Just seven years ago, in 2016, a book was published by one of the world’s largest investors that painted a surprisingly rosy picture of Pakistan’s economic trajectory. The author was Ruchir Sharma, and the book was The Rise and Fall of Nations.
Sharma said that since coming to power in 2012, Nawaz Sharif had put Pakistan back on the road to development. Inflation had declined to less than 3% and the government budget deficit had fallen from 8% to 5% of GDP, “well into the safe zone.” This “new burst of optimism” was inspired less by Sharif than “by the decline in violence and the infusion of Chinese money.”
China was investing heavily in Pakistan, to the extent of $46 billion, to build new roads, railways and power plants in the China Pakistan Economic Corridor (CPEC), a pivotal element of its global Belt and Road initiative (BRI). He noted that even if China spent less than half that amount in Pakistan, it would double the current rate of foreign investment.
At the same time, relations with long-time rival India were on the mend since Modi had reached out to Sharif. Then came the punchline: Sharif has pushed reform and “turned Pakistan into the world’s hottest stock market in 2013.”
Sharma acknowledged Pakistan’s mixed record of political stability and economic growth. Civilian and military rule alternated as the country’s fortunes fluctuated. Perennial tensions with India occasionally escalated into full scale wars.
Populist rulers such as Zulfikar Ali Bhutto in the early 1970s turned out to be demagogues who failed to deliver. Bhutto sought to redress inequality, placed caps on how much land private citizens could own, and engaged in a nationwide program of nationalisation which did not even spare private schools. Every major industrial and financial corporation was nationalised. The result was corruption, hyperinflation and a decline in the standard of living.
The country had a low rate of investment at just 12% of GDP. To grow, it would have to double or triple it. The underground economy accounted for more than a third of the above-ground economy, leading to a low tax base. In the labour force, the female participation rate was lower by more than 50%, just as it was in other Muslim countries such as Egypt, Iran and Saudi Arabia.
Sharma says the investment climate changed once terrorist incidents began to decline. After a horrible terrorist incident took the lives of students, teachers and guards at the army public school in Peshawar, the army stepped up its vigilance and counter terrorism measures. Since then, the army and the civilian government had coexisted nicely, with the former focusing on controlling the menace of terrorism and the civilian government managing the economy.
For all these reasons, Sharma declared Pakistan as one of the rising stars in the developing world.
Like a mirage, the euphoria vanished in just a couple of years. Knowingly or unknowingly, Sharif crossed an invisible red line and was removed from office. He stood accused of every crime under the sun, and was not only disqualified from office, but incarcerated.
Two years later, an upstart politician was installed in his place by the army. A former cricket star with no political experience, he promised a magical turnaround not only in the country’s economy, but also in its political culture. Not only would he rid the country of the corruption that had plagued its entire life, he would not borrow a dime from the IMF or the Gulf Arab states. He would turn the country into an economic wonderland which would not only attract foreign investment, it would reverse the migration of labour to the Gulf Arab states. Pakistan would become a land of moral virtues in the best Islamic traditions.
Of course, none of this happened. It could not have happened in just a few years, regardless of who was in power. Pakistan’s problems are structural and deep rooted. Sharma had made the mistake of doing what he had said in his book should not be done: making economic projections beyond five years. In Pakistan’s case, it’s hard to even trust projections that just go out a year.
If Sharma publishes a second edition of this book, he will probably acknowledge the errors in his assessment. The man he called a rising star, Nawaz Sharif, has been relegated to history, living indefinitely in exile in England. The man who succeeded him has turned out to be yet another populist demagogue in the Bhutto tradition.
A deeper analysis of Pakistan’s failures can be found in a book by Professors Daron Acemoglu and James A. Robinson. Published in 2012, Why Nations Fail has become the most widely cited book in development literature. Even though Pakistan is not once mentioned in the book, its theory of institutional failure fits Pakistan perfectly.
The two professors, academic heavyweights who teach at MIT and Chicago respectively, contend that countries fail when elites freely extract economic rents from everyone else because there is no check and balance on their power. In such cases, property rights are weak, there is no respect for rule of law and there is a large underground economy.
The population has no incentive to innovate and invest because their gains are seized by the state, which creates a vicious cycle.
Countries with “extractive” economic and political institutions remain poor, while those with “inclusive” institutions lift their people out of poverty. Inclusive institutions have representative legislatures, good public schools, open markets and respect for intellectual property. These countries invest in infrastructure, educate their populations, and fight poverty and disease. Their open intellectual environment encourages innovations and attracts foreign capital.
The authors discuss the case of North and South Korea, which were united 80 years ago. After a civil war, the two split. The North went the way of communism while the South embraced markets and eventually democracy.
