-------------------------------------------------------------------------------PAKISTAN---THE ECONOMY OF AN ELITIST STATE DR. ISHRAT HUSAIN The author is a Director at the World Bank.
The views expressed in this article are his personal views and do not represent those of the World Bank, its management or the Executive Directors.
-------------------------------------------------------------------------------The state and the market: Mere instruments of wealth accumulation and concentration for a tiny elite DYNAMICS OF THE ELITIST MODEL IN PAKISTAN The political economy of Pakistan can be adequately unraveled by understanding the dynamics of the elitist model of growth within which, in the considered opinion of this writer, the whole politico-economic processes unfold. We seek to explain as to why the elitist growth model was successful in Pakistan and what can possibly be done to weaken the grip of the elites and thus change this past pattern of growth. This scholastic exercise has been carried out in the earnest hope of bringing about a fundamental change in the lives of the ordinary people of Pakistan. These observations are thus rooted in the literature on the political economy of developing countries. How does one know that an elitist growth model is in fact being pursued? Although there are no direct indicators or precise quantifiable parameters, a number of characteristics can be identified that make this type of model work in practice. The essential ingredients are: (a) a strong leader or succession of leaders who enjoy almost regal powers and implement their own agenda with few or almost no checks and balances; (b) a powerful bureaucratic class that implements the wishes of the leader without questioning their legality or relating them to the larger public interest and in the process arrogates to itself the task of defining the goals of the State, which are made to coincide with its own; and (c) a dormant and subservient population that is passive and indifferent to the actions of the leaders and bureaucracy. For almost half of its fifty years Pakistan was governed by strong military leaders and for the other half by strong civilian leaders who unwittingly adopted the same military leaders as their role model. Although the Eighth Amendment introduced checks on the powers of the Prime Minister in actual practice this had little
effect. The elected governments were dismissed four times between 1988 and 1996 on charges of corruption and excesses. The bureaucratic class was a powerful ally of the strong leaders until 1973 and played a major role in advising and implementing the agenda for their political masters. After 1973, when they lost their security of tenure the nature of the alliance shifted to that of a docile, subservient, and unquestioning group of functionaries who diligently carried out the orders of the politicians---right or wrong. Until recently freedom of expression, freedom of association and freedom of the Press were severely curtailed. The majority of the population was uneducated and illiterate and used to a tradition of a paternalistic way of governance inherited from the colonial period and cemented by the subsequent autocratic rulers. Agitations against the government were seldom triggered by economic issues. This combination of strong autocratic leaders, a pliant bureaucracy, and a subservient population made it possible for the benefits of growth to be unequally distributed and concentrated. The relationship between economic growth and income inequality in developing countries has been the subject of numerous empirical investigations as well as speculative discourses. The inverted U curve discovered by Sim Kuznets, based on the cross-sectional study of a sample of developing and developed countries, has remained the predominant strand of thinking on this subject. The literature on 'redistribution with growth' which appeared in the mid-1970s confirmed the tendency for the benefits of growth to be concentrated in the early stages and to spread only slowly. Those developing countries which have taken positive action such as improvements in modern sector employment through education and the rapid growth of demand for labour or redistribution of land and, redirection of public investments have witnessed the poor sharing equitably in income growth. In the case of Pakistan and a number of other countries the poor have been prevented from sharing equitably in the general increase in output by a number of specific disabilities that can be summed up as lack of physical and human capital and lack of access. In the political economy of growth in Pakistan, as narrow minority of influential elites drawn from the landlords, political parties, the military civil servants, big business and the professional class dominated the scene throughout the past five decades and maximized their rent-collecting activities. As demonstrated earlier this was the main stumbling block in securing access to public services by the poor and their acquisition of physical and human
