Rich State, Poor State and the Fuss over Budgets

Rich State, Poor State and the Fuss over Budgets
States possess many resources, of which one is finance. Governments, by definition, have to manage the business of the state which, put simply, is managing the resources of the state. Clearly, some states have more resources than others and some do better than others in managing them. In either case, the idea is to make use of the resources for public welfare – for maximization of the larger good. Acemoglu and Robinson, in their magnum opus text Why Nations Fail argue that the wealth of a state is not determined by the amount of resources it has but rather by the quality of its institutions. Thomas Piketty in his Capital in the 21st Century argues that capital is wealth and regional inequalities that we see today are a manifestation of the differences in the level of wealth that resides within these regions.

If one comes to think about it, the two assertions basically point to differences in the four broad categories of resources; financial, technical, human and institutional. Some states are poor because of their lack of one or a few types of these resources: I call them type-A states. And others are poor despite having an abundance of these resources, i.e. type-B states). In certain cases, type-B states are poor even though they have some of these resources in abundance because they are not able to convert them into goods and services for their people. In short, they are not able to put the resources to profitable use to ensure that they are consumed to better the lives of the people. They are states that are poorly managed and badly governed. Something that provides cogence to what Acemoglu and Robinson espouse is the fact a type-B state which is rich in all resources except institutions would still remain underdeveloped because human, technical and financial resources that it possesses would require efficient institutions to be converted into productive assets that can improve lives and livelihoods. And a type-A state that is poor in all resources except institutions, would still be able to leverage the little amount of resources it has to provide some level of relief to its people.

Security staff attempt to intervene as government and opposition parliamentarians hurl copies of the budget at each other

Incidentally, there is a third type too. I call it, naturally, the type-C states! These operate in the low resource-bracket; have little capital and their institutions, as Acemoglu and Robinson call it, are extractive. That means that institutional governance is bad and labour productivity is low. Their conversion of resources into productive assets is slow and mistargeted. While states that have abundance of non-institutional resources can claim higher levels of economic growth during certain periods, they can never claim sustained and inclusive growth because their lack of efficiency and the capacity deficits of their institutions would never be able to take the benefits of such growth out of the hands of a privileged few to distribute it amongst the masses.

The type-C state would find it difficult to achieve any growth in the first place. But even if it does manage periods of high growth, thanks to external financing that often travels from the global north to south, it would never be able to sustain that growth and include the marginalized segments of the society.

With little pride one would have to admit that Pakistan lies somewhere between a type-B and a type-C state. Our institutions are bad enough to be categorized as type-C, however, other resources at our disposal are not as scant so as to categorize us as type-C. That is why, compared to the developing economies of the sub-Saharan Africa, we have had at least 20 years of high growth in our existence of 74 years.

With the above understanding, one begins to imagine why the developing world creates such a fuss about budgets. While a budget represents state capacity and indicates the current level of resources that the state is able to commit to provide certain types of goods and services to the people, it neither promises any expansion in the current level of resources nor does it provide any means by which the governance of the available resources should take place or be improved. It is merely a disclosure of the resource plan that the state has put up to distribute resources between various sectors that require them. As to how that plan would be executed and how the process losses will be minimized are factors that can determine whether resources are committed to development and if they can produce the sustainable and inclusive growth that the federal budget of 2021-22 promises to foster.

While budgets don’t tell the entire story and the fuss about them is needless, that in no way dispenses the need to formulate them. They provide a certain direction and that direction, if adjusted to the changing context of the economy and the needs of the people, is essential. Contrary to the political economy of budgeting and the populism that has come to be associated with it, political parties outdo each other by their claims of putting up people-friendly budgets. Budgets, without expanding the size of the pie and improving institutional governance, will achieve exactly as much as they achieved in Pakistan in the past. The relief that each budget will provide to the downtrodden and the marginalized will be, quite simply, non-existent!

The writer is an economist and ex-Director of the Burki Institute of Public Policy (BIPP). He tweets at @AsadAijaz