DONALD Trump’s victory in the US presidential elections has momentarily shifted attention away from a case of fundamental import being heard in the Supreme Court of Pakistan. While substantive issues regarding the case, such as the actual or beneficial ownership of offshore companies and associated assets in question, whether the underlying money used for these transactions was obtained by legal means or not, whether the monies and assets were declared in tax and wealth returns in Pakistan, and how and when the money was transferred abroad, are all before the honourable court and therefore sub judice, the importance of the case vests in whether the ultimate verdict helps or harms Pakistan’s institutional development.

Pakistan’s institutional framework — the ability and willingness of the state to frame laws and policies for public good, to enforce its writ, and to prosecute violations of the laws of the land — has weakened over a period of time. The atrophy appears to have accelerated since 2008 with the second coming of elected kleptocracy — though non-civilian governments have been guilty of self-serving transgressions and violations too.

A principal manifestation of a weak institutional framework is the ability of ruling power elites to influence or usurp state institutions and public policy for private gain, effectively resulting in the privatisation of public policy. While individuals or some segments within society benefit, this outcome is welfare-destroying for society at large.

Stronger institutions are necessary for development.

The private gain accrued from the abuse of public office may or may not be financial in nature. It could be the abuse of state authority to suppress political dissent, accumulate political power in unconstitutional ways, or to settle old scores. Too often, however, the erosion of institutional checks and balances by abuse of public office is for financial gain. Corruption, especially large-scale corruption, imposes a huge hidden cost to society, apart from its quantifiable financial burden.

A large corpus of academic literature pertaining to institutional theory over the past four decades has linked weak institutional quality and poor governance with lower private investment, lower economic growth, worse development outcomes, and higher inequality, among other correlations.

In the case of Pakistan, the financial cost of corruption has been estimated at around five to seven per cent of GDP a year. This corruption occurs in a variety of ways: leakages in government revenue, tax refund fraud, embezzlement in public-sector procurement, mis-pricing of real-estate transactions by the public sector, fraud, kickbacks and commissions in public investment projects etc. Combined with tax evasion, the resulting capital flight has been estimated by the State Bank of Pakistan (SBP) at approximately $8 billion in the last three years.

If even half of this percentage could be saved through stronger institutional checks and balances, it would mean that Pakistan’s public education budget could be doubled, or its public spending on healthcare for its citizens increased by over five–fold. Equally important, it would mean that the quality of spending could potentially increase, resulting in a substantial improvement in availability and quality of public services as well as outcomes in the wider social sector.

The damage large-scale and pervasive corruption does to society and the economy, however, goes much deeper than merely its financial impact. Mega corruption can only flourish in the absence of strong institutional checks and balances. Well-functioning institutions are designed to work for everyone in society, guaranteeing protection of rights especially of those in the lowest strata of society who are without influence and are therefore most vulnerable. But, importantly, they also protect investors and businesses from government excess and/or appropriation.

When institutional checks and balances are systematically undermined to create an eco-system for mega corruption to thrive in, as a corollary it also weakens property rights — an essential requirement for not only private investment and commerce, but also innovation and entrepreneurship in the economy. As collateral damage, if left unchecked over a protracted period, it is more than likely to affect the level of trust and social cohesion in a society. Each of these conditions on its own imposes a significant cost to the economy and societal welfare.

The other significant channel through which a weakening of institutions and a thriving of corruption undermine long-term economic development is by the systemic erosion of state capacity. The bypassing of institutionally governed rules on impartiality, non-discriminatory treatment and application of law, and the creation of privileges for a few requires the appointment of cronies and loyalists in key positions in state institutions. The systemic undermining of meritocracy becomes a major impediment over a period of time to the overall functioning of the state. In terms of economic governance, it is manifested in a progressively weaker capacity to plan, formulate and execute viable policies for the management of the economy.

This is a state Pakistan has been pushed into. A corrupt and inefficient Federal Board of Revenue (FBR), an increasingly politicised central bank, an incompetent civil service packed with party loyalists, and a thoroughly corrupt and useless public sector at large. The result: a low tax base, massive leakages in tax revenue, a growing informal sector, rampant smuggling and under-invoicing, a shrinking export sector and manufacturing base, a public education and health system skirting collapse, declining productivity in agriculture.

It is in this context that the case before the honourable Supreme Court has such fundamental importance. If the rule of law can be established, and be seen to be established, and crony institutions such as the National Accountability Bureau, Federal Investigation Agency, SBP and FBR that should be servants of the law and state but have instead been made hand-maidens of a corrupt elite, are taken to task and made to do the work they should be doing, there is hope for Pakistan’s institutional framework. While good governance and strong institutions have an intrinsic value to society, they have an equally important instrumental value as a means towards better economic growth performance and higher development outcomes.

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

Published in Dawn, November 11th, 2016