Why nations fail

Published Jan 10, 2013 08:04pm

SOME books should be made mandatory reading not just for Pakistan’s parliamentarians but its power elites.

Two relatively recent books deal with a theme I have touched upon extensively since I began writing this column two years ago — of how, without a stronger institutional framework and better “governance”, Pakistan’s economy will remain mired in stagnation.

Despite the fact that the pioneering work in the field of new institutional economics came from economists such as Mancur Olson and the Nobel laureate Douglass North over three decades ago, and has gradually become mainstream in the inquiry into the causes of the divergence in the economic well-being of countries with the work of later economists, the link between “institutions” and “economics” has received scant attention in Pakistan.

The development debate within the country has invariably focused on greater use of factor endowments, and the concomitant “big ticket” infrastructure projects, and only very incrementally has graduated to better use of these endowments, be it natural resources, capital or the population. In the latter, i.e. the improved productivity approach, lie the seeds of the institutional debate — what has prevented Pakistan from fully utilising its vast economic potential, while other economies with poorer factor endowments, and a much later start, have powered ahead?

While the title of this column suggests I will be covering Daron Acemoglu and James A. Robinson’s book of the same title that was released in 2012, and which deals with “the origins of power, prosperity and poverty”, I will actually be referring more to Niall Ferguson’s The Great Degeneration: How Institutions Decay and Economies Die.

Niall Ferguson’s book is based on the BBC Radio 4 Reith Lectures 2012 series, and despite its twist to the institutional view, should be more readable for parliamentarians than the academic work of Acemoglu and Robinson. The twist comes from the fact that Niall Ferguson is more interested in nations — today’s US in particular — that historically have had strong institutions which have led to unprecedented economic well-being, but which are now atrophying at the hands of a self-serving political class and system (and complex regulation brought on by big government).

In a sense this is the exact opposite of what Acemoglu et al are studying, which is why only some nations have developed strong “inclusive” institutions while most others are languishing with “extractive” ones that only benefit a small elite. Nonetheless, both the works converge pretty much at the same powerful point — that “good” institutions matter for widespread, and sustainable, prosperity.

A few illuminating extracts from Niall’s work follow. A passage on ‘The Stationary State’ from Adam Smith’s The Wealth of Nations:

“In a country too, where, though the rich or the owners of large capitals enjoy a good deal of security, the poor or the owners of small capitals enjoy scarce any, but are liable, under the pretence of justice, to be pillaged and plundered at any time by the inferior mandarins ... In every different branch, the oppression of the poor must establish the monopoly of the rich, who, by engrossing the whole trade to themselves, will be able to make very large profits.”

On the ‘Rule of Law’, Ferguson quotes from the late Lord Chief Justice Tom Bingham’s book of the same name, in which seven criteria have been specified by which a legal system can be assessed, namely:

— The law must be accessible and so far as possible intelligible, clear and predictable;

— Questions of legal right and liability should ordinarily be resolved by application of the law and not by the exercise of discretion;

— The laws of the land should apply equally to all;

— Ministers and public officers at all levels must exercise the powers conferred on them in good faith, fairly, for the purpose for which the powers were conferred, without exceeding the limits of such powers;

— The law must afford adequate protection of fundamental human rights;

— Means must be provided for resolving, without prohibitive cost or inordinate delay, bona fide civil disputes which the parties themselves are unable to resolve; and — Adjudicative procedures provided by the state should be fair.

Most importantly from our perspective, the rule of law for elites is considered the first of three “doorstep conditions” to move from a basic natural state to a “mature” one which represents an “open access pattern” characterised by a fast-growing economy, decentralised government and a vibrant civil society (North et al).

What are the implications for Pakistan? First and foremost, that the elites will have to be subjected to the rule of law. They will have to be moved from a state of perpetuation and protection of their privileges, to the enforcement of their responsibilities. To do this, we have to lay the groundwork for an interlocking set of institutions that provide for political as well as economic governance. (Olson described a society’s transition in terms of moving from “roving bandits” to “stationary bandits”, i.e. autocratic, and perhaps dynastic, rule).

The precondition for economic development (and not just economic growth) is strong institutions. The precondition for democracy to work is the application of the rule of law, both prior to elections — in filtering those who can stand for public office from those who are ineligible under the law — as well as afterwards, in enforcing rules and boundaries on the behaviour and actions of those in power.

If Pakistan can make the transition to the rule of law, it will have virtually guaranteed a stronger economy and a better quality of life for its citizens.

The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.

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Comments (25) (Closed)

