Name: Ali Afzal

Registration No. 04091713139

Semester: 8th – Development

Sequence of Paper:

 Q3(b)
 Q4
 Q1
 Q2
 Q5

Question 3 (b)

Answer:

Introduction: Critical Analysis of Book “Why Nations Fail?”

"The quality of institutions defines the fate of nations" quoted Acemoglu and Robinson – the
authors of Why Nations Fail?

 But this book completely rejects the notion that there might be any force other than
institutions which dominates the economic development of a country.

The book “Why Nations Fail?” is a genuine effort of Acemoglu and Robinson to dig deeper in
the causes of progress and development of countries through special focus on quality of
institutions. The basic thesis of the book is to investigate the institutions impact economic
development of a country.

It was in 18th century when French political philosopher Montesquieu studied that geographic
concentration of poverty and prosperity. He argued that people in tropical climates were
generally poor, disease-ridden and backward in social, economic and political development. The
case was opposite for the areas with colder climates.

Critical Evaluation of the Why Nations Fail?

This article argued that there was no simple or enduring connection between climate or
geography and economic success. However, The great Indus Valley civilization of Mohenjo
Daro and Harrpa in Pakistan are a best example of this proposition.

Given below are the arguments of the book and their critique:

1. According to Jeffrey Sachs, an American economist, the major problem of Why

Nations Fail is that it focuses too narrowly on domestic political institutions and ignores
other factors, such as technological progress and geopolitics.
2. It makes an argument that is appealingly simple: countries with “inclusive” (rather
than “extractive”) political and economic institutions are the ones that succeed and
survive over the long term. But imperative to note is
 that politics ultimately controls the quality of institutions. As the political regime
so will be the nature of institutions.
 Politics and institutions cannot be dealt with in isolation.
3. There are fifteen chapters in the book which provide detailed historical process for
politics and economic institutions of big nations and society.
 The book is lengthy. Too much narration and exemplification of events make the
book time taking.
4. The first and second chapter rebut the current theories in explaining poverty.
However, the institutional explanation of progress and growth of country is also
debatable on following grounds:
 Geographic factors influence the funds allocation. The Global Climate Risk Index
has placed Pakistan on the fifth spot on the list of countries most vulnerable to
climate change in its annual report for 2020, which was released by the think-tank
Germanwatch.
 Emviromental faalctor is also comepltely discarded. When funds will be diverted
to environment protection, the less will be left to invest on general public. Again,
this factor adversely affects income distribution in country.
 Geographic factors determine the working hours of a nation. That is due to the
temperature concerns. It is really hard for Pakistanis to work during day timing of
1 to 3pm. The reason is quite obvious- the temperature which reaches to 40-50°c.
5. The third chapter explain the main argument for the book. It says that institutions
are define the growth prospects of a country.
However, there are many other factors such as the religion, culture, traditions, and norms
which also influence the quality and nature of institutions.
6. Fourth chapter lay down the basic assumptions that small dissimilarities at
important juncture makes the process of institutional change less difficult.
However, it is imperative to note that countries progress over time. The small junctures
might not always lead to constant stagnation of countries. Pakistan for example
experienced several dictatorship regimes bit still the democracy prevails, although in a
weak form.
7. The fifth chapter explains the circumstances in which extractive institutions can
have economic development.
The writers completely undermine
8. Sixth, seventh and eight chapters show data for institutional change that happened
in several parts of the world and how institutional theory can explain the
phenomenon. But there is a issue with its several explanations, they are not correct:
 The book goes back in history to talk about economic growth during Roman
times. The problem with this is that before 800AD, the economy everywhere was
based on sustenance farming. So the fact that various Roman government
structures were more or less inclusive did not affect growth.
  The authors demonstrate an oddly simplistic world view when they attribute the
decline of Venice to a reduction in the inclusiveness of its institutions. The fact is,
Venice declined because competition came along. The change in the inclusiveness
of its institutions was more a response to that than the source of the problem.
Even if Venice had managed to preserve the inclusiveness of their institutions, it
would not have made up for their loss of the spice trade. When a book tries to use
one theory to explain everything, you get illogical examples like this.
9. Chapter nine shows examples that explain why in certain circumstances, inclusive
institutions change to become extractive institutions.
However:
 The authors believe that political “inclusiveness” must come first, before growth
is achievable. Yet, most examples of economic growth in the last 50 years—the
Asian miracles of Hong Kong, Korea, Taiwan, and Singapore—took place when
their political tended more toward exclusiveness.
10. Chapter ten, eleven and thirteen explains the circumstances that helps the diffusion
of inclusive institutions how institutions stay through the dynamics of virtuous and
vicious circles and how the theory can explain the current political situation to
understand why nations fail.
But this argument can be criticized on the ground of modernization theory:
 As the “modernization theory,” observes that sometimes a strong leader can make
the right choices to help a country grow, and then there is a good chance the
country will evolve to have more “inclusive” politics. Korea and Taiwan are
examples of where this has occurred.
11. Chapter fourteenth breaking the mold looks at three case studies – Botswana, The
South of America, and China, which all managed to move from, or negotiate their
way around (in the case of Botswana) extractive to inclusive political institutions
which encouraged economic development.
But the critique follows that:
 The book also overlooks the incredible period of growth and innovation in China
between 800 and 1400. During this 600-year period, China had the most dynamic
economy in the world and drove a huge amount of innovation, such as advanced
iron smelting and ship building. As several well-regarded authors have pointed
out, this had nothing to do with how “inclusive” China was, and everything to do
with geography, timing, and competition among empires.
 The authors have a problem with Modern China because the transition from Mao
Zedong to Deng Xiaoping didn’t involve a change to make political institutions
more inclusive. Yet, China, by most measures, has been a miracle of sustained
economic growth. I think almost everyone agrees that China needs to change its
politics to be more inclusive. But there are hundreds of millions of Chinese whose
lifestyle has been radically improved in recent years, who would probably
disagree that their growth was “extractive.” I am far more optimistic than the
authors that continued gradual change, without instability, will continue to move
China in the right direction.
  The incredible economic transition in China over the last three-plus decades
occurred because the leadership embraced capitalistic economics, including
private property, markets, and investing in infrastructure and education.
 This points to the most obvious theory about growth, which is that it is strongly
correlated with embracing capitalistic economics—independent of the political
system. When a country focuses on getting infrastructure built and education
improved, and it uses market pricing to determine how resources should be
allocated, then it moves towards growth. This test has a lot more clarity than the
one proposed by the authors, and seems to me fits the facts of what has happened
over time far better.
12. Chapter fifteen understanding prosperity and poverty predictive power of the
theory – which is limited given the role of agency and contingency in said theory.
But it can be argued that:
 The authors end with a huge attack on foreign aid, saying that most of the time,
less than 10% gets to the intended recipients. They cite Afghanistan as an
example, which is misleading since Afghanistan is a war zone and aid was
ramped up very quickly with war-related goals. There is little doubt this is the
least effective foreign aid, but it is hardly a fair example.