In sub-Saharan Africa, Congo ranks at the bottom while Botswana ranks at the top. Congo suffered because it was in the grip of a self-centred, exploitative dictatorship. Botswana focused on developing inclusive institutions, held regular elections, enforced property rights and never experienced a civil war. People were happy because the governing elite voluntarily valued the public interest over private greed.
In the US, a century after the civil war, the south remains relatively poor compared to the north because the institutions in the north were inclusive while those in the south were exploitative, with slavery being its most dominant manifestation.
Sadly, the book does not discuss why some countries develop inclusive institutions and succeed while others that don’t. Is it a stroke of good luck, a fortuitous occurrence, and a random phenomenon or is it because they were somehow blessed with open-minded, inclusive leadership?
Institutional success is not an inherited trait. The same country can turn around. India’s economy turned around in 1991. Decades later, Bangladesh’s economy shot ahead of Pakistan’s and may one day outstrip India’s in terms of the growth rate of GDP. How did these two economies discover the secret of success? Will Pakistan ever develop them?
The argument that institutions matter does come across as tautological and circular at times. It’s like saying some countries succeeded because they were smart enough to create strong institutions. In other words, they succeed because they succeeded.
In countries such as Pakistan, why would the elite voluntarily give up their franchise? Why would the landlords divide their estates? Why would the multi-millionaires start paying taxes? Why would the army let go of the commanding heights of the economy?
This is where Sharma’s book, despite its inability to prognosticate Pakistan’s future, provides some useful insights. It discusses ten factors that distinguish success from failure. One of them is demographics. He says countries with falling birth rates will fail, which is certainly true for developed economies such as Japan. But the obverse is not true.
Having a large population can sometimes stymie economic growth. Having 6.7 persons in the household, as is the case in Pakistan, puts a lot of strain on the household budget. For a given level of GDP, the higher the population, the lower its per capita income.
His contention that controlling the rate of inflation – which he measures metaphorically as the price of onions – is more important than corruption is correct. Corruption by itself does not distinguish successful economies from failed economies.
His assertion that manufacturing matters is correct. For many countries, such as Bangladesh, not only does it create more jobs, it also creates more exports. IT is important but it does not promote job growth. In India, it only accounts for one% of the labor force.
His assertion that inequalities in wealth lead to populist demagoguery is also correct. This phenomenon is being observed these days throughout the globe, not just in developing countries.
Pakistan remains a very difficult country to analyse. There is no consensus among historians about its past. As someone noted, every time it has come to a fork in the road, it has taken the wrong turn.
It’s difficult to place much confidence in projections about its future.
Sharma said that since coming to power in 2012, Nawaz Sharif had put Pakistan back on the road to development. Inflation had declined to less than 3% and the government budget deficit had fallen from 8% to 5% of GDP, “well into the safe zone.” This “new burst of optimism” was inspired less by Sharif than “by the decline in violence and the infusion of Chinese money.”
China was investing heavily in Pakistan, to the extent of $46 billion, to build new roads, railways and power plants in the China Pakistan Economic Corridor (CPEC), a pivotal element of its global Belt and Road initiative (BRI). He noted that even if China spent less than half that amount in Pakistan, it would double the current rate of foreign investment.
At the same time, relations with long-time rival India were on the mend since Modi had reached out to Sharif. Then came the punchline: Sharif has pushed reform and “turned Pakistan into the world’s hottest stock market in 2013.”
Sharma acknowledged Pakistan’s mixed record of political stability and economic growth. Civilian and military rule alternated as the country’s fortunes fluctuated. Perennial tensions with India occasionally escalated into full scale wars.
Populist rulers such as Zulfikar Ali Bhutto in the early 1970s turned out to be demagogues who failed to deliver. Bhutto sought to redress inequality, placed caps on how much land private citizens could own, and engaged in a nationwide program of nationalisation which did not even spare private schools. Every major industrial and financial corporation was nationalised. The result was corruption, hyperinflation and a decline in the standard of living.
The country had a low rate of investment at just 12% of GDP. To grow, it would have to double or triple it. The underground economy accounted for more than a third of the above-ground economy, leading to a low tax base. In the labour force, the female participation rate was lower by more than 50%, just as it was in other Muslim countries such as Egypt, Iran and Saudi Arabia.
Sharma says the investment climate changed once terrorist incidents began to decline. After a horrible terrorist incident took the lives of students, teachers and guards at the army public school in Peshawar, the army stepped up its vigilance and counter terrorism measures. Since then, the army and the civilian government had coexisted nicely, with the former focusing on controlling the menace of terrorism and the civilian government managing the economy.
For all these reasons, Sharma declared Pakistan as one of the rising stars in the developing world.
Like a mirage, the euphoria vanished in just a couple of years. Knowingly or unknowingly, Sharif crossed an invisible red line and was removed from office. He stood accused of every crime under the sun, and was not only disqualified from office, but incarcerated.
