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PAKISTAN---THE ECONOMY OF AN ELITIST STATE

DR. ISHRAT HUSAIN
The author is a Director at the World Bank. The views expressed in this article
are his personal views and do not represent those of the World Bank, its
management or the Executive Directors.

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The state and the market: Mere instruments of wealth accumulation and
concentration for a tiny elite
DYNAMICS OF THE ELITIST MODEL IN PAKISTAN

The political economy of Pakistan can be adequately unraveled by understanding the

dynamics of the elitist
model of growth within which, in the considered opinion of this writer, the whole
politico-economic
processes unfold. We seek to explain as to why the elitist growth model was
successful in Pakistan and
what can possibly be done to weaken the grip of the elites and thus change this
past pattern of growth.
This scholastic exercise has been carried out in the earnest hope of bringing
about a fundamental change in
the lives of the ordinary people of Pakistan. These observations are thus rooted
in the literature on the
political economy of developing countries.

How does one know that an elitist growth model is in fact being pursued? Although
there are no direct
indicators or precise quantifiable parameters, a number of characteristics can be
identified that make this
type of model work in practice. The essential ingredients are:

(a) a strong leader or succession of leaders who enjoy almost regal powers and
implement their own
agenda with few or almost no checks and balances;

(b) a powerful bureaucratic class that implements the wishes of the leader without
questioning their legality
or relating them to the larger public interest and in the process arrogates to
itself the task of defining the
goals of the State, which are made to coincide with its own; and

(c) a dormant and subservient population that is passive and indifferent to the
actions of the leaders and
bureaucracy.

For almost half of its fifty years Pakistan was governed by strong military
leaders and for the other half by
strong civilian leaders who unwittingly adopted the same military leaders as their
role model. Although the
Eighth Amendment introduced checks on the powers of the Prime Minister in actual
practice this had little
effect. The elected governments were dismissed four times between 1988 and 1996 on
charges of
corruption and excesses.

The bureaucratic class was a powerful ally of the strong leaders until 1973 and
played a major role in
advising and implementing the agenda for their political masters. After 1973, when
they lost their security of
tenure the nature of the alliance shifted to that of a docile, subservient, and
unquestioning group of
functionaries who diligently carried out the orders of the politicians---right or
wrong.

Until recently freedom of expression, freedom of association and freedom of the

Press were severely
curtailed. The majority of the population was uneducated and illiterate and used
to a tradition of a
paternalistic way of governance inherited from the colonial period and cemented by
the subsequent
autocratic rulers.

Agitations against the government were seldom triggered by economic issues.

This combination of strong autocratic leaders, a pliant bureaucracy, and a

subservient population made it
possible for the benefits of growth to be unequally distributed and concentrated.

The relationship between economic growth and income inequality in developing

countries has been the
subject of numerous empirical investigations as well as speculative discourses.
The inverted U curve
discovered by Sim Kuznets, based on the cross-sectional study of a sample of
developing and developed
countries, has remained the predominant strand of thinking on this subject. The
literature on 'redistribution
with growth' which appeared in the mid-1970s confirmed the tendency for the
benefits of growth to be
concentrated in the early stages and to spread only slowly. Those developing
countries which have taken
positive action such as improvements in modern sector employment through education
and the rapid
growth of demand for labour or redistribution of land and, redirection of public
investments have witnessed
the poor sharing equitably in income growth.

In the case of Pakistan and a number of other countries the poor have been
prevented from sharing
equitably in the general increase in output by a number of specific disabilities
that can be summed up as
lack of physical and human capital and lack of access. In the political economy of
growth in Pakistan, as
narrow minority of influential elites drawn from the landlords, political parties,
the military civil servants, big
business and the professional class dominated the scene throughout the past five
decades and maximized
their rent-collecting activities. As demonstrated earlier this was the main
stumbling block in securing access
to public services by the poor and their acquisition of physical and human
capital.

PRODUCTIVE SECTORS

The distribution of land--the most important asset in the first two decades of the
country's history--was
highly skewed, with large landholdings and jagirs concentrated in the hands of a
few thousand families.
These land titles were not earned; they were conferred on the beneficiaries by the
British for the loyalty
demonstrated by these classes in keeping the British Raj intact.

