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Rules of the game

April 20, 2017


SOCIETIES are built on institutions, which are, as economist Douglass C. North put it, the “rules of the game” that help propel us towards, or restrain us from, the path to prosperity and economic development. These institutions are built over time and are either adjusted periodically to cater for the changing needs of society or are further reinforced and cemented, depending on the influences on them.

Developing countries freed from colonial governance, like Pakistan, tend to see the current disappointing state of the nation as a consequence of past foreign dominance. While there is some truth to this observation, we need to examine other factors, too, that make it difficult for a country to develop or modify institutions for development and building a more broad-based economy that is resilient and adaptive. The role of the Pakistani elite minority, for instance, is key in influencing the course of the country’s path towards development.

Generally, the economic development of any nation is initiated by small groups of people with resources. Political leanings, relationships and the desire to gain control shape the type of policies and access that are sanctioned. Focus on creating large economic rents — ie windfall profits — for themselves is paramount to this elite group and, unless balanced by opposing forces, it will be in the group’s immediate interest to create situations with limited access for other players.

It is of concern when industrialists can mould policies to suit their goals.

Illustrated through an analysis by Daron Acemoglu and James Robinson, during the competition for global sea trade between various European countries in the late 16th century, the British government dismantled the monopolies by Royal Charter on trade. Did leaders suddenly realise that there was greater good in letting everyone in England have the same opportunity for economic benefit? Or was it something else?

In reality, the preceding civil war in Britain had left the government and those in power with such a poor navy that they had no choice but to concede to removal of the monopolies in exchange for the use of private ships for trade. The elite that controlled or influenced policies and institutions realised that it made more economic sense for them to be part of the global trade, despite the cost and risk of letting a wider pool of entrants erode their economic rents in the longer term.

In a similar vein, examining the policies and institutions in Pakistan and those benefiting from them is telling. Ayub Khan’s empowerment of the 22 families was carried out as per the popular neoliberal and pro free market principles of the time. The belief of concentrating wealth in a few hands equipped to multiply this wealth, and enjoying a cascading effect of growth for those lower down on the prosperity ladder sounds almost logical — ie make a handful of people rich and once markets gain traction, everyone can eventually partake of the bounty.

The problem is not that there were no benefits because there was macroeconomic growth. The concern arises when industrialists of such stature can mould policies and conditions to suit themselves and their goals. These policies and conditions are the institutions, political and economic, that are being constantly created, modified or perpetuated — the institutions that decide who can step up on the ladder of growth. It’s a vicious cycle — a few set up the rules, benefit from them, perpetuate these rules and build a support base, a base which reinforces the power of the few.

If I, as one of the privileged few, am benefiting from these polices and incentives, there is little impetus for me to change these rules to benefit others who will take away from my overall profit. Reforms by Ayub Khan to redistribute land more equitably failed to have any impact because those that owned land found ways to work around the policies and keep the concentration of wealth within their families. There was, understandably, no inclination towards the greater good and it is unreasonable to expect otherwise. It has to be in the interest of the elite to modify policies and conditions to make institutions more inclusive.

The question then becomes how to change the situation whereby it will be in the interest of those in power to change the rules or, at the very least, be in a position where they have no choice but to accept changes to the rules. The basic premise that vested interests, particularly of the elite, need to be modified to include a development-for-all agenda is not an easy order by any means but it does provide a practical approach to devising policies and tackling development issues. It is a step away from the regular rhetoric of blaming corrupt politicians and being stuck in a situation of path dependency.

The writer is a researcher in the development sector.

Published in Dawn, April 20th, 2017

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