Conclusion:

As an endnote, the book is very comprehensive yet it is a human effort, therefore, it provides a
fair ground for criticism.
 Question 4

Answer

“A report entitled “Fragile States 2014: Domestic Revenue Mobilizations” produced by the
Organisation for Economic Cooperation and Development (OECD) in February 2014, says that
the major cause behind the country’s failure is a non-functional domestic revenue system — the
failing tax system.”

Tax Reforms Considering Political And Economic Institutions of Pakistan

Need for Tax:

 Tax is the cost of living in a civilized society that people have to pay for
economic development and planning.
 It is the realization of money in the country; tax levied by the government on
goods, firms, individuals, and societies.
 The federal tax in Pakistan is like any other tax systems in the world. Direct and
indirect taxes are classified into two broad categories. Direct taxes include
salaries, interest on securities, income from property, and income from the
business whereas indirect taxes include sales taxes.
 Unfortunately, only 5 per cent of people in Pakistan pay taxes directly. The
remaining 95 per cent either do not show their income or avoid paying by forming
a close relationship with a tax practitioner and senior officer. Tax collection is a
major economic challenge being faced by Pakistan.

Reasons for Poor Tax System of Pakistan: Extractive Political and Economic Institutions

There are many reasons behind the poor tax system such as;

 Poor management in tax offices

 Unprofessional behavior of tax officials
 Complex and ambiguous tax laws
 Lack of public awareness about the tax system
 Harassment by the tax administration
 And above all People’s hesitation when it comes to paying taxes.
 Lack of confidence in the state’s ability to handle taxpayers honestly and professionally
and to spend their money is perhaps the most important reason why Pakistanis refuse to
pay taxes.

