Economy and history

March 31, 2024

Understanding Pakistan’s underdevelopment in terms of institutional instability

Economy and history


key factor in fuelling institutional instability as much as perpetuating underdevelopment is that Pakistan’s rent-based institutional structure systematically constrains human potential,” claims Akmal Hussain in his latest book Pakistan, Institutional Instability & Underdevelopment: State, People and Consciousness. In line with noted economist Douglas North, a noble laureate, Hussain defines an institution “as a set of formal rules and informal norms which together with their enforcement mechanisms structure human interaction.”

As one of Pakistan’s noted economists and public intellectuals, Dr Hussain needs no introduction. He is among a handful of Pakistani economists advocating peoples’ welfare instead of IMF-dictated policies in pursuit of “economic growth.” His research and publications constitute an elementary reading on Pakistan’s economy. In the book under review, he goes beyond the economic realm.

For instance, instead of looking at Pakistan’s history to understand the economy, he examines Pakistan’s economic trajectory to understand the country’s history. After all, it was an interplay of economy and history that shaped the institutions. This dynamic interplay is mediated by human consciousness.

Owing to the broad scope of the book, this review aims at highlighting only the economic roots, as analysed by Hussain, of Pakistan’s underdevelopment.

According to Hussain, the civil-military bureaucracy gained the upper hand in orientating public and economic policies under Gen Ayub’s military rule. Since the post-colonial Pakistani state had inherited a narrow industrial and financial base, like many post-colonial states, Pakistan adopted import substitution industrialisation in the consumer goods sector by nurturing private enterprise.

In other words, a policy of providing rents as a means of inducing a few trading groups to become industrialists was introduced. The rents were generated by offering subsidies on exports, cheap credit, tax exemptions, etc. In the 1960s, a policy of “functional inequality,” a la Simon Kuznet, was introduced. This strategy of unequal growth – accentuating inequality – was deployed in order to enable the capitalist class to accumulate more capital so that the rich have a higher level of savings. It was assumed that these savings will be invested in industry, resulting in higher economic growth.

As far as inequality was concerned, Kuznet was deployed to project an optimistic future: market mechanism would overcome the disparity during the initial stages of unequal growth. This policy has “persisted to this day,” claims Hussain. The result of these policies in the 1960s has recurred almost every ten years: exports based on primary goods and low-value-added agriculture-based manufactures do not keep pace with the import requirements of a rapidly growing manufacturing sector.

This, in turn, leads to two consequences. First, a balance of payments crisis after growth slows down following an initial spurt. Second, foreign aid was/ is deployed to overcome the economic slowdown.

Hussain explains the balance of payments crisis at three levels. For the first, “the investment rate necessary to generate a 6 per cent GDP growth (without foreign aid) is 24 per cent of the GDP. Since the actual domestic savings rate has been around 12 per cent, there is a gap of 12 per cent of the GDP which must be filled by foreign savings,” (foreign direct investment, foreign loans or grants, etc). “Not only is the foreign savings rate low but also the export earning capability is inadequate, thus creating a foreign exchange gap.” Next, every time the economy grows at the rate of 6 per cent, a balance of payment crisis occurs owing to the underdeveloped nature of the economy.

As Figure 1 shows, the net current account deficit (as percentage of GDP) is the mirror image of GDP growth, i.e. “every high GDP growth period has been brought to an end with a balance of trade crisis. This means that due to persistently slow export growth, the foreign exchange earnings are insufficient to finance the rising import requirements of high GDP growth.” The balance of payments crisis pushes the country into the IMF’s lap.

The element of human consciousness Hussain introduces in the debate on (under)development may help break new grounds in the field of development studies.

It will not be a huge digression to remind the readers that Pakistan’s total external debt and liabilities have reached $127 billion (41 per cent of the GDP). Pakistan’s external debt repayment obligations for the next three years are $73 billion.

Figure 1: Real GDP growth and the net current account 1960-2018.