This particular incentive, i.e, to acquire wealth not through hard work or
productive means but by winning
the favours of the ruling classes, formed the basis for the subsequent evolution
of Pakistan's economy.

In the 1950s, import licensing, overvalued exchange rates, and subsidized capital
made available by a
succession of politically unstable but bureaucratically entrenched governments
provided ample
opportunities for a small class of robber barons to enrich themselves and their
families. Although they laid
the foundation for industrial growth in Pakistan, the efficiency and equity
dimensions of this growth were
never seriously considered.

The Ayub decade of reforms, with its overt emphasis on 'liberalization', was
anything but 'liberal'. Under
high rates of effective protection, working in almost monopolistic or
oligopolistic market structures with
interlocking interests in financial and banking houses, a few hundred industrial
families were able to capture
enormous gains from the industrialization policy. While the social benefits, i.e.,
value added at world prices,
were insignificant, or in any cases negative, the private benefits, i.e., value
added at distorted market
prices, were exceptionally high. Several empirical studies of the
industrialization of Pakistan by Lewis,
Amjad, Whitehead, and Islam, and research articles in the Pakistan Development
Review have sufficiently
documented the concentration of economic assets resulting from the economic
policies pursued in the
1960s.

The Green Revolution of the late 1960s and the 1970s did make a significant
difference in rasing the
overall level of wheat and rice production and the productivity of land in
Pakistan, but the nature of the
technology favoured the irrigated areas rather that rainfed areas. As irrigated
land in Pakistan is more
unequally distributed--owned or operated mostly by large landholders--while the
poor subsist on the
rainfed areas, the differential impact of this new technological breakthrough
further accentuated the income
disparities. Reinforcing this tendency were two other public policy-induced
development.

First, private tubewells to tap sweet ground water reservoirs were encouraged and
subsidized, and
second, generous amounts of subsidized credit by the Agricultural Development Bank
were granted to
large farmers to purchase tractors and other mechanized equipment. The expansion
in the number of
owneroperated farms was paralleled by a decline in the demand for hired labour in
the rain-fed areas. The
consequent migration of rural labour from the barani areas to the urban areas
created further pressures on
the environmental and general conditions under which the poor lived.

The revolt against the pro-rich economic policies of Ayub Khan that culminated in
the separation of East
Pakistan brought into power the populist regime of Zulfikar Ali Bhutto. It was
felt that the past trend of
economic concentration would be reversed under this type of political regime and a
more egalitarian
economic order would be established. The nationalization of large-scale
industries, banks and financial
institutions, and agro-processing industries were considered the key element of
this strategy. But the record
of the 1970s shows that the country not only slipped badly in maintaining this
high economic growth
performance, but that the income distribution effects were equally disastrous.
Instead of expanding
investment for productive purposes, large private businesses resorted to
speculation, trading, and obtaining
contracts from the state-run corporations. While these corporations suffered
financial losses which were
financed by the exchequer, the business classes prospered by co-opting the
managers of the corporations
to their side. Although a number of exogenous shocks make it difficult to
disentangle the harmful effects of
the policies pursued during this period, the migration of millions of workers to
the Middle East after the oil
price boom and their remittance did act as a safety valve to what would otherwise
have been a period of
high unemployment, high inflation, stagnant output, and worsening income
distribution.

The reversal of the Bhutto policies in the 1980s and early 1990s brought an end to
the uncertainty, but by
then a new source of rent-seeking had been discovered by the elites. As pointed
out earlier, the
nationalized commercial banks and the development finance institutions suddenly
became major conduits of
industrial capital flows. The loans sanctioned by these financial institutions not
only allowed the equity
portion of the sponsors to be paid off through overinvoicing of machinery and
equipment but the loan
applications were never subjected to rigorous appraisal to establish the financial
viability of the underlying
project. The mushrooming of spinning units that produced low value-added yarn
brought enormous grief to
export expansion efforts. Unlike other Asian countries, the higher value-added,
labour-intensive garment
and other ancillary industries never took off, making Pakistan's policy makers
hostage to the powerful
lobby of spinners and making the country highly vulnerable to fluctuations in the
external cotton yarn
market. By forgoing an excellent opportunity for expanding employment and incomes
in the textile sector,
the country once again fell prey to the machinations of a small group of
industrialists who earned their
profits by processing domestically produced cotton procured at subsidized prices,
i.e., below international
market prices, and selling yarn at world prices.

