Governing the Ungovernable
Institutional Reforms for Democratic Governance
ISHRAT HUSAIN
Ace N o: 2 76 8SDa1e: 5- JI- 2020
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Acknow ledgeme nts
This book is a culmination of my residential tenure as Public Policy Fellow with che Asia Program ac the Woodrow Wilson Center at Washington DC from June 2016 to March 2017. l wish to thank che President and officers of che Center and particularly Michael Kugelman, che Deputy Director, for providing me chis opportunity. The Trustees of che Fellowship Fund for Pakistan and Mr Arif Habib were generous in sponsoring che fellowship Munawar Noorani and Zaffar Khan deserve my gratitude for proposing and then making this happen. Ac che Center, I wish co acknowledge Janee Sykes che Librarian who opened up all che resources available at che Library of Congress, Bruce Griffith and Bill Kelly of che IT department, Arlyn Charles, Lindsay Collins, and Krishna Ariel for their support chroughouc my stay. The participants of che seminar ac che Center where I presented che work in progress gave me helpful comments. Two of my research assistants, Aleena Ali and Hamza Tariq, went beyond their normal duties and responded promptly and diligently to all my requests. Aleena did a superb job in carrying out che licerarure survey and collating che material in a systematic way. Hamza volunteered to help in preparing che bibliography and verifying che foot notes even after che completion of his assignment. I wish to thank my friend, Steve Radelec, an outstanding scholar in his own right who made che services of one of his graduate students at Georgetown, Rayah Al Farah at my disposal . She worked conscientiously and diligently on che assignment given to her. Two ocher interns, Divya Sahni and Jamie Liang came to my rescue during che period when I didn't have an RA
The title of chis book was che brainchild of my friend, Shuja Nawaz, who not only had several discussions ac different points of time but also
ACKNOWLEDGEMENTS
provided some unpublished material and offered extensive comments on the Cha pter 'The Military'. Lieutenant General Asim Bajwa , Lt Gen. {retd) Khalid Nawaz and their staff, and Major General Chaudhry Sarfarz Ali made material available which added new ins ights on the defence forces and their businesses. Three persons, among many, need ro be mentioned for rheir conrribucions. Shahid Yusuf was as usual fierce in his critique of the chapters he reviewed and commented upon. Michael Kugelman not only provided candid feedback himself but also shared the work of the participanrs of the Conference held in January 2017. Robert Hathaway, a former Direcror of the Asia Program, rook a lot of time our to read the drafts and offered valuable comments.
I am nor in a position to acknowledge everyone who participated in the focus groups, filled our the srrucrured quesrionnaire, and responded ro my queries and follow up questions. It was indeed a pleasure that a large num be r of civil servanrs-acrive and retired, corporate CEOs, civil society activ sts, academics and scholars, and donor representatives shared their views and thoughts candi(lly and openly. The work produced here would not have been possible withour their inputs. Ali Sarfraz and Waqas u1 Hasan deserve special mention for getting me the missing data on government employees and following up on the questionnaires. Nasim Beg also pushed so me of the C 100 members and has helped me throughout the srudy. Ismail Qureshi deputed one of hi s staff at the National School of Public Policy to make reports of the training syndicates available to me. Sakib Sherani was kind enough ro share his own work in progress on Institutions of Reforms with me. Naseer Rana of the World Bank, with whom I had collaborated earlie r, was generous by furnishing very exhaustive notes and substantive co mments at the inception stage. To ensure consistency of data , I relied upon the State Bank of Pakman (SBP), and Farooq Arby and his colleagues were extremely generous in preparing the time series on a large number of variables. I wish to thank them for their oucstanding work
M} intellect ual debt ro three of my former bosses who are gianrs in the profession of economi cs-Stan ley Fischer, Larry Summers and Joe Stiglirz-from whom I learnt a lot, would always overwhelm me but m y interes t in institutions and economic growth was sparked by Dani Rodrick
ACKNOWLEDGEMENTS
of Harvard. I have found his work to be both illuminating but also relevant for policy purposes. Thanks, Dani for seccing me on this course.
I was very fortunate when one of Pakistan's leading visual artists, Naiza Khan, winner of che 2013 Prince Claus award, volunteered to adorn the title cover of this book with one of her creative designs. Despite her teaching engagements at Cornell she produced seve ral outstanding pieces and it became really difficult to choose one of chem. I am greatly indebted to her for this generous offer and for sparing time to produce an excellent piece of work which has enhanced the aesthetic value of this book.
I would like to express my profound thanks to Ameena Saiyid, Nadia Ghani, and Raheela Baqai of the Oxford University Press for their consistent and continuous support, and to my editor, Sunara Nizami , for her hard work and dedication throughout this project.