Two years later, an upstart politician was installed in his place by the army. A former cricket star with no political experience, he promised a magical turnaround not only in the country’s economy, but also in its political culture. Not only would he rid the country of the corruption that had plagued its entire life, he would not borrow a dime from the IMF or the Gulf Arab states. He would turn the country into an economic wonderland which would not only attract foreign investment, it would reverse the migration of labour to the Gulf Arab states. Pakistan would become a land of moral virtues in the best Islamic traditions.
Of course, none of this happened. It could not have happened in just a few years, regardless of who was in power. Pakistan’s problems are structural and deep rooted. Sharma had made the mistake of doing what he had said in his book should not be done: making economic projections beyond five years. In Pakistan’s case, it’s hard to even trust projections that just go out a year.
If Sharma publishes a second edition of this book, he will probably acknowledge the errors in his assessment. The man he called a rising star, Nawaz Sharif, has been relegated to history, living indefinitely in exile in England. The man who succeeded him has turned out to be yet another populist demagogue in the Bhutto tradition.
A deeper analysis of Pakistan’s failures can be found in a book by Professors Daron Acemoglu and James A. Robinson. Published in 2012, Why Nations Fail has become the most widely cited book in development literature. Even though Pakistan is not once mentioned in the book, its theory of institutional failure fits Pakistan perfectly.
The two professors, academic heavyweights who teach at MIT and Chicago respectively, contend that countries fail when elites freely extract economic rents from everyone else because there is no check and balance on their power. In such cases, property rights are weak, there is no respect for rule of law and there is a large underground economy.
The population has no incentive to innovate and invest because their gains are seized by the state, which creates a vicious cycle.
Countries with “extractive” economic and political institutions remain poor, while those with “inclusive” institutions lift their people out of poverty. Inclusive institutions have representative legislatures, good public schools, open markets and respect for intellectual property. These countries invest in infrastructure, educate their populations, and fight poverty and disease. Their open intellectual environment encourages innovations and attracts foreign capital.
The authors discuss the case of North and South Korea, which were united 80 years ago. After a civil war, the two split. The North went the way of communism while the South embraced markets and eventually democracy.
In sub-Saharan Africa, Congo ranks at the bottom while Botswana ranks at the top. Congo suffered because it was in the grip of a self-centred, exploitative dictatorship. Botswana focused on developing inclusive institutions, held regular elections, enforced property rights and never experienced a civil war. People were happy because the governing elite voluntarily valued the public interest over private greed.
In the US, a century after the civil war, the south remains relatively poor compared to the north because the institutions in the north were inclusive while those in the south were exploitative, with slavery being its most dominant manifestation.
Sadly, the book does not discuss why some countries develop inclusive institutions and succeed while others that don’t. Is it a stroke of good luck, a fortuitous occurrence, and a random phenomenon or is it because they were somehow blessed with open-minded, inclusive leadership?
Institutional success is not an inherited trait. The same country can turn around. India’s economy turned around in 1991. Decades later, Bangladesh’s economy shot ahead of Pakistan’s and may one day outstrip India’s in terms of the growth rate of GDP. How did these two economies discover the secret of success? Will Pakistan ever develop them?
The argument that institutions matter does come across as tautological and circular at times. It’s like saying some countries succeeded because they were smart enough to create strong institutions. In other words, they succeed because they succeeded.
In countries such as Pakistan, why would the elite voluntarily give up their franchise? Why would the landlords divide their estates? Why would the multi-millionaires start paying taxes? Why would the army let go of the commanding heights of the economy?
This is where Sharma’s book, despite its inability to prognosticate Pakistan’s future, provides some useful insights. It discusses ten factors that distinguish success from failure. One of them is demographics. He says countries with falling birth rates will fail, which is certainly true for developed economies such as Japan. But the obverse is not true.
Having a large population can sometimes stymie economic growth. Having 6.7 persons in the household, as is the case in Pakistan, puts a lot of strain on the household budget. For a given level of GDP, the higher the population, the lower its per capita income.
His contention that controlling the rate of inflation – which he measures metaphorically as the price of onions – is more important than corruption is correct. Corruption by itself does not distinguish successful economies from failed economies.
His assertion that manufacturing matters is correct. For many countries, such as Bangladesh, not only does it create more jobs, it also creates more exports. IT is important but it does not promote job growth. In India, it only accounts for one% of the labor force.
His assertion that inequalities in wealth lead to populist demagoguery is also correct. This phenomenon is being observed these days throughout the globe, not just in developing countries.
Pakistan remains a very difficult country to analyse. There is no consensus among historians about its past. As someone noted, every time it has come to a fork in the road, it has taken the wrong turn.
It’s difficult to place much confidence in projections about its future.