Rentier Capitalism

Disorganised Development and Social Injustice in Pakistan

S. Ahmed

• Publisher: Palgrave Macmillan
• Year: 2016
• ISBN:
  9781137554475
• Topic: Economics
• Subtopic: Development Economics
• Index: Economics

Since the early 1950s East Asia (China, Taiwan and South Korea) and South-East Asia (Indonesia, Malaysia, Thailand and Vietnam) have, despite war and other challenges, managed to transform the lives of their people, whereas South Asia (India, Pakistan, Bangladesh and Sri Lanka) has lagged behind. The success of East and South-East Asia has not been accidental – it has been driven by action to reduce rural poverty, by the provision of decent education and health services to the people, and by high quality physical and institutional infrastructure, such as roads, ports and railways, and targeted support from the State to develop particular industries. In contrast, Pakistan has never confronted the problem of rural poverty, nor invested in public services. This failure is a reflection of the power of the landed class and its urban allies. This has now taken the form of widespread rent-seeking in the economy with the country's ruling elite sharing out the spoils amongst themselves rather than taking measures to grow the size of the economy so that all might share in the resulting prosperity.

Rentier Capitalism sheds light on the reasons behind Pakistan's failure to bring prosperity to its people when compared to other East Asian and South-East Asian countries.

1
Development, Social Justice and the Limits of Public Policy

Historical background

Pakistan’s development experience of recent years can be best understood by briefly retracing events that followed in the immediate aftermath of the Second World War. In 1945, as the war ended, large parts of Europe lay in ruins, the task ahead was primarily one of reconstruction. However, the idea of development was already in the minds of the political leaders, civil servants and academics who began sketching out the post-war settlement at Bretton Woods in 1944. Hence the name International Bank for Reconstruction and Development (IBRD or the World Bank) was chosen for the institution that would seek to embody the collective will of the then global community. Its aim would be to benefit not only those areas of the world that had been devastated by the conflict but also those that had been characterized by their chronic backwardness. The idea of a global compact in which rich countries helped the poor in their quest for development was thus born, formalized with the creation of a series of regional economic commissions and extended through the 1960s with the United Nations Decade of Development that also made it morally incumbent on the rich countries to provide the equivalent of 0.7 per cent of their GDPs to the poor countries as Official Development Assistance (ODA).

It should be remembered that taking the world as a whole, the impact of the war had varied substantially. Africa (except Libya and Egypt), Australia and Latin America had seen little by way of military action. Even in Asia only Japan, during the war itself; China, from the time it had been invaded by Japan in 1937; and the Philippines had witnessed the kind of destruction that Europe had suffered during the war, whereas Burma, Thailand, Malaya, Indonesia and French Indo-China had been occupied by the Japanese. The South Asian subcontinent (India, Pakistan, Bangladesh and Sri Lanka) escaped the physical detritus that war brings, but it suffered from the war-related disruption in trade and investment between 1939 and 1945 and from the mobilization and subsequent demobilization of several million soldiers who had fought on the side of the allied powers. Indeed, all significant economic activity involving international trade and payments had been effectively suspended during these years, and virtually all public and private resources and agencies, even in noncombatant countries, had been adversely affected by the conflict not just in Asia but across the world.

It was consequently self-evident that, whether in Asia or elsewhere, restarting meaningful economic activity after 1945 was going to be a tall order. Moreover, this would have to take place against the gathering momentum of political development and independence from colonial rule. The South Asian subcontinent and the whole of South-East Asia, consisting of Thailand, Malaya, French Indo-China, the Philippines and Indonesia, had yet to emerge from colonial control in 1945 as, indeed, much of Africa. Latin America, nominally independent at that time, did not figure prominently in the popular imagination. The struggle for real political independence from colonial control was thus considered to be the foremost expression of a desire in these countries to be able to take decisions that would lead to an improvement in the living conditions of their people. It took precedence over everything else.

Second, as the struggle for political independence took primacy, the idea of economic development as an overarching strategic objective had yet to acquire a measure of concreteness or urgency. Economics itself was still grappling with pre-war issues related to the balance of payments and the trade cycle, and the theory of economic growth was in its infancy. Development economics, as we know it today, was also in its infancy. In India, for instance, most nationalist leaders in the 1920s and 1930s had spoken of improving literacy as the route to remove impoverishment; others had spoken of the need for self-sufficient villages; some saw industrialization as an essential prerequisite of progress; freedom from hunger was another post-colonial objective while nationalist movements generally alluded to a nebulous desire for their people to take their ‘rightful place’ in the community of nations. An overriding compulsion to attack poverty in society was largely absent from the political discourse in the colonies although the Colonial Act passed in the late 1930s had marked a shift in that direction. In fact, for a number of years after independence most nations took only somewhat inchoate steps towards economic development in its more modern sense. Nevertheless, there was fairly wide agreement that the State and central planning would be the harbingers of progress in the newly independent countries and a blind faith in market forces had been profoundly shaken by the events of the 1930s.