PRODUCTIVE SECTORS The distribution of land--the most important asset in the first two decades of the country's history--was highly skewed, with large landholdings and jagirs concentrated in the hands of a few thousand families. These land titles were not earned; they were conferred on the beneficiaries by the British for the loyalty demonstrated by these classes in keeping the British Raj intact. This particular incentive, i.e, to acquire wealth not through hard work or productive means but by winning the favours of the ruling classes, formed the basis for the subsequent evolution of Pakistan's economy. In the 1950s, import licensing, overvalued exchange rates, and subsidized capital made available by a succession of politically unstable but bureaucratically entrenched governments provided ample opportunities for a small class of robber barons to enrich themselves and their families. Although they laid the foundation for industrial growth in Pakistan, the efficiency and equity dimensions of this growth were never seriously considered. The Ayub decade of reforms, with its overt emphasis on 'liberalization', was anything but 'liberal'. Under high rates of effective protection, working in almost monopolistic or oligopolistic market structures with interlocking interests in financial and banking houses, a few hundred industrial families were able to capture enormous gains from the industrialization policy. While the social benefits, i.e., value added at world prices, were insignificant, or in any cases negative, the private benefits, i.e., value added at distorted market prices, were exceptionally high. Several empirical studies of the industrialization of Pakistan by Lewis, Amjad, Whitehead, and Islam, and research articles in the Pakistan Development Review have sufficiently documented the concentration of economic assets resulting from the economic policies pursued in the 1960s. The Green Revolution of the late 1960s and the 1970s did make a significant difference in rasing the overall level of wheat and rice production and the productivity of land in Pakistan, but the nature of the technology favoured the irrigated areas rather that rainfed areas. As irrigated land in Pakistan is more unequally distributed--owned or operated mostly by large landholders--while the poor subsist on the rainfed areas, the differential impact of this new technological breakthrough further accentuated the income disparities. Reinforcing this tendency were two other public policy-induced
development. First, private tubewells to tap sweet ground water reservoirs were encouraged and subsidized, and second, generous amounts of subsidized credit by the Agricultural Development Bank were granted to large farmers to purchase tractors and other mechanized equipment. The expansion in the number of owneroperated farms was paralleled by a decline in the demand for hired labour in the rain-fed areas. The consequent migration of rural labour from the barani areas to the urban areas created further pressures on the environmental and general conditions under which the poor lived. The revolt against the pro-rich economic policies of Ayub Khan that culminated in the separation of East Pakistan brought into power the populist regime of Zulfikar Ali Bhutto. It was felt that the past trend of economic concentration would be reversed under this type of political regime and a more egalitarian economic order would be established. The nationalization of large-scale industries, banks and financial institutions, and agro-processing industries were considered the key element of this strategy. But the record of the 1970s shows that the country not only slipped badly in maintaining this high economic growth performance, but that the income distribution effects were equally disastrous. Instead of expanding investment for productive purposes, large private businesses resorted to speculation, trading, and obtaining contracts from the state-run corporations. While these corporations suffered financial losses which were financed by the exchequer, the business classes prospered by co-opting the managers of the corporations to their side. Although a number of exogenous shocks make it difficult to disentangle the harmful effects of the policies pursued during this period, the migration of millions of workers to the Middle East after the oil price boom and their remittance did act as a safety valve to what would otherwise have been a period of high unemployment, high inflation, stagnant output, and worsening income distribution. The reversal of the Bhutto policies in the 1980s and early 1990s brought an end to the uncertainty, but by then a new source of rent-seeking had been discovered by the elites. As pointed out earlier, the nationalized commercial banks and the development finance institutions suddenly became major conduits of industrial capital flows. The loans sanctioned by these financial institutions not only allowed the equity portion of the sponsors to be paid off through overinvoicing of machinery and equipment but the loan applications were never subjected to rigorous appraisal to establish the financial viability of the underlying project. The mushrooming of spinning units that produced low value-added yarn brought enormous grief to export expansion efforts. Unlike other Asian countries, the higher value-added,
labour-intensive garment and other ancillary industries never took off, making Pakistan's policy makers hostage to the powerful lobby of spinners and making the country highly vulnerable to fluctuations in the external cotton yarn market. By forgoing an excellent opportunity for expanding employment and incomes in the textile sector, the country once again fell prey to the machinations of a small group of industrialists who earned their profits by processing domestically produced cotton procured at subsidized prices, i.e., below international market prices, and selling yarn at world prices. Not only did the country get stuck in a low-level export equilibrium, but the financial institutions themselves accumulated a large portfolio of non-performing assets. The non--servicing of these loans has created a serious problem for the health of the financial system, the pricing of new credit, and the access to credit by newcomers. The concentration of written-off or non-accruing credit in the hands of a few thousand individuals and firms exacerbated the inequality trend.