Finally, I have no words to convey my heartfelt gratitude co my spouse , Shahnaz, and daughters, Farah and Uzma. They have always been fully behind me in whatever I have endeavoured to do, even ac the expense of their own inconveniences. Shahnaz not only relocated twice during this period bur took care of all the daily chores and allowed me complete space and freedom co concentrate on my work. Farah and Uzma were both interested in my work bur equall y concerned about che long hours I was putting in and the travels I was undertaking. I felt guilty that this project kept me away from spending more time with my adorable grandchildren. This book would not have seen the light of the day without their love and support.
Preface
Why is Pakistan perceived to be an 'ungovernable ' state? A label it never carried in the past? Can anything be done to restore ic to the track from which it derailed? These are questions thac are often asked by the global community and the public at large in Pakistan. We do nor pretend to have either a magic wand co answer these very complicated bur relevant questions or a crystal ball to foresee the future. In all humility, what we can do is to figure out why Pakistan was among the top ten performing developing countries ahead of China, India , Vietnam, and many ochers in economic and social indicators recording an average GDP growth rate of 6 per cent annually for over 40 years until 1990. It was a peaceful country enjoying respect amongst the world community. Tourists and visitors from abroad were able to visit any part of Pakistan freely in what they found to be a safe and secure country of friendly, hospitable , and caring people. Thousands of students from African and Asian countries studied at its universities and professional colleges. What happened then over the following 25 years from 1990-2015? How did Pakistan get left behind both economically and in terms of social development in the region, lee alone in comparison to China and Vietnam? The Indian economy was only five times larger than Pakistan's in 1990. According to the latest estimates , it is eight or nine rimes larger now. Pakistan has, during this period, gained notoriety in the international media as one of the most dangerous countries in the world. Even visitors who need co visit it for business purposes and are ass ured full security and safety, are reluctant to come. Tourism has virtual ly vanished. Notwithstanding many excellent institutions of higher learning in Pakistan, there is prevalent a famine of foreign students.
PREFAC E
This book is a modest attempt co understand the reasons for chis cont rast in the performance of Pakistan during cwo different periods, i.e 194 7-90 and 1990-2015. The choice of the cwo periods is based o n a close scrutin y of che broad economic trends and social patterns. The book strives co analyse che factors cha t can adequately account for the relatively robust accomplishments in che earlier period and the relative decline and stag n ation i n the second period. le represents a kind of quasinatural experiment in exploring che ingredients chat contribute co these different results.
The point is a survey of academic liceracure, policy and plan rev iews, and popular discou rs es since 1947 to identify che alternate explanatory hypotheses that have been a dvan ced, and chen test them against empirical eviden ce This methodology cannot hope to m arch the rigorous standards se t by professional economises as there is no underlying quantitative model und erpinning chis analysis which is , hence, necessarily ad hoc in nature. The idea was, however, co use a multidisciplinary approach and avoid che limitations of economic modelling, including abscractions from the real world sicuacion; a sec of assumptions co keep the model simple and the cho ices of variables co be included, some of which are not easily amenable co quantification. Using dummy variab les was an option chat was considered buc chat could have also led co enranglem encs with econometric issues of specification, omitted variables, estimation techniques, and the cobuscness of the results. Data paucity was a further cons ideration. As chis volume is intended for a wider audience than just economises, I decided co follow a more eclectic, qualitative, evidence-based method and capture the richness of the diffe rent prisms of political scientists, soc io logists, journalises, management and economises, and the like.
This study has beneficted from che insights of influential and thoughtful indi v iduals, focus groups, informal conversations, and consultations with people from a wide range o f walks in life. In addition co scholarly research , scud es of various government commiss ions in Pakistan have also been mad e us e of
T1ere are several features char make chis case study discincc from earlie r ones The definition of governance here is not limited co scare- centred
institutions alone but is multi-dimensional, covering a wide range of them. It is the first of its kind that examines in some depth the com piece array of the institutions in a historical context. le blends academic literature with popular opinion on these institutions expressed in the media. Most of the academic literature and popular discourses analyse these institutions in isolation. To overcome this weakness, an attempt has been made to examine the behaviour, norms, and actions of the society, policy, private sector, the military, religious organizations, and external actors that directly or indirecdy impinge upon the performance and outcomes generated by these institutions. Emphasis is placed on their incerlinkages and interdependencies.