Finally, historically slow export growth can explain the balance of payments crisis.

According to Hussain, “The most important factor in the tendency for slow export is that the export structure is oriented towards predominantly low value-added goods” (rice, leather, yarn and textiles, etc. constituting 82 percent of exports compared to 2 per cent hi-tech exports), “the income elasticity of global demand for Pakistan’s export is low, which means slow growth in export demand. Even in the sluggish global demand for these exports, Pakistan is losing its share to Bangladesh and India due to lack of innovation, inefficiency, inconsistent quality and poor marketing.”

The strength of Hussain’s analysis is not merely its ability to demonstrate the hollowness of “comparative advantage” theories; it enriches such theoretical paradigms as combined and uneven development and dependency. More importantly, a similar framework may be applied to study other economies in the periphery countries.

Does he suggest a solution to Pakistan’s underdevelopment? The chapter titled Overcoming Underdevelopment through a Human Economy offers a detailed answer. However, this review is focused on merely one aspect: export diversification. Hussain emphasises knowledge-intensive, highly value-added exports (goods and services). However, diversification of knowledge-based exports also requires diversification of knowledge production. “These two features of export structure, knowledge intensity and the inverse of ubiquity, have been combined in the new literature into an Economic Complexity Index.” Hussain informs the readers that Pakistan ranked 87th out of 108 countries on ECI in 2015. In his view, the “main reason” behind the success of Brazil, South Korea or Thailand and Malaysia in comparison to Pakistan was their policy of shifting export structures towards knowledge-intensive goods.

Critics may claim that Hussain’s prescription sounds like a truism. Also, assigning primacy to export diversification throws up analytical challenges. In the case of South Korea, for instance, the context of the Cold War and Japan’s role in facilitating knowledge-intensive Korean exports should be taken into account as primary drivers of the South Korean model. Export diversification is not merely a matter of policy. Likewise, the Pakistani state stands little chance of economic re-orientation while the elite and the bourgeoisie benefit from a phenomenal real-estate plunder. Without radical re-configuration of power structures whereby popular classes begin at least sharing, if not monopolising, power, a change in economic orientation will remain elusive.

Instead of offering radical solutions, Hussain offers a neo-Marxian model with a Sufi touch. In the model developed by Hussain, human consciousness, at times translating into resistance to dictatorial regimes in Pakistan, contributes to development. An element of compassion is offered as a bulwark against utilitarian drives. In order to “show that compassion, which is at the deepest centre of consciousness, is essential to the experience of human being” and to understand human consciousness, Hussain invokes ideas from religion and ancient wisdom traditions. Consequently, Hussain not only invokes soft versions of Islam but also social-democratises Jinnah and Iqbal. This aspect might earn him the wrath of ultra-radicals. While Hussain, a member of Pakistan’s 68-generation that humbled Gen Ayub, is still devoted to an effort to view the country’s founders as progressive secularists, brave new scholarship is questioning such a portrayal. It seems that the latter discourse is gaining a foothold, too. In this regard, one may cite Ishtiaq Ahmed’s Jinnah or Hoodbhoy’s Pakistan: Origin, Identity and Future.

Despite the room for such disagreements and criticisms, even radicals will acknowledge the invaluable contributions Hussain’s book makes to a number of ongoing debates regarding Pakistan’s political and economic crisis as well as the country’s identity and a roadmap for future. Mercifully, the book is not meant for development experts or economists alone. Written in an accessible idiom, it seems to target a wider audience. Besides being an excellent guide to Pakistani politics and chequered history, the element of human consciousness Hussain introduces in the debate on (under)development may help break new ground in the field of development studies.

Pakistan, Institutional Instability & Underdevelopment: State, People and Consciousness

Author: Akmal Hussain

Publishers: Folio Books, Lahore, 2023

Pages: 360

Price: Rs 1,995

The reviewer is a freelance contributor. He is the author of Media Imperialism in India and Pakistan (Routledge)

Economy and history