THIS story is about a country where the elites completely control politics and the economy. The elites are disproportionately overrepresented in parliament as money literally buys votes. The elites also dominate the economy as even though they are less than 0.5 per cent of the population, they hold almost 30pc of all private wealth.

Predictably, this country is the poorest place in the wider region forcing many of its young to emigrate to greener pastures. In case you are wondering, this is the story of Sweden before 1921. Sweden has come a long way from being a poor country to now dominating the top positions of the Global Human Development Index. How can Pakistan follow suit?

A lot of people seem to think that the answer lies in consistent economic growth. In a recent report, the World Bank looked at how Pakistan can achieve higher and sustained economic growth. Pakistan’s economic growth, the report points out, is held back by the inability to allocate resources to most productive uses. This inability is driven by various “distortions” that are introduced by policy decisions, or left unaddressed by them.

One such distortion is high import duties that make firms that only sell domestically as opposed to exporting, more profitable. Specifically, every 10pc increase in import duty increases profits of firms that only sell domestically by 40pc.

Export subsidies are another distortion as they primarily assist only those exporters that export traditional products like apparel. In this way, these export subsidies create a strong incentive against innovation and diversification.

The report, however, does not talk about why these economic market distortions come about in the first place. In reality, these economic market distortions are brought about by distortions in the political market.

The political market in Pakistan exhibits many distortions — monopolisation and lack of competition, for instance — with the same elite families, barring a few exceptions, getting elected to the provincial and national legislatures over and over again.

Only when heavy investment is channelled into human capital will Pakistan’s workforce be able to produce high-value products.

To put it differently, the supply of political leadership by politicians does not equal the demand for political leadership by the people. Moreover, frequent interruptions in the democratic process, bans on student unions and the inability of preventing the use of illicit money in elections, also brings about distortions in the political market.

In a sense, the economic market distortions are a manifestation of the elites’ monopolisation of the political market. These political market distortions then bring about the sub-optimal economic outcomes as this serves the elites’ interests and priorities. This is exactly why inefficient economic policies linger on as they help the elites dominate the political market through carving out an ever greater share of the economic pie for themselves.

Distortions in the political market are also the reason behind the abysmal state of Pakistan’s social indicators. Despite 25 million to 35m out-of-school children, successive Pakistani governments have failed to address this existential challenge.

Some argue that this situation is a function of Pakistan lacking economic resources. But, Pakistan did relatively well in terms of economic growth until 1993. India’s per capita income only surpassed Pakistan’s in 2007.

Still, Pakistan comes at the very bottom of the Human Development Index with a score that is 13pc lower than the average for South Asia. Specifically, Pakistan shows poor performance in preventing under-five mortality and illiteracy even when compared to countries with similar income per capita.

As Myron Weiner showed in The Child and the State in India, many countries in Europe, US and Japan instituted compulsory education even when they were poorer than modern-day India. Weiner argued that India had failed to ensure universal literacy because India’s elites carried prejudicial beliefs about the efficacy of providing education to the children of the poor.

Like India, Pakistan’s elites also do not believe in educating the children of the poor. And the fact that the political elites have been able to shield themselves from competition through distortions in the political market, they feel no pressure for increasing the education budget. In other words, where economic growth is important, it does not provide the complete picture about why Pakistan has so woefully lagged behind in social indicators.

Sweden was only able to move towards economic growth and social development by removing distortions in the political market. Through a series of reforms, the link between money and votes was broken and Sweden finally moved towards universal suffrage and parliamentarism in 1921.

Sweden’s politicians brought about stiff taxes in order to set up a cutting-edge welfare state, while making sure that these policies did not interfere with economic growth.

What this shows is that by only reducing distortions in the political market and strengthening democracy can Pakistan hope to move towards sustainable economic growth and social development. For only when Pakistani politicians are forced to channel heavy investments into human capital — education and health — will the Pakis­t­ani workforce be able to produce high-quality and high-value products. Short of this Pakistan will remain stuck in the familiar boom-and-bust cycle.

Some economists like Dani Rodrik have even labelled democracy a “meta institution” as it leads to good institutions and high-quality economic growth. In order to remove distortions in the political market, Pakistan must initiate a reform process to improve the overall quality of Pakistani democracy. The reforms could include proportional representation, campaign finance reform and even quadratic voting.

The World Bank’s reluctance to opine on a country’s political system is understandable. But, the rapid pace of democratic breakdowns or democratic regression since 2006 behooves international financial institutions to now focus on democracy as a key variable in the process of economic growth and social development.

The writer completed his doctorate in economics on a Fulbright scholarship.
aqdas.afzal@gmail.com
Twitter: @AqdasAfzal

Published in Dawn, February 27th, 2023