Current Status of Tax System Reforms

 The number of non-taxpayers in Pakistan is also low because inflation is rising rapidly.
 On the other hand, more than 90 million people belong to the salaried class.
 In the current situation, Pakistan is facing a deficit of payments. The government says
financial aid from China, Qatar, Saudi Arabia, United Arab Emirates, and others were
used to pay off debts last year
 The government cries all the time that Pakistanis do not pay taxes to cover up their
incompetence while this is not the case at all. People are paying taxes but none of the
financial intellectuals are willing to look at the flow of taxes paid that where they are
going? What is the guarantee of tax on daily necessities like tea leaf, milk, sugar, flour,
pulses, meat, etc. that it is reaching the national treasury? It is based on the personal
character and integrity of millions of businessmen, industrialists, and relevant
government officials.
 Another example is the mobile phone service providers to whom millions of consumers
pay billions of rupees in monthly taxes. Are these billions of rupees accumulating in the
public treasury? Billions of rupees are being collected from millions of Pakistanis without
any discrimination in terms of sales tax. Whose job is it to deliver them to the national
treasury in a foolproof manner? In this regard, it is necessary to come up with a
mechanism to end the unrest in the hearts of the people.
 According to a survey by the Federal Board of Revenue (FBR), Karachi is the highest
tax-generating city. The tax collected from Karachi’s six major markets is higher than the
combined tax collected from Lahore, Rawalpindi, Islamabad, and Faisalabad’s largest
markets. Also, the FBR inspected the markets of Saddar, Tariq Road, Clifton, Golimar,
DHA, and Gulistan-e-Jauhar and found that they collectively pay taxes of Rs30.87
billion.
 In contrast, Lahore’s four major markets paid Rs567 million in taxes, including Anarkali,
Mall Road, Hafeez Center, and Liberty Market. Besides, Islamabad’s major markets paid
Rs1.93 billion in taxes. These markets include Supermarket, Blue Area, F-10 Center, and
Jinnah Super.
 So, if we take the taxpayers as a statistic and given that India has 6 times the population
of Pakistan, then Pakistan should have at least 6.2 million ITR filers, while at present
there are only 2.2 million. And there are millions of registered units or 35 pieces
(Professional Corporation) that are nil return filers. Pakistan is far behind in this regard.
 The next criterion that is important when looking at taxes as a trend is ‘avoidance’. India
spends $70 billion annually on its people while Pakistan spends $6 billion annually on the
people. In terms of size, Pakistan should spend $ 12 billion a year on its people.
Similarly, by comparing to developed countries, it can be seen that out of 330 million
people in the United States, 142.3 million are filers. Other developed countries, such as
China, the United Kingdom, and Canada, account for up to 80 per cent of income
taxpayers.
Recommendations in light of Political and Economic Institutions:
 The state must first provide the social contract, i.e., good law and order and security of
life.
 The system that protects only the rich must be dismantled.
 The system of state subsidies, licensing and regulation; special perks and privileges for
ministers and army and civil service employees and land distribution system needs to be
ameliorated.
 Accountable tax system must be introduced.
 Pakistan’s Federal Board of Revenue (FBR) needs an immediate reinvigoration as it
collects a mere 9% of Pakistan’s GDP — the lowest rates of tax collection by a federal
government in the world, excluding oil-producing countries.
 The government should tax the rich and launch programmes for broadening tax base.
 Broad-based, single-stage sales tax at a lower rate of 5% should replace the present 16%
complicated regime to give relief to low-income groups and boost business growth.
 The government should immediately withdraw all exemptions and immunities and pass
asset-seizure law to counter money laundering, tax evasion and rent-seeking.
 There are 130 million mobile users in the country, out of which one million pay hefty
bills. They must be compelled to file tax returns.
 Pakistan cannot become a democratic welfare State unless the rich and mighty are taxed
and billions spent on tax-free benefits of both active and retired Presidents, Governors,
Prime Ministers, Chief Ministers, Ministers, Advisers, Judges and high-raking Military-
Civil officers, are saved by giving them Composite Packages.
 Question 1

Answer:

Institutions of England and Prosperity in the Country

The history of ENGLAND is an interesting one when it comes to the evolution of institutions from their
extractive nature to the inclusive one. Before 17 th century, England suffered from the extractive
institutions. They were its norm throughout history and at times had been been able to generate
economic growth. But they did not permit innovation. Therefore, the progress could not be attained by
England, and that primarily due to

 the absence of new innovations

 political infighting generated by the desire to benefit from extraction, or
 the nascent inclusive elements were conclusively reversed.

