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Extractive institutions

January 10, 2013

NOT a day passes in Pakistan without some reference being made to the importance of institutional stability and the breakdown in the institutional development.

These references take on a phraseology including institutional accommodation, redressing institutional imbalance and the need for all institutions to work within their ambit — ponderous phrases attached with cautionary notes. Cumulatively, what they illuminate is the enduring issue of institutional development which has beset Pakistan (as it has the rest of the world).

Last year, this debate on the role of institutions in governance moved a notch further with the publication of an influential book Why Nations Fail: The Origins of Power, Prosperity and Poverty authored by Daron Acemoglu, an MIT economist, and James Robinson, a Harvard University political scientist. Analysing data spread over centuries and across empires and nations, the authors have concluded — convincingly — that the progress and prosperity of nations is inextricably bound up with the way political and economic institutions evolve in their histories.

In a bald summary, nations commanding inclusive political and economic institutions progress to prosperity while those with extractive political and economic institutions end up being poor and fragile. This institutional account of the historical evolution of nations is an impressive feat, and seems to hold true for most of the case studies marshalled in the book.

Inclusive institutions are the ones where plurality and greater participation of the populace is ensured, and economic gains and incentives are broadly shared. Extractive institutions are created for the benefit of a tiny elite and perpetuated for the benefit of that elite.

How institutions structure nations is illustrated in the contrasting examples of two small towns bearing the same name of Nogales facing each other across US-Mexican border. Mexican Nogales is dirt poor, instable with lower health and educational outcomes. By contrast the US Nogales is rich, stable and demonstrates better health and education outcomes.

The overarching explanation for their contrasting fortunes lies in the nature of their current political and economic institutions: the US Nogales boasts of a set of inclusive political and economic institutions as opposed to the extractive political economic institutions that underpin Mexican Nogales. Pretty much the same explanation could be used to account for the contrasting fortunes of North and South Korea.

However, historical evolution is not an immutable fact. There comes a time in the history of nations — a critical juncture — which, if properly directed, can reverse the fortunes of a nation and set it on the path of inclusive institutional development.

In Britain in 1348, the Black Death — which wiped out a large chunk of farm labour — represented such a critical juncture; it led to a restructuring of the previously extractive landlord–labour relation directing it towards more equal relations embodied in legislation. The upshot was Britain’s decisive turn from extractive political and economic institutions to inclusive ones.

Perhaps more germane to Pakistan is the way colonialism shaped political and economic institutions. Post-colonial countries are largely the inheritors of extremely extractive political and economic institutions. In most cases post-colonial rulers have not only maintained these coercive and extractive institutions but also augmented the extractive aspects to preserve the hold of a narrow ruling elite nurtured by colonialists.

Broadly speaking, Pakistan seems to fit this institutional model responsible for our current backwardness and institutional drift. The country inherited highly extractive institutions at birth. The new ruling elite, which comprised the civilian-military complex with a sprinkling of landed aristocrats, maintained and enlarged these arrangements.

This saw the emergence of what pejoratively came to be called ‘brown sahibs’, a byword for the continuation of the colonial-era institutional legacy. The resulting institutional arrangement remained narrow and largely geared towards the civil-military complex, the corporate sector and the co-opted landed political elites.This colonial-era legacy took the form of One Unit which signified the extreme political and economic extraction from East Pakistan. What resulted from this was the break-up of united Pakistan.

One other manifestation of extractive economic institutions was inherited and continued unmodified, and saw the wealth of the country concentrated in the hands of what came to be called the 22 families. The year 1968 was to change this slightly when a popular movement erupted to demand a greater say in the running of the country. The highly restricted political system opened up a bit as a result of the 1971 elections. Since then, the largely restricted system has been on a ‘glasnost’ trajectory interrupted by periodic military interventions that set back the slow process of inclusive institutional transformation.

While the political system is becoming a shade more inclusive, economic institutions still remain largely extractive and coercive with monopolies and cartelisation reigning supreme as shown by the sugar crisis and similar instances. Though these historical imperfections take time to correct, the upcoming elections nonetheless provide us with one of the limited ways to chip away at the still very much controlled and closed political system.

Yet the rumours of conspiracies being hatched to block the people’s right to participate in the political process and choose their political representatives are deeply worrying. In 2013, a time of grave national challenges, this adventurism may reverse the marginal gains made so far in the struggle for inclusive institutions.

The writer is an Islamabad-based development consultant and policy analyst.