would help their child grow, they would help them directly when needed but let them work on their own as well. Moreover, good parents set rules and regulations and provide resources. Similarly, a good state should be like a good parent. The state should remove barriers or frictions a citizen faces, it should set standards and enforce them, and it should also help to determine collective values such as the society’s values: what are the things we should desire; should we desire wealth or should we desire having an impact on the lives of other people? These are the standards a state should help set. It’s the same analogy for parents, where you ask that how should a good father or a good mother be? If you ask a common man “do you want to do everything for your child?” Their obvious answer would be no because the child would never learn then, but if you ask them “do you want to do nothing for the child?” the answer will again be a no because that would be wrong as well. This exact thinking should apply to a state, but it shouldn’t be paternalistic, because this would prevent a citizen (or a child)from learning anything because they won’t be able to develop curiosity. You need them to be independent, which means that you’ll also need to trust the child’s or citizen’s judgement at times. The state should be supportive and nurturing.

Q - There is significant empirical evidence that shows trade liberalisation leads to reallocation of resources from less productive to more productive sectors. Even though our tariffs have dropped from 60% in the 90’s to around 10% in 2005, why have we not experienced such a reallocation despite such massive trade liberalisation? This is specifically pertinent given increasing calls for protectionism globally.

Dr AIK - This is a very interesting thing and again the devil is in the details. Let me give you a small example. Think of policies regarding infant industry protection. This was very common in the 1950s/’60s where we used to protect our industries. Africa also did this along with Asia (East Asia in particular). There was a big difference and I wouldn’t just blame Africa but we too were part of this, so I’ll put South Asia in the Africa bucket. There are two ways to protect and it’s the same example of a parent I mentioned before. You can either tell the child “ I’ll protect you at all times,” and if you do that, you can make the child lazy, or you can tell the child “I will protect you initially, but my expectation is that you won’t require protection after a few years and gradually, I will start removing the protection”. Asia took the latter approach which was that they would protect the industry initially, for example ship building in Korea, it was a protected industry, but they said that they would eventually take this protection away and if the industry is not ready by the time the state takes away the protection , it’s the industry’s shortcoming. If the State says that the protection will continue at all times, then the industry will continue to demand it. Think of yourself as a firm in Pakistan, there are two efforts you can make. Suppose that you are being protected right now, one effort you can do is that you can improve yourself so that when the protection is withdrawn, you’re ready to compete, or the second effort you can put in is to make sure that the protection stays there forever by bribing the government officials and convince them to subsidise you continuously. If you take the latter approach, your (costly) protection may continue, but you will also waste your effort in a global productivity/competitiveness sense because you will be spending time in rent-seeking and subsidy-seeking rather than growth-enhancing or productivity-enhancing . This has been sadly the case in Pakistan and in many other developing countries in South Asia and Africa.

Q - Do you think there are a lack of financial markets in Pakistan, that this may be hindering the efficient allocation of capital and resources and, in turn, growth? For example, farmers in Pakistan generally do not have access to forward contracts. Therefore, when they make their investment decisions they do not know what price they will get, leading to uncertainty. If yes, then how do we go about developing these markets?