Moreover, the conflict over institutions and the distribution of resources has been pervasive throughout
history. English history is also full of conflict between the monarchy and its subjects, between different
factions fighting for power, and between elites and citizens.

The major institutional initiatives that led to the prosperity of England are as follows:

1. Signing of the Magna Carta (“the Great Charter)

In 1215 the barons, the layer of the elite beneath the king, demanded the signing of the Magna
Carta. This document enacted some basic principles that were significant challenges to the authority
of the king:

 Most important, it established that the king had to consult with the barons in order to raise
taxes.
 The most contentious clause was number 61, which stated that “the barons shall choose any
twenty-five barons of the realm they wish, who with all their might are to observe, maintain and
cause to be observed the peace and liberties which we have granted and confirmed to them by
this our present charter.”
 Despite King John’s propaganda and mischievous efforts to involve Pope with him to revise the
Magna Carta, he failed to do so.
 Most important, it established that the king had to consult with the barons in order to raise
taxes.
 The most contentious clause was number 61, which stated that “the barons shall choose any
twenty-five barons of the realm they wish, who with all their might are to observe, maintain and
cause to be observed the peace and liberties which we have granted and confirmed to them by
this our present charter.”
 In essence, the barons created a council to make sure that the king implemented the charter,
and if he didn’t, these twenty-five barons had the right to seize castles, lands, and possessions
“… until, in their judgement, amends have been made.”
2. Parliament Making of England
 Conflict over political institutions continued, and t he power of the monarchy was further
constrained by the first elected Parliament in 1265.
 Despite consisting of elites, the English Parliament developed two distinguishing characteristics.
First, it represented not only elites closely allied to the king but also a broad set of interests,
including minor aristocrats involved in different walks of life, such as commerce and industry,
and later the "gentry," a new class of commercial and upwardly mobile farmer s. Thus the
Parliament empowered a quite broad section of society-especially by the standards of the time.
Second, and largely as a result of the first characteristic, many members of Parliament were
consistently op posed to the monarchy's attempts to increase its power and would become the
mainstay of those fighting against the monarchy in the English Civil War and then i n the
Glorious Revolution.
3. Limiting Powers of Church
 In 16th to 17th century, Henry VIII initiated the break with the Roman Catholic Church and
the “Dissolution of the Monasteries,” in which Henry expropriated all the Church lands.
 The removal of the power of the Church was part of making the state more centralized.
This centralization of state institutions meant that for the first time, inclusive political
institutions became possible. This process initiated by Henry VII and Henry VIII not only
centralized state institutions but also increased the demand for broader-based political
representation.
4. The Emergence of Glorious Revolution
The emergence of glorious revolution was last nail in the coffin – it revolutionize the political,
economic, and social institutions of England.
 Question 2

Answer

Glorious Revolution in light of Chapter 10: The Diffusion of Prosperity

The Glorious Revolution was primarily the replacement of the reigning king, James II, with the joint
monarchy of his protestant daughter Mary and her Dutch husband, William of Orange.

Causes

 After the accession of James II in 1685, his overt Roman Catholicism alienated the majority of
the population.
 In 1687 he issued a Declaration of Indulgence, suspending the penal laws against dissenters and
recusants.
 In April 1688, James II re issued the Declaration of Indulgence and ordered all clergymen to read
it in their churches.
 Archbishop of Canterbury, William Sancroft, and six other bishops were imprisoned when
protested its illegality. Later, at trial they were acquitted to the cheers of the London crowd.
 Mary, James's daughter by his first wife, Anne Hyde, was a Protestant, married to William, the
Protestant Prince of Orange.
 This couple, were to be James's successors on the throne.
 England's Protestant majority were satisfied about their future in the hands of William and
Mary.
 Unfortunatelly for them, on 10 June 1688, James Francis Edward was born.
 He was the son of James II and his second wife Mary Beatrice and was baptized into Roman
Catholic faith. This opened the possibility of a permanent Catholic dynasty. The protestants
were horrified..

Results

 On 30 June 1688, a group of seven Protestant nobles invited the Prince of Orange to come to
England with an army.
 William was willing to make the trip.

The Emergence of Revolution

 William arrived on 5 November 1688. As soon as he landed at Torbay in Devonshire, people

flocked to his support.
 Many Protestant officers, including Churchill, defected and joined William, as did James's own
daughter, Princess Anne.
 James lost his nerve and declined to attack the invading army, despite his army's numerical
superiority
 Later, he got away to France, where his wife, their newly-born son James and the generous
hospitality of the court of King Louis the Fourteenth awaited him.

