‘Pakistan paradox’

Argentina is a country that is well known for its football talent and Maradona is a name that most of the people will relate to this country, however to me Argentina appears as a close cousin of Pakistan, which shares a lot many traits with it, but I hope their trajectories would be different.

Since gaining independence from Spain in 1816, Argentina has defaulted multiple times on its debt; has faced double-digit inflation rates—up to 5000% and have seen many significant currency devaluations.

Argentina’s economic history gave rise to the term “Argentine paradox” as the country once outpaced Canada and Australia in terms of per capita income during the first three decades of the 20th century.

Argentina was among the 10 richest states in terms of per capita wealth by 1913. All this fairy tale ended in 1930 and this rich nation spiralled into economic disaster and political instability when military junta took over the country ending democracy that was running for almost six decades.

Political instability has been the single most significant contributor to this collapse. Argentina was one of the most stable nations in terms of macroeconomics; but, following then, it became one of the most turbulent. Still, it took Argentina few decades to reach the economic lows that it has never seen before.

I am talking about Argentina because it is always better to learn from the history of others than to experience all the problems. Pakistan is also at a critical juncture currently with threat of default looming large on its horizon.

Before we discuss Pakistan any further let me talk about one of my favourite book “Why Nations Fail”. It explores the factors that contribute to a country’s success or failure and is a thought-provoking work. The book, written by Daron Acemoglu and James A. Robinson, makes a strong case for the idea that a country’s political and economic institutions are what ultimately determine its level of prosperity.

According to the authors, inclusive institutions are essential for promoting economic growth and long-term advancement. These inclusive institutions stand out for being transparent, giving everyone the same opportunity, defending property rights, and upholding an even playing field. In such systems, people are free to engage in economic activity, which promotes creativity, investment, and productive endeavours, resulting in total economic growth and wealth.

On the other hand, a country’s failure is mostly due to its extractive institutions. Extractive institutions stifle economic growth and maintain inequality by consolidating power and wealth in the hands of a select few. By taking resources from the majority and impeding the growth of a diversified and competitive economy, they serve the interests of a governing elite. Corruption, favouritism, and the repression of personal freedoms and rights are frequently attributes of extractive institutions.

Comparing two countries through the lens of institutions sheds more light on the role of inclusive and extractive institutions. We can appreciate how England became a global economic force due to inclusive institutions that promoted individual initiative, safeguarded property rights, and promoted a market-oriented economy. In contrast, look at the situation in Sierra Leone, where corrupt officials, extractive institutions, and a turbulent past have prevented economic growth and increased poverty.

Same comparison could be made between North and South Korea, two countries that share everything including history, geography and ethnicity and yet there are stark differences between them—North Korea characterized by extractive institutions and economic stagnation and South Korea by inclusive institutions and remarkable economic growth.

The current situation in Pakistan draws a lot more from the cases discussed in the book. Pakistan needs inclusive institutions to foster economic growth and prosperity.

Economic challenges in Pakistan have been exacerbated by long-standing problems with governance, corruption, and weak institutions. Extractive institutions that concentrate wealth and power in the hands of a select few have caused the nation’s growth and development to be uneven. These issues have taken many different forms, such as poor tax collection, restricted access to high-quality healthcare and education, and a lack of financial support for infrastructure and innovation.

Seeds of our economic woes were sown by the British who adopted policies that influenced the socioeconomic and political environment of the Indian subcontinent. A tiny elite class of local collaborators or “cronies” who benefitted from their connections to the colonial masters were the beneficiaries of these measures.

The landed aristocracy or powerful families who made up the colonial cronies frequently received advantages, access to resources, and positions of authority.

Unfortunately, after independence India was able to work on the land reforms and create a sizeable middle class, in Pakistan the colonial social inequality and hierarchies remained and thrived. It permitted the maintenance of political systems that frequently put the interests of the elite ahead of the needs of the masses. This elite class even after the departure of colonial masters retained its privileged positions and controlled an excessive amount of power and riches. Thus, Pakistan has seen a situation that is rightly described as “Elite Capture”.

This situation in Pakistan needs a hard reset and IMF programs alone or half-hearted efforts to create a semblance of equitable governance are not going to cut it. We need to attack at the heart of structural inequality.

Eliminating structural disparities in Pakistan demands an all-encompassing strategy that considers many facets of society, government, and the economy.

Pakistan ranks dismally low on the international index of institutional governance and transparency whereas to reduce structural inequities we must strengthen institutions. This involves advancing accountability, openness, and the rule of law. Reducing corruption, guaranteeing fair access to justice, and enhancing governance at all levels.

Despite of paying lip service to Islam we disregard its emphasis on education. As a nation we are investing about 2 percent of GDP on education as per World Bank data which is much less than India, even less than Ethiopia or Costa Rica or most of our neighbours. Whereas investing in high-quality educational and skill-building initiatives is crucial for lowering disparities.

It is important to increase access to education, especially for rural and marginalised groups. Initiatives for skill development and vocational training can increase job prospects and provide people more power.

Our disparities are huge, and inequality is touching extremes where minimum wage is sometimes equal to the price of a Pakistani branded lady’s suit or a nice meal in an upscale restaurant would cost more than an average family’s monthly budget.

In order to narrow income inequalities and redistribute wealth we need progressive taxation policies and social assistance programmes. Unfortunately, we have almost no social safety nets to protect disadvantaged population and help them escape poverty. The ones that we have are marred by earlier described malaise of corruption and lack of transparency. We do have income support programs but whenever these are put under a lens it is clear that massive abuse and corruption is still plaguing such initiatives.

We need to encourage entrepreneurship and economic diversity to boost employment growth and lessen dependency on certain industries.

This may be accomplished by offering incentives to small and medium-sized businesses, encouraging innovation, and establishing an atmosphere that supports company expansion. Unfortunately, our banking sector has learnt the easy way of investing in government debt to generate income and hence the mid to small size businesses are left with minimal credit availability.

We failed in agrarian reforms while India pushed these under Nehru, but without addressing land inequality there can be no fair allocation of resources.

Lists of these measures could go on and on and would burden the readers but it could be summarised in few words that we need to get rid of the extractive institutions if we need to get out of this trap of economic depression.

Let’s get back to Argentina to understand what lies ahead for us if we do not mend our ways.

To combat the spiralling inflation that has hit 30-year highs, the Central Bank of Argentina increased its benchmark interest rate to 97% on Monday 15th May.

While globally inflation is a problem, but Argentina is in unique trouble because the country’s annual inflation rate surged past 100% last month. The excessive inflation resulted in large outflows of investments held in the local currency, leading to a 23% decline in its value against the US dollar this year.

There is a very good saying that, “if you find yourself in a hole, stop digging”. We must understand we cannot get out of ditch doing the same thing that led us into it.

As a nation we are in a ditch, and it appears there is no bottom available to stop us from this free fall. We must learn our lessons sooner and start acting as a nation if we want a way out of this bottom-less pit otherwise there will be a new term developed in the books of economics; “Pakistan Paradox”.

Copyright Business Recorder, 2023