I utilize the broader concept of social, economic, and sustainable development rather than simply economic growth. There are examples where the countries have grown rapidly through indiscriminate utilization of its natural resources, whose benefits accrue co a narrow minority at the top, and which over time become unsustainable. Such countries have wimessed civil wars, social conflicts, a breakdown of law and order, and prolonged periods of economic decline. Pakistan has also been characterized as an economy where the stare has been hijacked and markers rigged, with uneven development, pronounced income inequality, and gender and regional disparities. This strategy was pursued by successive governmentswhether military or civilian, or a mixture of these-in order co further their own interests and of those belonging to a small elite class. In my definition, development is a more all-encompassing endeavour that results in better education and higher literacy, adequate healthcare, productive jobs and livelihoods, an acceptable level of nutrition and access to clean drinking water, elec cricicy, roads , and infrastructure for ordinary citizens. Economic growth is c ritical as it induces investment in human and social development. An educated , healthy, well-nourished, and skilled labour force then enhances productivity and raises output and incomes, resulting in higher economic growth. This virtuous cycle is therefore the key to broad-based development. Over 80 districts of Pakistan rank low on the deprivation index, and the aim of the strategy should be to spread the
PREFACE
benefits of development in such a way that these accrue disproportionately to the citizens of these deprived districts.
The growing militancy, and the ascendancy of the jihadist elements and groups can also be expl ai ned in terms of the withering away of the scare and its institutions. As the people became increasingly disillusioned and disaffected by the s care institutions, these non-scare actors stepped in to fill the vacuum and operated parallel systems of justice, service delivery, and security. For example, th e people in Swat joined or supported the militant group because they were able co provide swift justice against criminals as was earlier the case during th e Wali of Swac's rule. Those unwill ing to join the jihadiscs were coerced into doing so as there was no fear of retaliation or punitive action by the dormant and dysfunctional state institutions. The army continues to administer Swat even after eight years of the operation as the civil administration is not ye t equipped to assume charge .
This brings us to che instruments, structures, and processes through whi ch che institutions exercise their authority, i.e. civil services, the federal, provincial, and local governments , the police, the prosecutory body, prisons, the parliament , and judiciary. The entire spectrum of institutions is critically evaluated to assess their capabilities and shortcomings but propo sals have been developed for reforms of only a few selected institutions concerned with acco untability, delivery of services, economic growth , social equity, and security that s hould have been prioritized. Successful restructuring of these rwo dozen institutions would have spill-over effects on the other insti t utions and the islands of good governance would go on expanding ove r time.
Going forw a rd, Paki s ra n s economy has to face a myriad of co mplex challenges arising from an unce rtain global environment, an explosive knowledge economy, disruptive t ech no logies, demographi c transition, and di mace change. Regionall}. the co unt ry can take advantage of its s trategic location linking South Asia with Central Asia, and Central Asia and China with the Middle Ease. The Chi na -Pakista n Economic Corridor (C PEC),
currently being implemented, can play a crucial role in establishing these linkages.
In the domestic arena, the battle against terrorism and ext remism, equipping the youthful population with education and skills for productive employment, bringing about inter-provincial harmony and social cohesion by reducing inequalities and disparities, and managing urbanization need to be aggressively cackJed.
Is Pakistan preordained t0 remain ' ungovernable ' , mired in a state of ceaseless , recurring crises, or can it become 'governable' once more? The long-term agenda for economic revival and social change that could help in transforming Pakistan into a 'governable' state, derived from the analysis and views solicited for this study, is spelt out below, and addresses these global, regional, and domestic challenges . These reforms, if properly implemented over a period of time by successive governments, should enable Pakistan t0 get back to the trajectory of an average annual growth of six per cent recorded in its first 40 years and achieve the status of an upper middle income co u ntry by 2035. However, the successful execution of chis agenda will depend upon the willingness of the ruling parry and the Opposition to adopt it and assiduously work to maintain political stability, provide a continuity and consistency of policies, and ensure clarity in their sense of direction The most important factor, as revealed by the findings of this study, is the resuscitation of institutions functioning under the executive, legislative, and judicial branches of governance to enable them co become sufficiently strong to effectively translate these policies, programmes, and projects on the ground. By doing so, it is possible to make up for lost rime because effective , responsive, and well-functioning institutions would help co minimize the politics of patronage, unshackle the entrepreneurial energies of the private sector, assure delivery and equitable access co basic services to the citizens, and empower civil society and local governments. It may be recalled that a study by the World Economic Forum had concluded that a slight improvement in governance results in
PREFACE
a threefold increase in p er capita in come in the long run. This is the likely gain which would be accrued by improving the civilian institutions of governance in Pakistan.
The entire ambit o f civil-military relations , a highly contentious and emotional iss u e, ought co undergo a drastic c hange if the civ ilian institutions become capable and effective, thus allowing the democratically elected leaders to asserr t heir sup remacy over the affairs of the state. The j uscificacion for seeking the aid of the army at the drop of a hat and thus opening the doors for th e ir intrusion in the civilian affairs would become redundant (the polls show that they are perceived by the p ublic in Pakistan to be the stro ngest and most trustworthy institution in the co untry at present). The armed for ces would themselves welcome the opportunity co concentrate on their core functions of ens uring the exte rnal sec urity of Pakistan, particularly ac a cime when ic is faced with serious threats from several directions.