The Consequences of Revolution

 A few weeks later Parliament decided that the throne was vacant in consequence of James's
flight.
 They voted that William and Mary of Orange should be proclaimed King and Queen but under
some conditions.
 These conditions were set out in a document called the Bill of Rights which was signed by
William and Mary in 1689.
 Bill of Rights Legislated: This document limits on the powers of the monarch and sets out the
rights of Parliament
 These new laws changed England from an absolute monarchy (where the monarch has power)
to a constitutional monarchy (where they have not much more than a ceremonial role).
 The British system of government has remained a constitutional monarchy ever since this time.
 Question5

Answer:

"The quality of institutions defines the fate of nations" quoted James Robinson and Daron
Acemoglu in their magnum opus Why Nations Fail?

The authors of “Why Nations Fail?” define extractive institutions as the institutions that remove
the majority of the population from participation in political or economic affairs . They also
affects the sustainability criterion of development of a country also.
“Pakistan suffers from institutional failure,” Dr. Ishrat Hussain quoted in his book “Pakistan's Institutions:
We Know They Matter, But How Can They Work Better?”

Certainly the extractive institutions are a great threat to Pakistan’s growth and development. Failed
institutions are unable to correct the problems faced by the society and eventually lead to economic
failure…If our leaders are sincere for change in Pakistan then they have to first get the institutions
working again. But do they know how or have the will to do it?

Justification and Evidence to Support the Claim that Extractive Institutions are Root-Cause of
Pakistan’s overall Problems:

Institutions determine attitudes, motivations and conditions for development. If institutions are elastic
and encourage people to avail economic opportunities and further to lead higher standard living and
inspire them to work hard, then economic development will occur.

The extractive institutions are root cause of all issues in Pakistan for following reasons:

1. Ineffective institutions complicate efforts to develop and implement effective public policies.
This means that Pakistan’s broader development challenges—which range from food, water,
and energy insecurity to widespread public health epidemics and millions of out-of-school
children—will remain unaddressed.
2. Dr. Ishrat Hussain in his book Governing the Ungovernable explains that extractive institutions
lead to the overall deteriorating conditions of masses; the cries of a few are heard only while a
major chunk of population suffers.
3. Additionally, Pakistan’s institutional shortcomings pave the way for the military as well as
problematic non-state actors—including charitable groups tied to militant organizations—to
step in and fill service delivery roles that civilian institutions are unwilling or unable to serve.
This dynamic not only further marginalizes civilian institutions—it also undermines the
institution of democracy. In short, Pakistan’s institutional failures have troubling economic,
development, and political implications for state and society.
4. The World Justice Project (WJP) measures rule of law performance in 128 countries and
jurisdictions across eight primary factors: Constraints on Government Powers, Absence of
Corruption, Open Government, Fundamental Rights, Order and Security, Regulatory
Enforcement, Civil Justice, and Criminal Justice. The Index is the world’s leading source for
 original, independent data on the rule of law. The WJP’s Rule of Law Index (RLI) 2020 reflects
that Pakistan secured 0.39 score and placed the country on 120th position in the world ranking.
5. Future generations suffer due to extractive institutions, and this is a potential threat to
sustainable development defined as - ‘development that meets the needs of the present
without compromising the ability of future generations to meet their own needs.
6. The extractive institutions benefit rich elite only. Therefore, a large section of society is deprived
of all the privileges and perks of state institutions at large.
7. The extractive institutions give birth to corruption. Same is evidenced from Pakistan’s poor
performance and higher score in corruption index. Pakistan has ranked 124 out of 180 countries
with a score of 31 on the 2020 Corruption Perceptions Index published by Transparency
International.
8. The poor and lower middle class section remains excluded from the fruits of growth.
Resultantly, poverty increases and overall conditions of people deteriorate.
9. Such institutions give birth to inequality in society
10. These institutions do not generate incentives
11. They in long run create dissent among the masses. The overall conditions of excluded class
become miserable in the long run
12. The present generations must be taken care generations
13. Only a narrow elite section flourishes.
14. Growth of all is growth-growth of few is not growth. It is as sample as it is.

Conclusion:

Today, the state of Pakistan’s institutions of governance remains poor, as illustrated by a slew of
measures.

 Pakistan ranks 154th on UN's Human Development Index

 In Governance Index, it ranks 120th out of 128 countries.

In a nutshell, the country is in a deep institutional crisis and direly needs institutional reforms.