FISCAL POLICY While the main productive sectors of the economy-agriculture and manufacturing promoted a pattern of growth that benefited a small minority of the population disproportionately, the contribution of this class to the tax-generating capacity of the country was almost negligible. In many developing countries, taxation has been used judiciously to finance the priority investment needs of the country and as an instrument for promoting equity. In Pakistan, unfortunately, taxation has not only been inadequate in relation to the needs but has also been regressive. The tax-GDP ratio of 14-15 per cent is the lowest among countries of identical income levels. More importantly, it is derived largely from indirect taxes, customs duties, excise taxes, and sales tax whose incidence falls proportionately on all income classes. Direct taxes account for 2-3 per cent of GDP and the coverage extends to only one million people. Most income tax payers are salaried or wage-earning employees, importers, contractors, or other whose taxes can be withheld at source. The autonomous taxpayers, i.e., those whose incomes are assessed by the tax authorities outside the withholding tax system, account for a very small fraction of the total income tax collected. Tax evasion, exclusion from the tax net, and collusion with the tax collectors have given rise to a nouveau riche class of tax officials and businessmen who have made millions at the expense of the State. This tacit arrangement between a small class of tax evaders and unscrupulous tax officials has reinforced the widening gulf between those at the top and the bottom of the ladder. The successive 'whitening'
of black money or tax evaded money and its round tripping through foreign exchange bearer certificates has not made it any easier to promote the culture of tax payment in the country. Another set of fiscal policy instruments that was used throughout the fifty years was an excessive use of selective tax incentives, discretionary exemptions from customs duties and income tax credits, etc. These concessions deprive the State of income that is transferred to the firm or the entrepreneur who makes the investment. The source of the investment was at least partly money that belonged to the government in the form of tax payments, but the income produced by that entire investment belonged to the investing firm or the entrepreneur. The firm did not care if the investment yielded positive economic returns as long as it got good returns on that portion that was its own capital. If part of the investment capital was borrowed from a government-owned financial institution, the expected financial return was even lower. The history of sick industries in Pakistan is replete with several thousand episodes of industrial firms borrowing heavily from government-owned financial institutions, receiving generous tax holidays and exemptions from customs duties, etc. overinvoicing the value of imported machinery, making a fast buck in the process, and abandoning the plant. The economy ended up with inefficient allocation of scarce capital, but the individual firm or entrepreneurs made substantial financial gain at the expense of the State. This modus operandi has resulted in Rs 135 billion of non-performing assets in the hands of financial institutions and more than Rs. 60 billion of tax income frogone annually. The beneficiaries of these transfers are no more than one thousand individuals and firms. A small portion of this Rs 60 billion would suffice to provide basic social services to the poor. The public expenditures, on the other hand, do not show any explicit bias towards the poor. Defence expenditure and debt servicing pre-empt a very significant proportion of the budget leaving very little for redistribution purposes. Subsidies on fertilizers and other agricultural inputs accrue mainly to the large operators or inefficient firms. The wheat subsidy benefits mostly the flour-mill owners. The implicit and explicit losses of state-owned corporations and enterprises such as the railways, steel mills, cotton and rice trading, heavy machinery, and WAPDA have put serious constraints on the manoeuverablity of the government in redirecting public expenditures. Even assuming that there was a benign and willing government that was prepared to invest in pro-poor programmes, it is not obvious that the administrative machinery, given the way in which it is organized and which has traditionally been beholden to the powerful interests, would be capable of reaching the intended beneficiaries.