Ayub Khan and Z ia ul - Haq co uld not have ruled Pakistan for as long as they did without the act i\e help of co mp etent civil servants and the highly effic ient ins titutions they manned. The military had to withdraw co their bar racks soon after the takeover to keep their professionalism intact but also because the co mmand and contro l sys tem to which they were accustomed was not attuned co civil administration. By the time Pervez Musharraf assumed power, che co rros ion had set in . Although his devolution scheme was co mm en dable, th e abolition of the offices of th e Commissioner, DC, ere. further weakened the institutions of governance. le is no longer possible for an ambitious general to hold the country together with the present ca dres of civ il servants and the institutional set up in a si tu ation when Pakistan is beset by a magnitude of complex and difficult problems. These civilian institutions, once strengthened, have co work co llaboratively and co ll ectively in a coo rdin ated manner to achieve the goals before them. The fed eral, provincial, and local governments , the parliament, and the judiciary have to respect the boundaries within which each has co fu nction witho ut encroaching on each other's domains. The cu rrent practices, norms, and mind-set that are characterized by confrontation, polarization, fighting for turf, and engaging in ' blame the other' games will
PREFAC E xvii
need to end. This will indeed be the most challenging undertaking which will either make or break the economic nervous sys tem and the security backbone of the country. The likelihood of this materializing will only be high when the gap berween the insticutional capability (including the capacity to adapt and change), and the changing development needs and aspirations of the population can be bridged.
It is my contention that the police and law-enforcement agencies, if properly recruited, tr ained, in centivi ze d, and equipped, along with a responsive judiciary can arrest th e inroads of the extremist and jihadist groups and help in implementing in letter and spirit the National Action Plan (NAP) that is intend ed to eliminate these non-state actors This, along with the delivery of basic serv ices to the ordinary citizens is the way in which the essential ingredients that had led to the perception of Pakistan as an 'ungovernable' state would slowly and graduall y dissipate.
The important question chat is often asked in Pakistan is: who will drive this change agenda? The concluding chapter attempts to address thi s pertinent question at some length. There is almost a consensus in Pakistan that institutional decay, aggravated over the last 25 years, has been responsible for bad governance, and thi s malaise has to be fixed. Pase experience has vividly demonstrated that sweeping reforms across th e board that affect the entire system are neither politically feasible nor economically desirable. Therefore, a second best solution has to be tried that limits the disruption and keeps the political noise and resistance to a minimum. The focus of this vo lume is, therefore, to select a small subset of a core of highly vital institutions for reform and restrucruring on a priority basis. The premise of this approach is that if these key institutions can be effectively reformed, it would create a demonstrati o n effect that would h e lp in moving towards the path of overall insticutional rejuvenation on a sustained basis. The purpose of this volume is to trigger popular and academic debate and discussion on the proposals developed here and push the envelope further to press forward the actions necessary to arrest and reverse the process of the institutional decay.
Introdu ction
Pakiscan was one of the top cen economic performers among the developing countries in the world during the first 40 years of its existence. Beginning with a very weak economic base at the time of Independence in 1947 and a tumultuous period of nation building, marked by continuing political instability in the aftermath of che death of its founder, Mohammed Ali Jinnah, ics record of achievement during the first four decades was impressive. It successfuUy absorbed and rehabilitated eight million refugees , or one fourth of its total population , fought a war with India, a much larger and more powerful neighbour, in 1965, and underwent a painful and traumatic dismemberment of che country in 1971. The emergence of a populist political regime chat undertook massive nationalization of private assecs in the 1970s, accompanied by an external shock of a major escalation of oil prices, dealt a massive blow to business confidence and led to a complete dislocation of the economy.
Close involvement with the US in the Afghan war to oust the Soviet Union in the 1980s and the associated faUout, i.e. che spread of sectarian violence, drugs, and Kalashnikovs , tore asunder the social fabric of the country. Notwithstanding these and many other chaUenges, boch internal and external, Pakistan was able to register an average of 6 per cent annual growth during ics first 40 years of existence. Pakistan was ahead of India and Bangladesh in all economic and social indicators.
According co some analyses , Pakistan had reached the threshold of becoming a middle income nation in the lace 1980s. According co Burki :1
In the lace 1980s, Pakistan had begun co exhibit many of the characteristics of a middle income co untry: ic was less dependenr on agriculrure than most
GOVE RNIN G TH E UNG O VERNABLE
low income countries and had an industrial sector that was comparab le in size and dive rsity to those in man y middle income nations; ic had a vast reservoir of highl y trained labourers ; it had a middle class numbering more than 30 million people, and it was as urbanized as the more developed countries of East Asia and the Middle East In the 1990s, however, the expectation that Pakisnn is on the verge of the crossing the thres hold to become a middle income country has ceased to exist.