Against this background, rather strikingly, the South Asian subcontinent, though poor, was ahead by some distance in a number of vital areas even in the late 1940s compared to its counterparts in East and South-East Asia. With a population of around 350 million it amounted to a huge, essentially integrated, single entity connected up through one of the largest railway networks in the world. Some modern manufacturing, including steel industries, had been established and the Second World War had given a major boost. Agriculture, though not particularly efficient, that is, either in terms of per capita or per acre productivity, nonetheless could feed the majority of the population, provide important raw materials for industry, contribute to exports but, above all, provide a livelihood for roughly two-thirds of the population. There was, too, a competent administrative bureaucracy recruited through competitive examinations by the State, an embryonic merchant class and a nascent corporate sector. Underpinning all this or, more accurately, performing in tandem, a fledgling group of intellectuals produced by the country’s universities was participating in and, indeed, setting the terms of a vigorous debate on the core issues of economic progress, albeit mostly in a foreign language, English. Such auspicious conditions for initiating the process of development were not available everywhere in Asia.

In both India and Pakistan, the real big questions were those of the resource constraint and of priorities. Given the level of domestic savings, how was the development effort going to be financed?¹ In this a degree of wishful thinking could be discerned in both the Indian and Pakistani nationalist movements – as in many former colonies – as if the mere transition to independence would by itself release the required resources. Other pertinent questions were either not asked or, more generally, ignored: for instance, what should be the share of education and health in public spending vis-à-vis other sectors of the economy? When India and Pakistan separated in 1947, many of the advantages listed above for South Asia accrued disproportionately to India. What is now Pakistan began with a population of 33 million, inherited a useful part of the Indian railway system and an extensive irrigation network in the Punjab but little by way of industry or a modern corporate sector. The economy was overwhelmingly agricultural and backward. In fact, three out of the four provinces that currently constitute Pakistan were especially undeveloped even by the standards of undivided India.

Development and poverty alleviation

More than half a century later, the questions of the resource constraint and priorities, along with others, have become the core elements of a radical debate on development not only at the academic level in research institutes and universities but at the global level in the United Nations, the World Bank and in other forums. After a somewhat slow and hesitant start, the wider question of human development and of poverty has taken centre stage over the last two or three decades through the Human Development Index (UN HDI), the Millennium Development Goals (MDGs) and at a more anodyne level in the World Bank’s Poverty Reduction Strategy Papers (PRSPs). How the required resources are going to be raised fall under the rubric of another UN-led initiative called Financing for Development. But both these initiatives reflect an uneasy feeling that after relatively steady progress in the 1950s and 1960s in terms of GDP growth per capita (Gunnar Myrdal had incidentally alluded in 1968 to the intractable nature of South Asian poverty in his sem-inal work: Asian Drama: An Inquiry into the Poverty of Nations), the pace of improvement has visibly slackened from the 1990s onwards. Expectations that the private sector would deliver proved optimistic. For most reasonable observers, it has become self-evident that development and poverty alleviation are intertwined, and judging by the experience of the more successful developing countries no country can claim to have succeeded in the former without visible progress in the latter.

Over the last three decades or so, much of the visible success with respect to development has occurred in East and South-East Asia (and to a lesser extent in Latin America). South Asia, too, has made some progress but at a markedly slower pace and primarily in GDP growth per capita. Progress in the social sectors has been very poor. And as the pace of economic growth has decelerated since the beginning of the millennium in Pakistan, most social indicators have stopped improving in both Pakistan and India. In addition, everywhere in the world, including South Asia, there has been a marked increase in inequality over the last 15 years. Moreover, while the absolute numbers living in absolute poverty (i.e. on less than $1.20 a day) have declined, indicators relevant to the quality of life such as literacy, access to health care, maternal and child health and sanitation suggest that the record is one of acute disappointment if not of outright failure for the majority of the population in South Asia. The majority of the population remains acutely vulnerable to the vagaries of both the global economy and natural disasters.