Jan 11, 2013 06:09pm
Can the power elites and politician of Pakistan even read?
Jan 11, 2013 02:21pm
Nice academic discussion... good luck with change happening in an environment steeped in ignorance and dead habits perpetuated by religion.
Jan 11, 2013 06:26pm
You are automatically asuming change for the better but it could also be for the worse. The latter is easier because it is a progression. Change for the better requires solid fundamentals especially in quality human capital backed by a power base i.e either the people or the army.
Hassan Mirza
Jan 11, 2013 02:26pm
We as a pakistani have Anwswers to any questions why we dont have any solution to any problem of pakistan. The anwser to all the pakistan problem is end corruption from the nation blood.inject clean blood in nation .
Jan 11, 2013 02:46pm
Interesting...remember reading a book by Max Weber...a German who studied various sociological factors which affect economics. Indians should thank Providence that crucial period of India's evolution far-sighted men like Jawaharlal Nehru laid foundations for institutions over a wide area which is standing India in good stead. India should improve upon it- the stink of corruption in India is unbearable!!!
Jan 11, 2013 02:33pm
No sir! Poly-science is not a science at all. It is a respectable sounding name given to enormous bundle of mishmash of ideas that change with time and fad. Anybody can become a political scientist!
Samina Sattar
Jan 11, 2013 06:22pm
in an ideal society the politicians obey the law and the masses obey their leaders. other wise the civil society becomes a free for all and the republic collapses .
Good Indian
Jan 11, 2013 01:26pm
Giving religion too much importance is what is keeping back both India and Pakistan from pursuing a path of progress and development. The more we shun religion, the more the progress. It is unimaginable that in 21st century, when we know so much about science and the universe, we still blindly trust what was uttered and said hundreds of years back. Religion, and I include my own religion too, is what keeps this world back. It was nice to read something that talks about development. Thanks.
j. von hettlingen
Jan 11, 2013 04:39pm
Pakistan is at a crossroads. Its executive wants to portray itself as a Western orientated, democratic government, yet its society is tradition-bound and its people religious. Social inequalities and wealth gap are the impediments to building a "vibrant civil society", that enjoys economic growth and the rule of law. How sustainable will Pakistan's stability be, if more than half of the population remains the underdog of the country?
Jan 11, 2013 02:58pm
Stay positive? Remember a guy called Mikhail Gorbachev who dismantled the power elite in the Soviet Union..far back in history a man called Julius Caesar walked to his certain death in the Roman Senate-when he realized that Rome was beyond repair !
Jan 11, 2013 08:28am
Simple question Sir : Why should our parliamentarians or power elite read this stuff ? They are the beneficiaries of a collapsing system. They are riding the gravy train and the euphoria of this blocks all else out.
Kamal Hussain
Jan 11, 2013 03:07pm
Nations fail primarily because of societies fail. A society is based on written and unwritten social codes. All successful nations emphasize treatment of all people with dignity irrespective of religion, sex, ethnicity, race, and caste. Travel to any city in the Indian subcontinent, observe how people treat each other, and you will discover that people in the lower economic strata - such are manual laborers and rickshaw drivers/pullers - are subjected to untold mental and physical abuses. Time-to-time one comes across stories in newspapers when a minister slapped a lowly clerk; this is the prime example of the "Indian mindset". Mr. Sakib Sherani cites books and authors - Adam Smith, Niall Ferguson, Tom Bingham and others - and speaks of good governance and rule of law. However, Mr. Sherani does not seem to grasp that there are fundamental problems with his people and the society.
Jan 11, 2013 02:54pm
Maybe you should focus on "turn around" countries ...countries which were once written off and which turned the corner against all odds! Spain under Fransico Franco..Britain under Margaret Thatcher..Chile Allende/Pinochet transition..even India's crises in 1990 liberalization and the turn around after that. The subject is too complex and I fairly certain all the questions will not be answered!
Jan 11, 2013 08:57am
Politicians and administrators are not even-handed in administering Pakistan.
Cyrus Howell
Jan 11, 2013 08:18am
Political "Science" is at best an inexact science.
Jan 11, 2013 08:03am
I have to keep wondering how these changes can be brought about. Political Science identifies problems, gives solutions, but I would like to read more work on what triggers the change. What is the spark that sets in motions the series of changes that would cause the ultimate change in structures and incentives that is needed?
Tribal Manto
Jan 11, 2013 07:34am
Good governance and adherence to the rule of law are the prerequisites for a strong and robust economy.
Jan 11, 2013 07:59pm
I think all of it implies to India too. Lets see if current wave of engagement by common people continues to bring the change. Though really interested in seeing if common people get engaged when accused is someone in power.
Different View
Jan 11, 2013 08:08pm
Good luck convincing western philosophy to the skeptic South Asian people. I am surprised they haven't banned using computers in the region. They have started blocking cell phones, youtube. Who knows tomorrow they might ban computers, cars, trains, and airplanes. Because none of them we developed.
Shams Alam
Jan 11, 2013 08:14pm
The major obstacle for South Asian nations is to accept democracy as a way of everyday life over feudal thoughts starting from personal lives to family lives and so on. We could start this by educationg our female member of the society as they would raise the future genarations. In the mean time all the parilametarian and government officials, including judges and lawyers should take some training such as Practicing Democracy 101. Shams Alam
Magister Ludi
Jan 11, 2013 08:19pm
One cannot omit Political Parties By Robert Michels if one is canvasing politics.
Magister Ludi
Jan 11, 2013 08:21pm
Over trivialization of a vastly intricate political scenario. Julius Caesar lost his life when he was unable to pay his pay the financiers of his civil war.
Jan 12, 2013 07:54pm
I have an idea for Pakistan- reduce the size of the government drastically, and end the central bank. Your articles although have a free market vibe, I find you shy away from actually looking at the monetary side of the equation. Persistent high inflation, and distorted interest rates are causing serious problems in the economy. Couple this this with a hydra headed monster of militancy, drying up foreign capital, we are where we are.
Jan 13, 2013 01:24am
Pakistan is always at the cross roads.
Jan 13, 2013 01:47am
I agree with you, without strong institutions little can be achieved, there is no dispute that rule of law is the base that will sustain a vibrant economy, this fact is not new, it's centuries old. The problem is how to make it possible in Pakistan? there are so many problems, it's impossible to know where to start, every institution has it's fault, and each points to the other as the cause of Pakistan misfortune. Each in the name of improvement tries to cause damage to other while protecting itself, I don't where will in end because non of them is making a sincere effort.