Since 1990, Pakiscan has fallen behind ics neighbouring count ries , and has had a decrease in the potential growth race from 6.5 to 4.5 per cent2 with episodes of boom and bust. The booms were shore-lived and could not be su stained over excended periods of rime. Political instability and freq uent changes of government in the 1990s may have creaced uncertainty for investors, thus slow i ng down che pace of economic activity. There has . however, been smooth and orderly transition of power from one elected government to the other twice since 2008 but economic and social indicators have not shown much improvement. Growth has been slow, less stable, more volatile, and far less sustained than that of other co untri es in the region, and also relative to ics own performance in the 2000-2007 period . It is only over the past two years thac some change for the better is becoming visib le but whether it will be stable and sustainable in the years leading up co the ge neral elections is yet to be seen.
Externally, the popular image of Pakistan is that of a fragile or failed scare with a large and expanding arsenal of nuclear weapons encircled by Islamic extremists, and a safe haven for nurturing and craining cerroriscs who pose a threac co other countries There is conside rab le unease in the international community about the ceaseless rivalry and hostility between nuclear armed India and Pak.iscan who have thrice fought wars against each other. T he eascern pare of Pakistan was separated from the wescern in 197 1 as a consequence of a war in which India played a decisive role. Kashmir continues to rem ai n a highly contentious and volacile powder keg. Relations with Afghani scan remain cense , and mutual re criminacions and mis trusc have vitiated the atmosphere. Although Pakistan is a non - NATO ally o f the Uniced Scates, che general sentiment in both countries about
each other is not overly favourable. The US considers Pakistan duplicitous in its dealings with the Afghan Taliban and the Haqqani network, while Pakistan is bitter that notwithstanding it incurring significant losses and sacrificing hundreds of thousands of lives , its role in the war against terror is not fully appreciated . 3 Pakistan is perceived b y those beyond its borders as a source of regional instability and as an ungovernable counuy.
Therefore, the popular hypothesis about Pakistan's economic drift is explained by this increasing influence of religious extremists and terrorists who have threatened law and order and di sturbed the peace and sec urity. Economic agents are reluctant to undertake new investments in this environment This h y pothesis may be partially valid but th e economic decline had begun in the 1990s, well before Pakistan was embroiled in the war against terror in the post-2001 period. The average growth rate in the 1990s, when the country was relatively peaceful and tranquil, was already down from 6.5 per cent in the 1980s to 4 per cent. Investment ratios, export growth, and social indicators all cook a dip in chose years. Poverty, which was showing a downward decline until the 1980s, worsened by the end of the 1990s. In contradiction co this trend, the 2002-2008 period, whi ch was a period of acute violence and terror activity in Pakistan-including assassination attempts and terrorist attacks on the sitting presid ent and prime minister-the country recorded a remarkable turnaround. The growth r ate couched 6 to 7 per ce nt on average , the investment /G DP ratio peaked at 23 per cent, and foreign direct inves tment (F DI ) flows exceeded US$ 5 billion.
The Chief Investment Officer of a Swedish Mutual Fund 4 had thi s to say :
It was not until the e nd of 2008 that I first travelled to Pakistan and met with around 30 co mpanies . Some of these co mpanies were family-owned and had been around for 40-50 ye ars. The businesses were growing at an average of ten per ce nt and the policical or security situation was not having much negative impact on their pe rformance
During the past seven years of tumultuous turmoil resulting from terrorist
GO VERN ING THE UNGOVERNABLE
ac: ivicies reaching a peak, che co rporat e sector's earning growth on annual compound average growth race basis has been around 20 per cent wich che return on eq uiry (RoE) in excess of 25 per cent.
The recent experience of che 2013-16 period is illuminating. Macroeconomic stabiliry has been achieved, economic growth races are moving in an upward direction, and the co nfidence of domestic and internacionaJ investors has been restored (Pakistan has been upgraded to th e MSC! EM Index from the FM Index and its credit ratings by Moody's and Standard & Poor have also risen), negating che view chat Pakistan's sec uriry situation and its deep involvement in the war agai nst ter rorism is responsible for its poor economic and social performance. Therefore, the securiry deficit hypothesis does not stand up to serious sc rutin y.
[c is true that if che huge financial and human coses incurred in combating terrorism, che restrictions on cravel to and from Pakistan, and the suspicion with whi ch Pakistanis are regarded were eliminated, the economic uprurn would have been even higher in che 2002-16 period .
There is a group of analysts who argue that availabiliry of generous foreign assistance has been che principal determinant of Pakistan's economic success or fa ilure, and chat its fortunes vacillate with the ebb and flow of resources from external donors. le has been argued chat the three periods of economic spurrs in the history of Pakistan, i.e the 1960s, 1980s, and early 2000s, can be attributed co the heavy infusion of these resources into the country. In che 1960s, Pakistan was a CENTO and SEATO ally and was closely aligned wich che US in che Cold War, in che 1980s the country participated acti vely with che US in ousting che Soviet Union from Afghanistan , and in che earl y 2000s Pakistan was rewarded for its pivotal role in che war against terror. le is therefore argued chat Pakistan was che recipient oflarge military and economic assistance and chat was the major reason for the turnaround in these periods. Notwithstanding chis popular perception, the empirical evidence does nor prove chis assertion.
