ARTICLE: The key to economic growth is definitely not free market capitalism; as they say, the proof of the pudding is in the eating - and we have been eating the neoliberal pudding for at least two decades and all we got from that is an unassailable external debt mountain and numerous doses of stomach cramps, more specifically unending financial crises.
The key to economic growth is apparently also not leftist economics. We have tried nationalisation in the past and even today do a lousy job of managing State-Owned Enterprises (SOEs). Whilst I am supportive of direct financial support to the very poor of society, the downside is that it does kill the will to do honest hard work. In any case, dolling out free money will not foster economic growth.
Over the years, I have been asked about the key steps necessary for economic growth in Pakistan. A few years ago I penned an article identifying the three steps to economic growth: monitoring trade, based on a mercantilist approach, eliminating the ability of tax collector to go back in history, and efficient resolution of land disputes in courts. I have also opined that education is necessary for economic growth, and we have done a miserable job of educating our masses; perhaps our real literacy rate, beyond spelling and writing your name, is around 20%.
But there is a difference between correlation and causation.
A correlation between variables does not automatically mean that the change in one variable is the cause of the change in the values of the other variable. Causation indicates that one event is the result of the occurrence of the other event; i.e., there is a causal relationship between the two events. This is also referred to as cause and effect - from the net.
For instance, the literacy rate may be down because the economy has not grown, rather than vice versa - as you get wealthier you want better education for your children. GDP grew because the State nudged the populace, foolishly in my opinion, towards consumption - but in this case, excessive consumption did cause a trade deficit and huge external debt. Perhaps correlation rather than causation explains most, if not all, factors being currently debated to explain economic distress in Pakistan.
However, in the current state of affairs, when we seem to have thrown the rule of law in the dustbin and might is right is the preeminent principle for determining fundamental rights in the country, the cloudiness starts to dissipate. Admittedly, this may seem harsh to most, albeit whilst we may hypocritically denounce what is happening with the African-Americans in the good old US of A, what the powerful do with the ruled in this country is not much better.
"There's a storm coming, Mr Wayne. You and your friends better batten down the hatches, because when it hits, you're all gonna wonder how you ever thought you could live so large and leave so little for the rest of us."- The Dark Knight Rises.
The key, in my opinion lies in the above quote - leave so little for the rest of us - how can there be economic growth when the resources and wealth are hogged, confiscated, or simply taken by the powerful few.
We may have become groupies for free market capitalism but we seem to have not taken the time to really understand what exactly it entails. The two critical factors on which economic growth is entirely dependent upon in a free market capitalist economy are the adherence of Rule of Law and protection of property rights and contractual rights. Rather than reinventing the wheel to explain what this means, it would be more appropriate to reproduce an abridged extract from the website of Lumen Learning, which, albeit lengthy, is pretty well articulated:
Laws must be clear, public, fair, enforced, and equally applicable to all members of society. Property rights are the rights of individuals and firms to own property and use it as they see fit. If you have $100, you have the right to use that money, whether you spend it, lend it, or keep it in a jar. It is your property. The definition of property includes physical property as well as the right to your training and experience, especially since your training is what determines your livelihood. The use of this property includes the right to enter into contracts with other parties with your property. Individuals or firms must own the property to enter into a contract.
Contractual rights, then, are based on property rights and they allow individuals to enter into agreements with others regarding the use of their property providing recourse through the legal system in the event of non-compliance. One example is the employment agreement: a skilled surgeon operates on an ill person and expects to get paid. Failure to pay would constitute a theft of property by the patient; that property being the services provided by the surgeon. In a society with strong property rights and contractual rights, the terms of the patient-surgeon contract will be fulfilled, because the surgeon would have recourse through the court system to extract payment from that individual. Without a legal system that enforces contracts, people would not be likely to enter into contracts for current or future services because of the risk of non-payment. This would make it difficult to transact business and would slow economic growth.
The operative sentence above being - Laws that are clear, public, fair, enforced and equally applicable to all members of society - we fail on the very first go and still claim we are a free market economy. We are anything but!
As always, the allowed column space stands exhausted, and hence the quest to find the key for economic growth in Pakistan will continue next week. I however recommend to my millions of followers (I can dream can't I) to keep the above extracts in the forefront when they read and enjoy (still dreaming) the coming week's write up. In Shaa Allah.
Do send me feedback if anyone has a view on what for economic growth in Pakistan is the key!
(The writer is a chartered accountant based in Islamabad. Email: syed.bakhtiyarkazmi@gmail.com. The views expressed in this article are personal. The views are not necessarily those of the newspaper)