Dr AIK - The lack of effective financial markets in Pakistan is indeed one of the biggest frictions. There are many examples of how removing financial frictions can help but one example we have in Pakistan is in our paper entitled “ Upping the Ante ,” where we gave schools in rural Punjab cash grants and we observed improvements. Their productivity and quality increases. This study showed that the financial constraints were real, because the schools showed improvement after getting a grant, which clearly means that the school was in need of funds and it can utilise the funds in an efficient manner. It was a randomised controlled trial and we disbursed funds in two ways. In some villages, we funded only one school, whereas in some villages we funded all the schools. What we found was that when funded every school, we actually got better results in terms of school quality and the reason is not very surprising because by financing this way, a spirit of competition was created. If you fund only one school, the school may get a sense of entitlement and thinks that improving the cosmetic features such as enhancing the building will help it to attract more students from other schools and doesn’t work hard to achieve good results in terms of quality. Conversely, when you fund every school, not everyone can use that money to enhance their campuses, and this is when they realise that the way to success isn’t by enhancing the building only, but also requires offering a better product in terms of classroom teaching and learning. In short, the schools adopt a market-growing strategy instead of a market-stealing strategy. The crux of the study is that when you give money, what may be more important is how you give money rather than just if you give money at all. This suggests that if you want to promote the SME sector or the agriculture sector, you have to do it in a way which enhances competition. You should give subsidies or assist in terms of inputs in such a way which goes on to increase competition rather than decreasing the competition. In Pakistan and may other countries, a lot of times when we give money, unfortunately we reduce competition rather than enhancing competition. The idea is that everyone should be treated equally rather than selecting “favourites” before the competition even begins due to an unfair disbursement of funds. Our study suggested that such biases make entrepreneurs complacent. This may also be one reason our industrial sector became the place where the giants are sitting and relaxing without any threat of competition—because they’re receiving subsidies and rents continuously. If the industry giants are threatened by an upstart who poses competition to them, in a fair environment, they would worry about it and work harder. Instead what the often do is block any disbursements of funds to their competitors or those who are emerging businesses. This is terrible and the industry giants should be faced with competitive pressure to improve their productivity rather than being allowed to block competition.

Political Economy :

Q - It is said that Pakistan’s economy suffers from a problem of rent-seekers and elite capture that impedes inclusive economic development. This structure has built and consolidated itself on decades of patronage, making it difficult to dislodge. Do you think governments should look to address this with an incremental or disruptive approach?