In che 1950s, Pakistan received huge military, civilian , and food aid, with the PL 480 imporrs of food from the US keeping hunger at bay. In the 19 70s, Pakistan was granted (through debt rescheduling) substantial debt relief; with over two-thirds of the debt payments of US$650 million, due
during 1974-7, being written off. Western aid through the World Bankled consortium amounted co $700 million annually but on top of this, official grants and concessional loans (some of which were subsequently transformed into grants or waived) from oil rich Arab countries and overseas workers remittances financed the huge imbalances in current account. 5
During co 1977-8, commitments of assistance from Iran and the Arab countries totalled $1.2 billion, largely on concessio nal terms. Pakistan was therefore comfortably able to meet as high a current account deficit as 10. l per cent of GDP in 1975, followed by 7 .1 and 7 per cent over the next two years. Parvez Hasan has calcuJaced that aid disbursements during th e mid- l 970s were at a level far above those reached during the 1965-7 0 p eriod (averaging $600 million annually, which included flows co East Pakistan ) after allowing for international inflation.
In the 1990s, the foreign currency depo sits of resident and non-resident Pakistanis in Pakistani banks, amounting to $11 billion , were utilized to finance ex ternal payments . These deposits, as chey had already been consumed , were then frozen in May 1998, causing a huge crisis ofliquidity and market confidence. This spilt over into the early 2000s. The IMF, World Bank, and Asian Development Bank (ADB) co ntinued to make loan s amounting to several billion dollars between 1988 to 1998, while Japan was the largest bilateral provider of concessio nal loans and grants uncil the nuclear tesc of Ma y 1998.
In the post-2008 period, the Kerry Lugar Bill authorized $7.5 billion US economic and military assistance co Pakistan for a five year period. MuJcilaceral banks and the IMF increased the quantum of their support while Pakistan became the largest recipient of UK aid. In this way, higher volumes of foreign assistance have been received in the post 2008 period bur the average growth rate h as hovered around 3 to 4 per ce nt. It can thus be seen that the periods of high growth rates, i.e. che 1960s, 1980s, and early 2000s, did not receive any exceptionally high foreign assistance flows as co mpared co the periods of the 1950s, 1970s, 1990s, and post2008 years.
McCarmey6 finds no credible ev iden ce co attribute Pakistan's episodes of growth co foreign aid inflows and circumstances emanating from the global
GOVERN I NG THE UNGOVERNABLE
economy. 'Using more rigorous econometrics over a longer period of time, there seems co be little generalised evidence that GDP growth in Pakisran has principally been of the [externally] dependent variety.' McCartney is of che view that accelerarion of economic growth occurred when the state successfully created conditions in which high profits were generated for investors and credit was channelled towards them. Therefore, the hypothesis of high foreign assistance resulting in high economic performance is not validated by the facts.
Coterminous with th e foreign aid syndrome is the widespread belief that the US and the Western countries in general have supported military dicr uors at the expense o f democratic governments. Their belief is that they are able to manipulate the strongman running the country to follow thei r agenda and interests , and therefore Pakistan's economy has fared well only under che military regimes with the blessings of the US. The frequent dis!T'issal of elected regim es in the 1990s and the coup co overthrow Z. A. Bhu 1:0 in 1977 were all engineered under this compact, and the drop in economic performance was caused by the consequential political instability. While it is true that US national interests did coincide with those of during the Cold War, the war against the Soviets in Afghanisran , and that against Al-Qaeda in the 2000s , it must be recalled that the US suspended or curtailed economic and military assistance ac crucial times in Pakis tan's history when the military dictators were still in power. aid was suspended soon after the 1965 war with India , the 1971 separation of Ease Pakistan , and under the Symington amendment in the early period of Zia ul-Haq's rule. Sanctions were imposed in 1999 when General Pervez Musharraf took over the reins of the government. President Bush's National Security Adviser, Condoleezza Rice has chronicled in her book, A Memoir ofMy Extraordinary, and Ordinary Family and Me (Ember, 2000) the efforts made by the US administration to bring in Mohcarma Benazir Bhutto co take over power from Pervez Musharraf in the posc-2007 period. The ambivalent attitude of the US can be gauged from the fact that d1ey have supported d ictators in Egypt but have for the past 15 years been engaged in the overthrow of Saddam Hussein , Muammar Gaddafl, and Bashar Al Assad in Syr ia. The close defence, nuclear, and economic
relations between India, the largest democracy in the world, and the US do not lend any credence to this theory either. US national interests in Pakistan have not remained static; US interest has vacillated over time and their support to Pakistan has been opportunistic rather than stra tegic or deterministic. Whenever these interests converge with those of Pakistan and notwithstanding irritacions and quibbles on both sides ( 1950s-SEATO/ CENTO; 1980s--expeUing the Soviets from Afghanistan; and the 200116 War in Afghanistan), the US has chosen to assist Pakistan irrespective of the nature of the government in power.
