The role of political institutions was reduced to being the passive spectators of the market mechanisms. They were dependent on the market to finance their operations without having any significant say in how the market should function.
This resulted in the accumulation of wealth in hands of a small number of people at the top who could manipulate markets and political processes to their end. Inequality rose and more people were pushed out of the rewarding regime as the system got rigged because of a lack of an oversight body, in this case the political institutions.
The same streak of neo-liberal agenda was adopted in Pakistan during the time of Benazir Bhutto when the State Bank of Pakistan was made independent in line with the emerging consensus that central banks should be independent from political decision-making. Whether that helped Pakistan’s economy or not is a separate issue.
But what it actually did was that the neo-liberal revolution separated the role of politics and economy in the psyches of people who came of age in the time of its heyday when the so called “Chicago boys” would trot the globe and meet governments while telling them to implement their policies of shock doctrines.
The actual effects of shock doctrines are well-articulated by Naomi Klein, as in some cases they amounted to a violation of fundamental human rights.
However, the separation of politics and economy got more entrenched in the psyches of national and international elites as they saw the market to be the sole solution of all the market problems.
This is a fundamental deviation from the basic theory of economics. Markets do solve a lot of problems and free markets do need to be allowed for optimal resource allocation and the determination of value through the determination of prices. However, when markets are left unhinged, at one point or the other, they are bound to fail.
Market failure can be simply defined as a process where the market does not offer any solution to a problem that is creating inefficiencies in the market. For example, the problem of hoarding to jack up the prices of a certain good is an example of market failure. These days dollars are not freely available in the market with rumours going around that big fishes have hoarded the dollar. This is a classic example of a market failure where the consequences are being felt by the whole economy of more than 200 million people.
If left on her own, a market does not have any remedy to the problem of market failure. Market failures are corrected through the intervention of a state that is willing to correct market inefficiencies for benefit of the majority. This is the basic argument for having a strong state that understands the role of free markets but knows when to intervene to correct the market so that the interests of a majority of people who lie in the median or below the income group are protected.
In Pakistan, the failure of national elites to understand the importance of a working political system is hurting the economy beyond measure. The legitimacy of the ruling elite is important for the economy to get the right signals and work on its self-correction. When the market is getting signals that the political decision-making is in the hands of people who either lack legitimacy to rule or else they are representative of an extractive system, the whole market mechanism is turned on its head.
Separation of market from the state is fundamentally a separation of political process from the economy. Economy at an aggregate level is dependent on a process of decision-making which requires the power of a state to implement her decisions. The decisions of a state are by definition meant to help lives of hundreds of millions of people who lie at the lower rung of society.
If a state is not making decisions to help the majority and unprotected segments of a society, the logic of having a state in the first place is violated. The state then becomes an extractive one with no ethical argument left for its existence. The logical role of a state has always been to maintain order and to make sure that all of its citizens are ensured the basic dignity by virtue of being humans.
The separation of politics from economy is a misunderstanding of the whole process of decision-making that is necessary for the proper functioning of an economy. If the decision-making process is not optimal, economic outcomes will not be optimal. If economic outcomes are not optimal many of the people who are not part of the exclusive group that controls the state and its resources will be left out and in effect resentment will set in. That resentment will then find its way to radical ideologies and ideas which manifest themselves through the waning of national ethos.
In Pakistan, the failure of national elites to understand the importance of a working political system is hurting the economy beyond measure. The legitimacy of the ruling elite is important for the economy to get the right signals and work on its self-correction. When the market is getting signals that the political decision-making is in the hands of people who either lack legitimacy to rule or else they are representative of an extractive system, the whole market mechanism is turned on its head.
The market then starts a process of extraction through the unprotected segments who are too powerless to do anything. And those who are in power either lack the legitimacy or they are part of the fleecing group themselves. In effect, a race to the bottom is initiated in which everybody tries to grab a share of the pie and get out before it’s too late.
It is therefore highly important that legitimacy of the ruling group is established through free and fair elections. It is only the process of free and fair elections that can help the country in its current economic mess. Free and fair elections will ensure the continuation of the political process and give the state enough legitimacy to exercise power on behalf of the millions. In this way any market failure that is hurting the people will be corrected through the intervention of the state.
Politics is the soul process of the economy. If the political process is rigged, economy will also by extension become a rigged system. Rigged economy is a plaything for the established elites to ensure the longevity of their class-tyranny. A state must know when to intervene to ensure that the market is functioning for the benefit of all without creating any negative externalities which if left unchecked will become too big to handle for the state herself.