Dr AIK - This is a very hard question. Look, it’s obvious that we have a political economy problem—in fact every country in the world has a political economy problem, even developed countries have political economy problems. An example of developed countries having a political economy problem are the recent events in America. The question is not do we have a political economy problem or not or are elites capturing or not capturing? The question is how do we address these problems? You’ve talked about having incremental or disruptive approach to solve these problems. I am not a big believer in revolutions because they’re bloody, unpredictable, and you can’t really plan on revolutions. I’m a big believer of a systematic change which often means that it is planned and incremental. A systematic change is hard to do. Sometimes you can make big policy shifts, but they have to be planned and systematic. Whether they’re sudden or gradual, big or small, what’s important is that they’re well thought out. For example, what happens in a game of chess is that a good player plans ahead their next several moves. You need to think like that and think that what will happen if I do X or Y, and what that happens what will I do in turn and so on and so forth. While taking this approach; you also need to be really practical/ Let’s consider the concept of Coasian Bargaining . Coase’s political theory was as long as people’s property rights are well defined, efficiency will always happen. A lot of times we create uncertainty, let me give you an example.. Let’s take current government’s initial aim of going after corruption, is that a good thing or a bad thing? The answer is that if you could go after corruption and reduce frictions and increase productivity, that’s a good thing, but if you go after corruption and you create uncertainty in the environment, in ad-hoc ways such as by opening a case on any bureaucrat on the whim of a judge or due to a NAB official’s personal grudge, you’ll make this entire process unpredictable. This uncertainty has a first order effect on growth because uncertainty is the worst thing you can do for an investor. If the financial actors don’t know about the future of their investments, they just won’t invest in the country and instead they’ll invest somewhere else such as Dubai, US, Europe etc because money is mobile. While creating an environment which is corruption-free is important, and I agree with the current government on that, but at the same time, a policymaker’s mindset should be “am I reducing friction and creating a predictable environment?” That means that you’ll need to follow the process instead of whims, you can’t have an autocratic mentality by thinking that I’m the be-all-end-all or I’m the sole judge and executioner. In fact, the one who judges should also be judged and held accountable for their actions. This is a big problem in Pakistan— that there’s no one to regulate or question the regulators. You simply can’t have a policeman who no one polices, that’s very dangerous. We need to have checks and balances everywhere including on the people who impose checks and balances. For the political economy problem, I think that the most important thing is to identify who are the relevant actors and what are the costs. Let me draw form two papers on finance with Professor Atif Mian . One is on political lending and the other is on stock exchange market manipulation . Both of them give examples on Pakistan and in both papers, you can see that there are huge costs. In one paper, we estimate that by bad lending or by lending to politically connected firms, you can lose up to two percent of your GDP a year. That’s a massive loss, but there’s a reason this loss is happening, because it is benefitting someone else. We also estimate that the brokers in the stock market back in the 1990s or early 2000s were making millions of dollars a year by market manipulation and I’m sure that it’s a lot more now if the manipulation is still going on there. By manipulating the market, you earn rents, yes, but what you end up doing is decreasing the size of the market. A solution to this problem isn’t getting rid of the broker because you can’t—they’re too powerful. What you need to do is to convince the broker that they’ll earn well if they allow the market to operate properly and earn legitimate broker commissions. The question is how do you assure the broker of this, because you know that when you have a powerful actor doing short term rent seeking. They’re not silly, they know that this is short-term thinking, so why are they doing it? It’s because if someone feels the ship is about to sink, you don’t know that will it sail tomorrow or not and because of this uncertainty, you just strip off everything from it and start selling its parts for whatever you can get . You need the Pakistani state to convince the powerful people (politicians, bureaucrats) as well as its citizen’s that this ship won’t sink but will, in fact, grow and prosper. So then you have two choices; either you can block it’s growth by doing some temporary rent-seeking or you can become a shareholder and benefit from its growth. That’s politically very hard to do because sometimes you will end up giving opportunities to people who are already privileged, it feels wrong that they’re already earning money. But it’s still important because you have to ensure that they develop a pro-growth and a pro-productivity mindset. For instance, a feudal landlord with a lot of land under them may be quite unproductive. You need to convince them that their asset needs to be developed; the question then arises of how should we develop it? Imagine if you own large relatively infertile land. In such a case it may be the value derived from this land is not what it produces but the fact that there are a lot of dependent tenant farmers on their lands. These “mazaras” may not be very productive, but, by casting their votes in the landlord’s favour, they could help him gain political power, which he could then, in turn, use for gaining more rents. In this case, you don’t get productivity from your land itself, but instead, it becomes a source of indentured/desperate people who then become votes and these votes transform into power for the landlord. In that context, you will never invest in your mazaras’ education or health because if you invest in them, they may no longer be dependent on you. However if the state changes the same structure by saying they’ll bring growth opportunities to the landlord’s area but those opportunities will only work if people working on the land are productive be it in agriculture, business , small enterprise , large manufacturing etc.. What matters the most is that the land can only become productive if people are productive. This will change the mindset of the same landlord who refused to invest on their people due to the fear of them becoming independent will now start working on making them productive by opening schools, health centres because now the incentive would change. This is just one example of what a more sophisticated Coasian Bargain could look like. More generally, we need to realise that we have the people that we have and we need to work with them to come up with win-win solutions. We will need to be a little patient because we might not have an immediate win, we will have to develop some patience, some faith in our country that it’s here for the long term and isn’t going anywhere. These positive expectations of growth are very important. I believe that nations get people to invest in them when people believe in the future of those nations and a lot of this can be done by positive expectations. Unfortunately, we destroy these expectations in Pakistan. I’ll tell you how, every time we criticise the previous governments, we destroy that because the trajectory I’m talking about isn’t in the past five years but in the past twenty or thirty years. When you say that you’re fine while your predecessors weren’t, what you also say is that even your successors aren’t good because there is no guarantee that your government will be re-elected. If we try to be more positive with each other, we can build a positive dynamic. Our governments need to acknowledge the good work of their predecessors despite their shortcomings and show commitment that they’ll do more good work. We need to move ahead positively instead of constantly slandering your opponents.

Economic Teaching :

Q - What changes do we need to bring about in the teaching and curriculums for economics so that it becomes on par with international standards and encourages more inclusive policy making?