We then examine another factor, namely th e global economic co nditions that may have playe d a negative role in this outcome. The reality is that che external environment between 1990 and 2008 was an excremely favourable a period in which most emerging and developing countries made great economic s trides, as Steve Radelec chronicles in his book The Great Surge,7 while Pakistan feU behind India, Bangladesh, Sri Lanka, Vietnam , and other countries during that period. Since 1995 , the real GDP of emerging and developing councries (EDCs) has grown by 4.7 per cent annually on average and per capita incomes have increased b y over 7 0 per cent between 1995 and 2013. On a populacion weighted basis , excluding China, the increase has been about 90 per cent. Consequently, the relative share of EDCs in the global GDP (measured at purchasing power parity) increased co 57 per cent in 2014. The number of poor living at $1.90 p e r day has halved from 2 biUion in 1990 co 897 million by 2012, bringing down the share of poor people in the tocal population from 37 co 13 per cent in 2012.
The number of people living at low levels of human development fell from 3 billion in 1990 co slightly over 1 billion in 2014. 8 The share of EDCs in the world exports rose from 24 co 41 per cent during this p eriod and international capital flows jumped from $91 co $1,145 bilUon. All the social indicators, s uch as life expectancy, maternal mortality, infant mortality, adult literacy, net enrolment ratios , and average years of schooling have shown significant improvements. We can therefore rule out that the ex ternal eco nomic environment was a major faccor in explaining Pakistan's poor performan ce during this 25-year period. Other countries in the neighbourhood who were lagging behind Pakistan have taken advantage of
GO
the dynamic global econo my to bring improvements in the living stan dards of che majority of their people.
Some analyses have attributed Pakistan's poor performance co the 'Garrison Stace' syndrome. 9 As Pakistan has been obsessed with confronting a much larger arch rival India since its formation , ic has co allocate a much large r amount of its resources to defence expenditure, and preserve and expand che corporate i nter es ts of the military. Hence, the neglect of education, health, and human development in general, and the diversion of resources to meet the demands of defence, nuclear capability, and ocher security-related expenditure has led to the present economic and social outcomes. The ratio of defence expenditure co GDP has been consistently hi gh in the first 40 years and is now 2.9 per cent of GDP, almost one half of what ic was in ch e 1980s. Mose of the nuclear-related expenditure was incurred in the 19 7 0s and 1980s. In FY 2016, the budgetary allocation for education was 2.7 p er cenc. 1° Combining health and education, the budgetary allocation is 3.7 per cent, higher than char of defence and internal security. In the education and health sectors, ic is governance and management issues char are the impediments in the delivery of these services rather than budgetary aUocacions .
A popular myth th ac has now become quire entrenched as accep ted truth is chac of che large corporate interests of the military. le is crue that the; have foundations and trusts chat run enterprises, but the proceeds and profits they earn are utilized for the welfare of army pensione rs, particularly the soldiers w h o retire at an early average age of 45 to 50. The edu cation and healthcare of their famil ies are financed by the income generated by these foundations and trusts. To put chis in perspective, the total market cap in November 2016 of all the listed companies owned by the Fauj i Foundarion, Army Welfare Trust, Shaheen Foundation, and Bahria Foundation represents onl y 4.5 per cent of the coral market cap of the companies listed o n the Pakistan Srock Exchange. These are th e big players and everyone points fingers cowards these companies. All of ch em pay all th eir taxes on their income, sales, and imporrs, an d do not enjoy any preferential exemptions or receive any special concessions. The share of other unlisted companies in the cotal assets of unlisted companies
is not known but is likely to be quite insignificant as the universe of privately owned enterprises and businesses is substantial. Therefore, the Garrison State hypothesis too does not meet the test of evidentiary confirmation.
Having ruled out faccors such as sec urity and te rrorism, inflows of foreign assistance, preference for military rule, external economic environmenc , and diversion of public expenditure towards defence which may have all p layed so me role but were not the princi pal determinant of the poor performance, we turn our attention co the institutions of governance. There is by now a great deal of theoretical literature and empirical evidence chat poincs u s in this direction.