The fiscal policy, normally a powerful tool aimed at improving equity, has ended up being an instrument for private wealth accumulation at the expense of large segments of the population. As productive sectors and fiscal policy have failed to spawn equalizing tendencies, the burden for improvement falls on the human resource development strategies. But it has been widely documented that the indicators of human development in Pakistan are among the worst in the developing countries. The reasons for this outcome are not surprising.
HUMAN DEVELOPMENT The educational system has been torn between the religious madrassahs and the modern school system. A large majority of children, particularly in the rural areas, attend the madarssahs where they are taught the Koran and Islamic precepts. A minority ends up in the modern school system, which is again subdivide into English medium and Urdu medium schools. As the official working language of the country is still English, this initial choice of schooling bears heavily on subsequent status and achievements in life. Those coming from well-to-do and affluent families invariably go to the English medium schools which are run privately and charge exorbitant fees. Children from poor families either do not attend school or, if they do, their place is the poorly-run government schools where Urdu is the medium of instruction. The quality of education is poor in such schools because the appointment of teachers and school administrators is based on political connections, influence, or money. A recent study found that threefourths of the teachers could not pass the tests administered to their students. The output from such schools is ill-equipped to meet the demands of modern life and is relegated to the ranks of the unemployed, or becomes petty clerks, messengers, or go into similar jobs. Those educated at the best private institutions in the country, such as the Karachi Grammar School or Lahore Aitchison college, go on to the Ivy League institutions in the US or Oxbridge in England and often come back to largely occupy the top professional jobs in the country or inherit political offices occupied by their families. So, unlike other progressive countries where education has promoted access and equality of opportunity across income classes, the education system in Pakistan has in fact strengthened and reinforced segmentation, perpetuated existing divisions among income and social classes, and allowed the benefits of education to be captured by the scions of the already rich. Access to nutrition and health facilities is also highly differentiated and parallels the story of educational
facilities. The government -run hospitals, clinics, and dispensaries are in terrible shape, devoid of basic drugs and equipment. The doctors manning these facilities use these public institutions to further their own personal practices-as patients are encouraged to visit them at their private clinics. The drugs supplied by the government for free distribution among patients are sold in the market to earn private profits, while poor patients have to fend for themselves. The private clinics and hospitals, on the other hand, are well run and maintained and boast of all state-of-the-art equipment, but their fees and charges make them an exclusive domain of the upper income classes. ORIENTATION OF INSTITUTIONS The interaction between the initial unequal asset distribution and public postures in agriculture, industry education and health further widened the gulf between the top one per cent and the rest of the population. The technological bias of the Green Revolution, the regressive taxation and public expenditure pattern, and the anti-poor nature of the human resource accumulation strategy in Pakistan have all worked in the same direction. The institutional infrastructure was deliberately weakened so that it is no longer capable of delivering services to the poor . The legal, judicial and contract enforcement mechanisms are so painfully slow that it is almost impossible to obtain any meaningful or timely redress from the infractions committed by state functionaries or members of the elite class. Underlying the success of the elitist model in Pakistan was the use of power over political resources to acquire power over economic resources. This power was gained either through direct appropriation of state assets or, indirectly, by misappropriating or avoiding paying what was owed to the State. The elite thus had a vested interest in opposing new market liberalizations that might threaten its privileges. On paper, there have been many attempts to liberalize the economy-right from the days of Ayub Khan. But the system in practice has never worked as it is supposed to. The services of middle and lower levels in the bureaucracy, or agents of the ministers or other influential higher-ups, are always needed if delays, complexities, obfuscations , overlapping jurisdictions, and endless requests for more information are to be avoided. Even if some well-meaning top officials are committed to bringing about reforms and liberalizing the economy, the administrative machinery down the hierarchy is so cumbersome and anachronistic that policy intentions are seldom translated into action. As if the fiscal monetary, and trade policies were not stifling enough, politicians, bureaucrats and military rulers enact a myriad of laws and regulations, rules, decrees, and statutory
orders that affect almost every single aspect of running a business. The interpretation of these rules and laws is the exclusive domain of the enforcers,while the appeal and litigation processes are so slow, time consuming, and cumbersome that it makes sense to cut private deals with the enforcing agencies rather than challenge them.