In other words, the development effort of 1950–1980 appears to have run out of steam in South Asia. As such, it is now creating new social issues and is in urgent need of reappraisal and renewal. Even where it has had a temporary, positive impact in boosting jobs and incomes, as, for instance, in India in the first few years of the millennium, the poorest quintile of the population appears to have been bypassed.² In the 1960s, the ‘green revolution’ had boosted food production and rural incomes over the whole of South Asia and, more recently, India has had considerable success in its IT sector. Bangladesh has become the second biggest exporter of clothing in the world after China. But, impressive as these achievements are, a decisive breakthrough in reducing poverty and improving the quality of life for the poorest, that is, raising incomes and improving social outcomes has proved elusive. As a result, governments have either stopped talking about social issues or are content to leave it to GDP growth as the way of tackling poverty and its many consequences for society. As a result, social justice as an integral component of development and requiring concerted State intervention has been quietly pushed into the background or forgotten altogether. In Pakistan, everything ostensibly rests on boosting the GDP growth rate and hoping that ‘trickle down’ economics will take care of the poor.³³ The power of the elite in setting such an agenda for development is reflected in the fact that this has happened without serious debate in the media or, indeed, elsewhere.

Given that much of the developing world started with broadly the same initial conditions in the early 1950s (most developing countries had per capita incomes within a range of $150–$200 per capita) the question why some parts of the world have done significantly better than others in terms of outcomes is thus a fundamental part of the debate on development now, some 60 years or two generations later. Two major oil shocks in 1973/74 and 1979/80 were obviously major setbacks but some countries were able to absorb them far better than others and South Asia escaped the debt crises that afflicted Latin America. The questions that arise are: Is poorer performance of the last two decades merely down to poor policies and weak administrative ability or is it because the idea of development as a shared national endeavour has lost its appeal partly because progress has become so difficult on the poverty front? More particularly, why has social justice been abandoned in the development effort in Pakistan in all but name. This can be seen not just in the increase in inequality in the country so that there is now something resembling a system of quasi-apartheid in the country but in most social indicators, like maternal and child health, primary school enrolment and subsequent drop-out rates, access to clean drinking water and sanitation where Pakistan appears to be either making no progress or moving in the wrong direction. Such phenomena cannot be wished away with facile explanations or simply ignored by commentators on development but that is the case in Pakistan.

As mentioned earlier in the chapter, one part of the explanation lies in the revival of neoliberalism in the 1980s and 1990s. As a result, a degree of revisionism has crept into the debate on development and the revisionism comes from the way Economics is taught in universities across the world and the type of empirical research that is funded by think tanks. In the developed countries the ‘small state’ is now widely assumed to be more conducive to growth and even international organizations like the World Bank, IMF etc. have promoted such views in advice to the developing countries. Likewise, in countries like Pakistan the official rationale questions why development with its emphasis on social indicators should be given extra importance and why it should take precedence over a simple measure like GDP growth per capita in terms of policy attention? After all, it is GDP growth that generates the jobs and incomes that improve the lives of people. In this largely one-sided process the public sector, as a countervailing force, has been wound down and many public services outsourced, privatized or simply abandoned. There appears to be near-unanimity that it is GDP growth that will deliver the needed social sector improvements. If such a contention is justified where does it leave the State?

The examples of East and South-East Asia tell us that improvement in the social indicators is not an automatic outcome of getting prices right; it is a necessary element of inclusive development as GDP growth alone will not prove sustainable in the long run if its rewards are not widely and fairly shared. The private sector on its own cannot tackle rural and urban poverty and provide essential health services such as vaccinations and low-cost or free education for the poor. Moreover, the incidence of large-scale poverty in any society is not just unacceptable itself but from a pragmatic point of view is likely to undermine social cohesion and morale and make such a society far less stable and less productive over the long run. Hence, some form of State-directed deployment of public expenditure towards the poor is an essential policy goal and not an act of generosity on the part of the well-off. In Pakistan, the presumption is that this redistribution cannot be done via taxing the well-off but by out-sourcing as much of it as possible to NGOs and philanthropists. It is abundantly clear that such solutions would not only be mere drops in the ocean but beg a series of questions about how priorities are to be set. What will be the drivers of success and how would success itself be measured? Such questions are only parenthetically posed. In Pakistan, too, a combination of ideology and narrow self-interest have conspired to present neoliberal ideas as being value free social science. Countries are in pursuit of growth and efficiency; equity is therefore regarded as a luxury. At a fundamental level, such a belief system excuses the rich from any responsibility for what happens to the poor in the country. More specifically, to take one important example, tax avoidance can be justified on the grounds that the rich are not users of public services and governments often waste taxes although it still does not address the free rider issue.

