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Patronage economy and governance

December 25, 2012

THE policy-institutions-society nexus provides a useful tool for measuring the depth of problems faced by different countries. Policies emerge from institutions, which, in turn, emerge from societal structures.

Thus, the quality of a country’s policies depends on the strength of its institutions, while the strength of its institutions reflects the nature of its societal structures.

In some countries, existing institutions can easily change their policies to rapidly rectify emerging problems, e.g., relaxing monetary policies to counter recession. In other countries, the appropriate policies lie beyond the remit of existing institutions.

In such cases, existing institutions have to be restructured or new ones created. Where societal structures are relatively egalitarian, effective new institutions that work for the benefit of the majority can easily be created.

The most stubborn problems exist in countries where effective policies which benefit the whole population cannot be adopted even if new institutions are created because prevailing non-egalitarian societal structures do not easily allow the emergence of effective institutions.

Where concentration of power in the hands of certain ethnic and/or socio-economic groups (e.g. big landlords, businessmen or generals) is high, these groups control existing and even new institutions. Hence, these institutions normally adopt policies which benefit these groups rather than the larger population.

The most damaging societal structure inhibiting the emergence of egalitarian institutions is the predominance nationally of a patronage-oriented rather than a merit-oriented economy.

In a merit-oriented economy, the economic fortunes of people are linked to what they know, i.e., their education and technical know-how. The economic interests of both capitalist and salaried classes demand good governance.

Entrepreneurs in such economies make money by producing high-tech goods which provide high returns. They consequently have an interest in ensuring the development of a skilled, well-paid labour force which can produce high-tech goods in factories and purchase them subsequently in markets.

Such entrepreneurs need a well-functioning government which can provide the physical infrastructure and the rule of law needed for such high-tech industries to thrive. Salaried classes here prosper not on personal contacts but on education. They too are interested in a well-functioning government which can ensure educational and economic opportunities for the vast majority. Thus, overall national economic structures encourage good governance.

In contrast, in a patronage-driven economy, the economic fortunes of people are linked to who they know rather than what they know. The economic interests of neither capitalist nor salaried classes depend on good governance. Entrepreneurs generally make money not by producing high-tech goods but by circumventing taxation, labour and environmental laws.

They need little support from a well-functioning government for the low-end goods that they generally produce. In fact, a well-functioning government may actually be problematic for them as it would make it more difficult to circumvent laws.

Similarly, the majority of the salaried population thrives on personal contacts and the concept of a well-functioning government ensuring equal opportunities carries little meaning for them. Thus, overall national economic structures discourage good governance. Such countries include the vast majority of developing countries, including Pakistan.

So, in Pakistan, the rural economy obviously thrives on personal connections and patronage relationships. However, even in the urban economy, the vast majority of businesses are family-owned ones which produce low-end goods and where access to higher positions is restricted to family members or their friends.

Educational qualifications are less important than personal trust for these business houses. Institutions are controlled by certain ethnic and socio-economic groups who consequently formulate policies benefiting themselves rather than the whole population. Thus, the pressure from the vast majority of both capitalist and salaried classes is for personal solutions rather than general good governance.

Most newspaper articles on Pakistan’s economic problems focus on suggesting, or lamenting the non-adoption of, sound policies, without considering the broader political economy of institutions and societal structures in Pakistan.

Even within policies, their focus is largely on macro-economic stabilisation policies and they tend to ignore micro-economic and long-term development considerations. The assumption seems to be that if macro-economic stabilisation is achieved, the rest will occur automatically and the country will invariably develop.

Unfortunately, the experience of Latin America in the 1980s and 1990s reveals that the particular macroeconomic stabilisation achieved by them based on the Washington Consensus actually undermined long-term development.

While macro-economic stabilisation is critical, it can be achieved in a variety of different ways. Thus, macro-economic stabilisation must be considered as part of a broader long-term development agenda so that the country can adopt macro-economic policies which support rather than hinder long-term development.

Unfortunately, such analysis is often missing in the writings of many leading Pakistani economic analysts. However, such analysis is critical.

More importantly, one must analyse broader institutions and societal structures to get a better sense of the likelihood of such a broader policy agenda even being implemented.

While the PPP’s economic management has been particularly abysmal, it is naive to expect that a new government will be spectacularly different since any party which emerges victorious (or for that matter a military, technocratic or even ‘caliphate’ government) will reflect and perforce cater to Pakistan’s current patronage-driven economy.

Good governance will only emerge in time as a merit-driven economy gradually develops within Pakistan. What are the prospects of its development?

Countries which have achieved rapid economic development, e.g. South Korea, Taiwan and China, had more egalitarian societal structures historically and moreover also benefited from special economic relationships with a beneficent superpower (Korea and Taiwan) or a rich diaspora (China and India).

Since Pakistan is not endowed with such advantages, its development will be slower. Nevertheless, the faint signs of change from a patronage-driven to a merit-driven economy are evident.

For example, many traditional family business houses are taking the initiative to establish private, high-quality business schools and universities, reflecting an interest in high skills and merit. As the captains of industry gradually abandon patronage for merit, this change may in time reverberate across the whole economy and consequently the polity.

The writer is a political economist at the University of California, Berkeley.