Dr AIK - This is an excellent question to end with. I can give you lots of details such as getting this curriculum or conducting a specific type of exams etc, these are not important as they’re all secondary. You only need to do three very basic things and this isn’t just true for economics or social science but general education in Pakistan. The first thing I would say is that you have to build curiosity. Based on my experience, my father always encouraged and pushed my siblings and I or anyone he met, to ask questions. When I was a child, my dad would always ask questions all the time, he would never discourage questions, and the questions he asked were about peoples’ own contexts. I think that here the role of a good parent comes in where they need to build their child’s curiosity. Your question can never be wrong, we think that there’s a particular way to ask a question or what is a good question. We think that a good question is a question that has been asked by someone who is abroad. In fact, a lot of the research that happens in Pakistan is that we take someone else’s questions and we take data from Pakistan and answer it. I think that this is not the best use of a person’s intelligence. Look around your context, have the confidence to ask the question which matters in your context; even if no one in the world has asked it yet, that doesn’t matter because it is an important question. I think that if we emphasize asking questions in our teaching, we can make a lot of difference. The hardest question you can give in the exam, is that you ask your student to pose a question themselves, that best tests the material that they’ve learned, and then answer it. This is very hard. Writing an exam question which tests what you understand about the material is some of the hardest things you can do and I think that we should view our teaching like that. When you finish a course, if that course has not encouraged you to ask questions and then help you to give a framework to answer it (economics is just one framework to answer them), then we have failed in education. So my first point is build curiosity, build the ability to ask questions. Unfortunately, I think that we suppress it. We often blame rote learning as a reason why curiosity isn’t built into in our education systems. BUT memorisation is a powerful thing if we deploy it to answer questions. It is memorisation suppresses the need to ask questions, that is best avoided.

The second thing I would say is taking analytical approaches, and that means both using theory and data. Realise that you do not answer a question well by arguing loudly and shouting, but using analytics, using a process. There’s qualitative data as well which is used by sociologists, anthropologists, political scientists, etc. but there’s a method and a theory. You test your hypothesis on the basis of that theory and then you change your hypothesis. That’s how you progress. Some people say that Pakistan doesn’t have data, that’s not true actually. A lot of my earlier research was done on data that was collected not by me but by people or organisation in Pakistan such as by Federal Bureau of Statistics, by the State Bank of Pakistan. This means that we have data , we just have to use it. There’s no shortage of data in Pakistan. The second thing I would like to say on the same front of analytics is experimentation. The Nobel Prize this year was awarded to Abhijit Banerjee, Esther Duflo, and Michael Kremer. Their approach is experimentation. If you don’t know something or if the data available isn’t sufficient, don’t make it an excuse. Children learn language naturally, but if you tell that child that before learning a language they need to know the entire dictionary, vocabulary, rules of grammar, etc. that child would never be able to learn. You experiment by doing trial an error – in learning languages and in designing better policy. We should create the space to have trial and error. In your education, build an analytical mindset which means using theory, using data and experimentation. That’s what an analytical framework is; there’s some theory, some use of data—either qualitative or quantitative—and then there’s some hypothesis building and experimenting.

The third thing that I would say is that while teaching, create some courses which encourage collaboration with practitioners. Engineering schools in the US are successful because they work with the industry. Folks like Tahir Andrabi , in his work in leading the School of Education at LUMS , demonstrates how important building in collaborations with practitioners such as those in the education department, and those running schools in the private and social sectors. You will not get the best of both worlds unless you introduce the students to the actual practitioners, be it politicians bureaucrats, , the private sector or NGO leaders, and allow them to do joint, collaborative work. Each discipline has a natural counterpart in the world of practice. You need to include that world of practice in the process of producing the work. For instance, if I’m sitting in a fan factory in Gujarat, I need to be able to tell the engineering department that these are the major issues so that not just me, but the university can carry out its research in a way that the private sector cannot benefit from and support. It will create a great deal of innovation. That’s how MIT or Harvard Applied Sciences operates, so we Pakistanis need to think about a collaboration between the world of practice and the world of the academia as part of our curriculum.