Clearly the issues that have arisen over the last few years are the bread and butter of professional development economists, but, it must be admitted, development economics does not have all the answers. The answers can only be found by reference to a value system. The purpose of this chapter is to explain why inclusive development should be accepted as a critical goal for developing countries, why it must be firmly anchored by social justice and to understand why it has succeeded in some countries and failed in others. The issues that arise need to be tackled from two different perspectives and not from an exclusively development economist’s point of view. One, from a generic, common sense point of view in which some elementary political philosophy issues come in and, second, from the narrower standpoint of Pakistan’s experience in South Asia. The overall perspective is important as some voices have begun to ask why should not other indicators, such as general well-being, override conventional development indicators. Additionally, why should notions of social justice be the responsibility of the State at all? It should be conceded here that the more novel elements of the debate, for example, measures of happiness and well-being, are still in a nebulous state; hence, not much can be said about them for the time being.⁴ But other doubts need to be tackled and for this we need to turn to a mix of sociology, anthropology and history to help us understand the nature of the beast that is called economic and social ‘progress’ and to understand how GDP growth and social justice are ultimately two sides of the same coin.

As far as Pakistan is concerned, answers to the questions are of interest because of all the countries in South Asia its early experience with development was propitious. Although it was a country that was not very richly endowed with resources it became the recipient of significant external help for at least the first three decades after independence (in part an unintended consequence of the cold war and its security aberrations). Its subsequent failure to reach the ranks of middle-income countries, such as those of East and South-East Asia, needs to be candidly analysed and understood. Has it simply been crass political failure at the highest level or a case of massive corruption in government and society, poor and wayward decision-making and a failure of domestic governance, as many are plausibly prone to allege? Or, have other, more intractable and more sinister causes been responsible?

The State and the origins of social justice: A digression

Sociologists and historians tell us that of the countries that have sought to modernize and develop many have been held back not so much by a lack of resources but by the absence of an implicit social contract, the latter defined as the multitude of informal arrangements and unwritten rules on whose basis any society functions on a day-to-day basis. It is the extant implicit social contract which ultimately determines a society’s priorities and the manner in which the resources required for development may be raised and deployed. The concept of the social contract was the brainchild of the French philosopher Rousseau. His ideas of liberty, equality and fraternity not only inspired the French revolution but constituted the core of the challenge to the prevailing feudal system of political and social organization in the second half of the nineteenth century.

The social contract has its own system of incentives and penalties and society responds to them better than, say, to the grand-standing of individual political leaders or the changing priorities of the State which reflect the preferences of the ruling elite. With a working social contract resources can be deployed in a broadly agreed dispensation to further the aims of society. Sometimes State policies can upset or overturn the social contract, for instance, when a particular ethnic, social group or institution captures the lion’s share of resources in the country. At other times, countries have been able to progress rapidly as the social contract has been more in tune with the preferences of the elite and of society and the latter have responded positively to the incentives and penalties that the State has put in place. East and South-East Asia fall in the latter category. Pakistan probably falls in the former category. Just as analysts and observers seek to understand the drivers of success there is an equal, if not greater need, to understand how and why failure results (Landes 1998; Easterly 2001a).

Before getting to grips with the full gamut of issues in which development and social justice become conjoined as national objectives it may be worthwhile to ask what are their philosophical and conceptual underpinnings vis-à-vis the functions of State in a developing country? The State has been traditionally seen as an amalgam of institutions where bargaining between different groups and policy trade-offs are negotiated. In carrying out this role does the State also have to foster economic growth and development directly or can it restrict itself to being a passive, coordinating enabler? At one level, an argument propounded by the more extreme neoliberals in recent years is that other than providing a rule of law, ensuring the sanctity of private property rights and the enforceability of contracts the State, strictly speaking, should have no further responsibilities (Friedman 1980).

At the next level, this minimalist argument is extended by prag-matists to include the provision of public goods, protecti...

Table of contents

• Cover
• Title Page
• Copyright
• Contents
• List of Tables
• Preface
• Acknowledgements
• Introduction
• 1. Development, Social Justice and the Limits of Public Policy
• 2. Why Has Pakistan’s Economy Underperformed?
• 3. The Social Sectors in Pakistan: A Story of Neglect
• 4. The Cultural Setting: Patronage and Rent-Seeking
• 5. The Political Economy of Pakistan’s Development
• 6. Regional Economic Cooperation in South Asia and South-East Asia
• 7. The State, Private Enterprise and Development
• 8. Democracy and Development: Diagnosing Poor Governance
• 9. An Agenda for Pakistan’s Future
• Epilogue
• Appendix
• Notes
• Bibliography
• Index