Pakistan’s fractured governance cannot hold, and hope lies only in giving way to democracy
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A somber mood permeates the economic and political landscape of Pakistan. The economy goes from bad to worse as it implodes under the burden of extractive institutions and unsustainable debt while a restive and youthful population desperately seeks some sign of hope. But the prospect of improved economic opportunity for the greater welfare of the populace can only be brought by political institutions ensuring that the nation’s growth potential is unleashed through equitable and effective distribution of resources. In its absence, the country descends into a downward spiral of burgeoning unemployment, poverty, and grinding despair. To quote WB Yeats, “Things fall apart, the center cannot hold; Mere anarchy is loosed upon the world.”
Pakistan’s annual inflation rate accelerated to 27.6 percent in January of 2023 from 24.5 percent in December, and 13 percent in January 2022. The impact of the almost 20 percent recent rupee depreciation is yet to be fully reflected in consumer prices. Moreover, as the government implements corrective fiscal measures and tariff increases delineated by the IMF for resuscitating the bail-out program, inflationary pressures will be fueled further.
That is not the worst of it. As well as eviscerating the purchasing power of lower and middle-class households, many families are having to contend with their main wage earners losing jobs as unemployment sweeps across the country with the widespread partial or complete closure of businesses. Since January, banks have not been issuing letters of credit, except for essential food and medicine, causing a backlog of raw materials for many industries. The logjam combined with the rupee depreciation and energy crises has sparked a manufacturing downturn.
Official employment figures will only come with a considerable lag, but it is reported that in the textile sector alone, 700,000 people are estimated to have lost jobs.
Javed Hassan
Official employment figures will only come with a considerable lag, but it is reported that in the textile sector alone, 700,000 people are estimated to have lost jobs. Including other industries, such as auto and construction, inter alia, there may be as many as 2 million job losses over the last six months. The total number of unemployed could be 6.2 million people or 8.5 percent of the total workforce of 73 million. The IMF has cut down its estimate of GDP growth forecast for the current fiscal from 3.5 to 2 percent, while others estimate a much sharper slowdown. The situation is dire and has been long in the making, but what makes it worse is the crisis of governance that fails to point a way forward.
Pakistan has had a history of fractured governance where the development of democratic institutions has seen long periods of hiatus. Even during supposedly democratic dispensations, the parliament, and elected leaders have acted as second fiddle to what is euphemistically referred to as the establishment. At other times, when the country has been subject to direct military intervention, the democratic journey has taken many steps back.
This is starkly reflected in the World Bank (WB) Worldwide Governance Indicators (WGI), which ranks key dimensions of legal, political, and economic institutions across 200 countries. Pakistan not only compares poorly against South Asian peers but its institutional quality ranks in the bottom quartile of nations on most indicators. Regarding democratic institutions, Pakistan’s percentile ranking is 25.12, which suggests Pakistanis face limitations in selecting their government and freely voicing their opinion. Regarding perceptions of the Rule of Law, that is, “the extent to which agents have confidence in and abide by the rules of society, and in particular, the quality of contract enforcement, property rights, the police, and the courts…”, the country’s percentile ranking is 23.56.
The overall picture presented by WGI for Pakistan is bleak with the clear inference that the state lacks the institutional capacity to regulate and direct economic and social interactions for promoting the democratic participation of citizens in governance and the advancement of an open and competitive business environment. Not only has the state failed to entrench respect for the law and observance of rules, but institutions have been misused by the élite for its benefits rather than ensuring greater levels of welfare. As Daron Acemoglu, co-author of “Why Nations Fail” and Professor of Economics at MIT argues, “extractive political institutions support these economic institutions by cementing the power of those who benefit from the extraction.”
The undermining of democratic processes has contributed to extractive political institutions running the economy to the ground. A miasma now hangs over the nation as it potentially faces bankruptcy. The governance structures lack the confidence of the people and the will to create inclusive economic institutions that can shape incentives to invest, innovate, and encourage new local and international investors to enter. That is imperative for creating new businesses and expanding existing ones to provide employment opportunities. For that to happen, there must be a political resolution. Democracy finally must be allowed to blossom and the will of the people prevail.
- Javed Hassan is an investment banker who has worked in London, Hong Kong, and Karachi. He tweets as @javedhassan.
