Despite a sustained level of significant economic growth for the last thirty years Pakistan continues to be, in many fundamental respects, an underdeveloped country, a country where the majority struggles at a low quality of life (economic and political insecurity, a lack of access to good health and education services, etc). This might prompt us to ask two inter-related (but distinct) questions: what is meant by the term ‘development’ and what leads to it? It is clear that in academia and in policy circles there is no obvious answer to either of them.
The standard way in which we typically conceptualise ‘development’, and the story that underlies much of modern political thinking, is to equate development with the growth of income (GDP per capita). And the key to achieving that, it is argued, is the promotion of markets. A functioning market system is effective because it allocates resources efficiently, fosters investments (in physical and human capital), rewards efforts, risk-taking, innovation and imagination. Markets, the claim goes, are the engines of growth (and therefore development). In addition they extend the range of choices people have, nurture autonomy and individuality, and all that bodes well for the chances of political democracy. Free markets will, it is hoped, eventually translate into a freer and more open society. Markets, because they encourage multiple sources of power, have historically been associated with the curbing of the exercise of arbitrary power, coercion and the limiting of the potential for corruption to take root.
Well, so far so good. But where the story gets complicated is that economists now widely acknowledge that markets are not smooth-functioning machines that can run on their own. Instead, they can fail for a whole host of different reasons: people can lack information, and they can make decisions without thinking of their negative consequences on other people. Consumers and businesses can be myopic, unfair; they can try and cheat the system for their own private gain because they don’t have a sense of responsibility to the community or, more prosaically, because they cannot be monitored and because not every transaction between them can be written down in a formal contract. Trust, ethics, and a sense of fairness might be just as crucial in the functioning of markets as good information.
One of the consequences of all this is that good institutions and good governance are probably a lot more important than previously thought. Markets might indeed lead to less corruption but for individuals and markets to flourish in the first place the system has to be not corrupt. So, the role of the state in countering these market failures and in promoting development has to be factored in. How? For example, in overcoming co-ordination failures (why should I pay my taxes if nobody else does?); in providing information, regulating, and setting down standards; in ensuring the rule of law and accountability that allows people to transact with one another. Also, more directly, there’s a case for investing in quality education, not simply because that is central to any conception of human flourishing itself, but because the private sector might under-invest if they don’t take into account ‘knowledge spillovers’. Also, critically, the state can have an obligation to make sure that those with skills and drive are not excluded because of their lack of present resources
Which leads us to a difficult question: why is it, then, that only some states think about the good of all its citizens? Can a society actually be a good society unless the economic and political system encourages the allocation of fair rewards to people with various talents, one that allows all of them to pursue and develop their own goals? There’s now ample empirical evidence to suggest that more equal societies in fact do much better on lots of indices of development, whether that’s in terms of levels of happiness or less crime, or better health and education outcomes.
So, we’re left with the conclusions that if markets can fail so can states. The real question remains: if some institutions are better than others at fostering development, if they ‘work’, why aren’t they adopted? The answer to that question, for some economists, lies in the further question: work for who? For the crux of the matter is why shouldn’t the elites block institutional or technological changes that might benefit significant swathes of the population if by doing so they undermine their own economic and political power?
The writer is a professor of economics at Lahore University of Management Sciences. The views expressed here are his own.