Not only did the country get stuck in a low-level export equilibrium, but the
financial institutions themselves
accumulated a large portfolio of non-performing assets. The non--servicing of
these loans has created a
serious problem for the health of the financial system, the pricing of new credit,
and the access to credit by
newcomers. The concentration of written-off or non-accruing credit in the hands of
a few thousand
individuals and firms exacerbated the inequality trend.

FISCAL POLICY

While the main productive sectors of the economy-agriculture and manufacturing

promoted a pattern of
growth that benefited a small minority of the population disproportionately, the
contribution of this class to
the tax-generating capacity of the country was almost negligible. In many
developing countries, taxation has
been used judiciously to finance the priority investment needs of the country and
as an instrument for
promoting equity. In Pakistan, unfortunately, taxation has not only been
inadequate in relation to the needs
but has also been regressive. The tax-GDP ratio of 14-15 per cent is the lowest
among countries of
identical income levels. More importantly, it is derived largely from indirect
taxes, customs duties, excise
taxes, and sales tax whose incidence falls proportionately on all income classes.
Direct taxes account for
2-3 per cent of GDP and the coverage extends to only one million people. Most
income tax payers are
salaried or wage-earning employees, importers, contractors, or other whose taxes
can be withheld at
source. The autonomous taxpayers, i.e., those whose incomes are assessed by the
tax authorities outside
the withholding tax system, account for a very small fraction of the total income
tax collected. Tax evasion,
exclusion from the tax net, and collusion with the tax collectors have given rise
to a nouveau riche class of
tax officials and businessmen who have made millions at the expense of the State.
This tacit arrangement
between a small class of tax evaders and unscrupulous tax officials has reinforced
the widening gulf
between those at the top and the bottom of the ladder. The successive 'whitening'
of black money or tax
evaded money and its round tripping through foreign exchange bearer certificates
has not made it any
easier to promote the culture of tax payment in the country.

Another set of fiscal policy instruments that was used throughout the fifty years
was an excessive use of
selective tax incentives, discretionary exemptions from customs duties and income
tax credits, etc. These
concessions deprive the State of income that is transferred to the firm or the
entrepreneur who makes the
investment. The source of the investment was at least partly money that belonged
to the government in the
form of tax payments, but the income produced by that entire investment belonged
to the investing firm or
the entrepreneur. The firm did not care if the investment yielded positive
economic returns as long as it got
good returns on that portion that was its own capital. If part of the investment
capital was borrowed from a
government-owned financial institution, the expected financial return was even
lower. The history of sick
industries in Pakistan is replete with several thousand episodes of industrial
firms borrowing heavily from
government-owned financial institutions, receiving generous tax holidays and
exemptions from customs
duties, etc. overinvoicing the value of imported machinery, making a fast buck in
the process, and
abandoning the plant. The economy ended up with inefficient allocation of scarce
capital, but the individual
firm or entrepreneurs made substantial financial gain at the expense of the State.
This modus operandi has
resulted in Rs 135 billion of non-performing assets in the hands of financial
institutions and more than Rs.
60 billion of tax income frogone annually. The beneficiaries of these transfers
are no more than one
thousand individuals and firms. A small portion of this Rs 60 billion would
suffice to provide basic social
services to the poor.

The public expenditures, on the other hand, do not show any explicit bias towards
the poor. Defence
expenditure and debt servicing pre-empt a very significant proportion of the
budget leaving very little for
redistribution purposes. Subsidies on fertilizers and other agricultural inputs
accrue mainly to the large
operators or inefficient firms. The wheat subsidy benefits mostly the flour-mill
owners. The implicit and
explicit losses of state-owned corporations and enterprises such as the railways,
steel mills, cotton and rice
trading, heavy machinery, and WAPDA have put serious constraints on the
manoeuverablity of the
government in redirecting public expenditures. Even assuming that there was a
benign and willing
government that was prepared to invest in pro-poor programmes, it is not obvious
that the administrative
machinery, given the way in which it is organized and which has traditionally been
beholden to the powerful
interests, would be capable of reaching the intended beneficiaries.
The fiscal policy, normally a powerful tool aimed at improving equity, has ended
up being an instrument for
private wealth accumulation at the expense of large segments of the population. As
productive sectors and
fiscal policy have failed to spawn equalizing tendencies, the burden for
improvement falls on the human
resource development strategies. But it has been widely documented that the
indicators of human
development in Pakistan are among the worst in the developing countries. The
reasons for this outcome are
not surprising.

