The eternal state of incompetence

LAHORE: Measuring the efficiency of state and non-state institutions is not simple. However, the fragility of institutions is observable in the dramatic increase in share of the shadow economy.

Unregulated economy is the best indicator of the weakness of regulatory institutions in Pakistan.

It is also clear from the decline of government revenues as a proportion of GDP.

Even for increasing revenue collection, the Federal Board of Revenue prefers indirect taxation instead of documentation. Dysfunctional institutions result in the inability of the state to deliver basic public goods.

Absence of appropriate regulatory framework, accumulation of tax, trade, wage and bank arrears indicates weakening institutions.

The fragility of the institutions is manifested in the ‘dollarisation’ of the economy that regularly goes on.

The central bank provides incentives to the banks to comply with its regulations regarding financing to the small and medium enterprises and house financing.

With housing finance support, the manufacturing and industrial sector credit further crowds out as the government is the largest borrower of commercial banks.

Poor enforcement of property rights, bankruptcies and contracts also point towards weak institutions.

The approach to strengthen the institutions has remained flawed.

Planners think that increasing the salaries would strengthen institutions. The wages and budgets of police have been more than doubled, but law and order in general has deteriorated; crime rates have increased particularly against the women.

The pay and perks of the judiciary have reached a new height, but pendency court cases have increased. Civil servants are drawing better salaries (in most cases) than the private sector, but the corruption has increased.

Our planners must understand that institutional capacities depend to a large extent on the combination of the rule of law and democracy. In fact, that global data implies that not only democratic governments but authoritarian regimes with strong rule of law can deliver efficient institutions that ensure sustainable economic growth.

Liberalisation has not put Pakistan's economy on a sustainable growth path as it was not complemented with strong institutions that are vital in any economy and planners overlooked the crucial importance of these institutions for good performance.

Liberalisation was carried out without strong market institutions in Pakistan that led to the extraordinary output collapse.

The importance of liberalisation cannot be underscored, but the devil is in details, which often do not fit into the generalisations and make straightforward explanations look trivial.

The restructuring due to market imperfections is associated with the temporary loss of output. No government in Pakistan was prepared to allow this temporary loss of output.

Economies, where the institutions are strong, decline in the production of non-competitive enterprises and industries get offset by an increase in the production of competitive industries and enterprises that replace inefficient ones.

Economies with weak institutions underperform because of barriers to capital and labour flows such as poorly developed banking system and securities markets, uncertain property rights, the lack of easily enforceable and commonly accepted bankruptcy and liquidation procedures, the underdevelopment of land market, housing market and labour market infrastructure.

No one doubts the sincerity of this government to strengthen the economy through policy changes and it has some effect on economic performance, but progress in liberalisation and macroeconomic stabilisation should not be considered sufficient to trigger sustainable growth.

Despite popular beliefs of the previous regime that the speed of liberalisation and macro-stabilisation would cure all ills, the most important policy measures aimed at preserving and/or creating strong and efficient institutions were half-heartedly implemented.

The present regime has further weakened the institutions by failing to timely fill regulatory posts or frequently removing bureaucrats at key posts like FBR, ministry of finance, commerce and power.

In fact, the democracy in Pakistan is illiberal as competitive elections were introduced before establishing rule of law.

Moreover, democracy is periodically reintroduced in Pakistan when the dictators lose control over law and order and are forced to hand back power through elections. The democratic regimes thus inherit weaker institutions.

Both dictators and the democratic governments after assuming power instead of shutting down completely some government programmes and concentrating limited resources on the other with an aim to raise their efficiency, keep all programmes half-alive, half-financed, and barely working.

This has led to the slow decay of public education, health care, infrastructure, law and order institutions, and R&D institutions. Virtually all services provided by the government from collecting custom duties to regulating street traffic are currently the symbol of notorious economic inefficiency.

The most painful fact is that the economic planners that are more learned people are aware of the weaknesses in the economy but choose to maintain the status quo to please vested interests.