Extractive Institutions & Post-Colonial Pakistan

Author Name: Hassan Mujtaba      20 Feb 2021     Domestic Economy

Daron Acemoglu and James Robinson are amongst the most cited scholars in economics and social sciences. Both gentlemen are highly accomplished academics with research interests converging towards the political economy, economic history, labor economics, and development. Professor Acemoglu is also the recipient of the James Bates Clark Medal, which is the second most prestigious prize in Economic Sciences after the Nobel. Besides, he ranks at the third spot in the list of top 10% economists as of January 2021.

While the duo has written and published hundreds of articles in leading academic journals, they are better known to the general public via their bestselling book titled Why Nations Fail: The Origins of Power, Prosperity, and Poverty, published in 2012.

The book is indeed a seminal work of scholarship in political economy and economic history. Acemoglu and Robinson raise the simple yet alluring question that why some nations prosper and succeed while others languish and fail in economic development; a question raised by many other economists and historians of the yesteryears as well. While doing a thorough review of literature, the duo rejects various hypotheses regarding the wealth of nations, such as the role of climate, geographical location, work ethic, or genetic makeup of a nation in determining its fortune. Instead, they argue that the institutions of a state, and especially their historical evolution in the context of colonialism, is the main factor that determines the prosperity or poverty of a nation-state.

While explaining their logic, Acemoglu and Robinson bring to attention the role of European colonizers in shaping the institutions of their former colonies. They argue that in countries where the European colonizers were able to settle—such as the United States and Canada—the state institutions evolved to be inclusive by protecting private property rights, rule-of-law, and establishing a fair judicial system, besides limiting the power of the state to impose coercive and arbitrary taxes. This scheme provided the settlers an incentive to save and invest, thereby increasing their productivity and generating economic growth.

In contrast, countries where the ‘European colonizers faced higher settler mortality’—such as the Gold Coast and Congo—inherited extractive state institutions characterized by weak propriety rights, biased judiciary, and a general absence of rule-of-law. Moreover, such countries came to be ruled by a rapacious elite that enriched itself at the cost of its citizenry in the form of rents, tributes, and arbitrary taxation. Small wonder then, that the wealth of such countries dwindled as the average citizen had no incentive to save, invest, or start an enterprise.

Using this framework—which economists refer to as the New Institutional Economics (NIE)—it is easy to see that the post-colonial states in South Asia are highly extractive, as all of them share a common [British] colonial legacy. The British were unable to settle in the Indian subcontinent due to hot & humid climatic conditions—similar to Gold Coast and Congo—and therefore established a set of highly extractive bureaucratic and political institutions to extract rents, revenues, and surplus to be siphoned off back to London.

In fact, according to Chakrabarti & Patnaik (2019), the British Raj extracted close to $45 trillion from the end of the 18th century up until their departure in the middle of the 20th century. This figure is more than twice the size of the United States Gross Domestic Product (GDP), which is the largest economy in the world!

While the British left in 1947, unfortunately, their wilily crafted extractive institutions were left intact and inherited by the local elites and state bureaucrats. In other words, brown sahibs became the direct heirs to the patronage of Gora sahib bahadurs!

In the context of post-colonial Pakistan, the extractive institutes, presided by an ambitious and power-hungry bureaucratic elite, have forestalled the growth of democracy, rule-of-law, and constitutional supremacy in the country. It has been aided and abetted by a judicial system, which has failed to be a neutral arbiter, at least, historically. The political & economic interests of this elite have grown so entrenched that it is incessantly involved in politicking—overt and covert—to protect them, creating political instability in the process. As a result, economic policies taken up by successive governments seldom come to fruition, further perpetuating the cycle of low-growth, underdevelopment, and social backwardness, as reflected by the dismal Human Development Index (HDI) of Pakistan, which is the lowest in the South Asian region.

Thus, if Pakistan is to embark on a trajectory of high economic growth and sustainable [long-term] development, then it will need to make its institutions inclusive by first ensuring that the distinction between de facto and de jure power is eliminated and second by making each Pakistani citizen an equal shareholder in the democratic enterprise, such that the constitution and rule-of-law reign supreme above all else.

Hassan Mujtaba is a researcher at Centre for Aerospace & Security Studies (CASS). The article was first published in PAKISTAN OBSERVER. He can be reached at cass.thinkers@gmail.com