HUMAN DEVELOPMENT

The educational system has been torn between the religious madrassahs and the
modern school system. A
large majority of children, particularly in the rural areas, attend the madarssahs
where they are taught the
Koran and Islamic precepts. A minority ends up in the modern school system, which
is again subdivide into
English medium and Urdu medium schools. As the official working language of the
country is still English,
this initial choice of schooling bears heavily on subsequent status and
achievements in life. Those coming
from well-to-do and affluent families invariably go to the English medium schools
which are run privately
and charge exorbitant fees. Children from poor families either do not attend
school or, if they do, their
place is the poorly-run government schools where Urdu is the medium of
instruction. The quality of
education is poor in such schools because the appointment of teachers and school
administrators is based
on political connections, influence, or money. A recent study found that three-
fourths of the teachers could
not pass the tests administered to their students. The output from such schools is
ill-equipped to meet the
demands of modern life and is relegated to the ranks of the unemployed, or becomes
petty clerks,
messengers, or go into similar jobs. Those educated at the best private
institutions in the country, such as
the Karachi Grammar School or Lahore Aitchison college, go on to the Ivy League
institutions in the US or
Oxbridge in England and often come back to largely occupy the top professional
jobs in the country or
inherit political offices occupied by their families. So, unlike other progressive
countries where education
has promoted access and equality of opportunity across income classes, the
education system in Pakistan
has in fact strengthened and reinforced segmentation, perpetuated existing
divisions among income and
social classes, and allowed the benefits of education to be captured by the scions
of the already rich.

Access to nutrition and health facilities is also highly differentiated and

parallels the story of educational
facilities. The government -run hospitals, clinics, and dispensaries are in
terrible shape, devoid of basic
drugs and equipment. The doctors manning these facilities use these public
institutions to further their own
personal practices-as patients are encouraged to visit them at their private
clinics. The drugs supplied by
the government for free distribution among patients are sold in the market to earn
private profits, while
poor patients have to fend for themselves. The private clinics and hospitals, on
the other hand, are well run
and maintained and boast of all state-of-the-art equipment, but their fees and
charges make them an
exclusive domain of the upper income classes.

ORIENTATION OF INSTITUTIONS

The interaction between the initial unequal asset distribution and public postures
in agriculture, industry
education and health further widened the gulf between the top one per cent and the
rest of the population.
The technological bias of the Green Revolution, the regressive taxation and public
expenditure pattern, and
the anti-poor nature of the human resource accumulation strategy in Pakistan have
all worked in the same
direction. The institutional infrastructure was deliberately weakened so that it
is no longer capable of
delivering services to the poor . The legal, judicial and contract enforcement
mechanisms are so painfully
slow that it is almost impossible to obtain any meaningful or timely redress from
the infractions committed
by state functionaries or members of the elite class.

Underlying the success of the elitist model in Pakistan was the use of power over
political resources to
acquire power over economic resources. This power was gained either through direct
appropriation of
state assets or, indirectly, by misappropriating or avoiding paying what was owed
to the State. The elite
thus had a vested interest in opposing new market liberalizations that might
threaten its privileges.

On paper, there have been many attempts to liberalize the economy-right from the
days of Ayub Khan.
But the system in practice has never worked as it is supposed to. The services of
middle and lower levels
in the bureaucracy, or agents of the ministers or other influential higher-ups,
are always needed if delays,
complexities, obfuscations , overlapping jurisdictions, and endless requests for
more information are to be
avoided. Even if some well-meaning top officials are committed to bringing about
reforms and liberalizing
the economy, the administrative machinery down the hierarchy is so cumbersome and
anachronistic that
policy intentions are seldom translated into action.

As if the fiscal monetary, and trade policies were not stifling enough,
politicians, bureaucrats and military
rulers enact a myriad of laws and regulations, rules, decrees, and statutory
orders that affect almost every
single aspect of running a business. The interpretation of these rules and laws is
the exclusive domain of the
enforcers,while the appeal and litigation processes are so slow, time consuming,
and cumbersome that it
makes sense to cut private deals with the enforcing agencies rather than challenge
them.

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