The principal argument of chis study is that the intermediation process through which good economic policies are translated inco rise in incomes and equitable distribution of benefits involves the institution s of governance. It is the quality, robustness, and responsiveness of these institution s through which the implemencation of social and economic policies rakes place. The principal institutions of governance comprise the judiciary, necessary for the protection of property rights, and the enforcement of contracts; the legis lature which prescribes laws and the regulatory framework; and the executive which makes policies and supplies public goods and serv ices. If th e access to the institutions of governance for common citizens is diffi c ult, time-co nsuming, and expensive, the benefits from growth get distributed unevenly, for the gainers are only those who enjoy preferential access to these institutions.
The Human Development in South Asia reports of l 995 and 2005 lay bare the incidences of uneq u al access d u e to poor governance:
South Asia presents a fascinating combination of man y co ntradictions. le has governments chat are high on govern ing and low on servi ng; it has parliaments th at are elected by the poor but aid the rich ; and [a] society chat asserts the rights of so me but pe rpetuat es exclusion for ochers. Desp ite a marked improveme nt in the lives of a few, there are many in So uth Asia who h ave been forgotten by formal institutions of governance. These are the poor, che downtrodden, and che most vulnerable of che society, suffering
GOVE R...'l lNG THE UNGOVERNABLE
fro m acute deprivation o n account of their income, caste, creed, ge nd e r or rdigion. Their have not moved with chose of the privileged few and chis in itself is a d eprivatio n of a depressing nature.
(Human Development South Asia Report, 1999)
Gove rn ance cons titutes fo r [o rdin ary p eo ple) a daily struggle for survival
an d dignity Ordinary people are coo often humiliated at th e hands of public ins tituti ons. For chem, lack of good governance means police brucalicy, co rrupt io n in accessi ng b as ic public services, ghost sc hools, teachers' a bse nte e ism , missing m edi c ines , high cost of and low access co justi ce, criminalization of politics, and lack of social justice. These arc just a few manifestations of the crisis of gove rnance
(H uman Development in South Asi a Report, 2005)
It must be conceded th at there is no definitive or conclusive definition of governance I use, for the purpose of this study, the World Bank definition set o ut in WDR 2017 (di sc ussed la ter on in this Chapter). The link b etween institution s and eco nomi c and social development is through investment in phys ical and human ca pital . Both the efficiency and the volume of invest ment co uld dep e nd up o n the quality of institutions. The writ of the s tate, d elivery of services, ma c roeconomi c sta bili ty, and equitabl e dis tribution of benefits can b e effectively achieved only if these institutions are functioning effective! ).
Manc ur O lson et al. (1998) were among the earlier sc holars who d e m o n s trated the link b etwee n governance capacity, institution s, and economic growth. 11 Their principal argument was chat countries with unstable governance m ake economic agents act under uncertain co nd itio n s, determining weak proper ty ri ghts, and enforcement and protectio n , and therefore fail in attempting to act iva te a constant growth process. Pro perty righ ts protection are an essential in gredient for private secto r investment an d the refore, ove rall economic growth. H oweve r, in a si tuation of political, eco n o mic, a nd legal un ce rt ai nty, the ri sk perceptions of investors is heightened. T hey, therefo re, de mand higher than normal rates of return and a quicker payoff period before they decide to in vest. The ir inability
to find such investment opportunities results in stagnant or declining invesrment ratios.
The academic literature on governance and economic growth has empirically examined questions such as: (a) whether th ere is a positive relationship berween good governance and economic growth, (b ) whether this relationship is unidirectional or does the relationship run in both directions , i.e. does good governance contribute to econo mic growth and vice versa, (c) if this relationship holds good, what are the components and aspec ts of good governance that influence such an outcome, (d ) how do countries select among these co mpon ents because suc h measures are highly correlated, (e) which public sector reforms will effectively strengthen these meas ures of good governance, and (f) what are the incent ives for the d ecisio n - make rs to put in place such reform s and zealo u sly implement them.
The available evidence in a number of studies across co untr ies suggests that there is a positive relationship berween good governance and economic growth . An IMF empirical stud y (2 003), 12 using geographic variables as instruments, found that governance has a statisticaJly significant impact on GDP per capita across 93 countries, and that governance explains nearly 7 5 per cent of the cross co untry variations in in co me per head. A stud y b y Huther and Shah (2005 ) 13 found that there is a high correlation b e rween the quality of governance and per capita income. The positive cor relation berween the 10-year economic growth rat e and gove rnan ce quality supports the argum ent that it is an important determinant in economic development. As the high est income co untri es h ave generall y not h ad the high est growth rates over the past decade, the positive correlation berween higher growth and better governance su ggests that good governance improves economic p erforman ce rather than vice versa. Kaufmann and Kraay (2 002) 14 found direct causal effect from better governance to higher per capita income across countries in relation to 175 countries for the period 2000-01. Nega tiv e causal effect is also found from poor governance in relation to per cap ita in come, implying that improvements in governance are unlikel y to occur merel y as a co nsequen ce of devel opment. The simple correlation coefficient between per capita income and the quality of governance is
