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Governance, Growth and Inequality
Dr.Akmal Hussain
Newspaper: Daily Times
Dated: Monday, May 08, 2006

In the preceding article we discussed the issue of the sustainability of Pakistan's GDP growth. We will now examine the question of inequality to assess the rapidity with which the benefits of GDP growth can reach the poor.

Inequality adversely affects both the sustainability of growth as well as its capacity for poverty reduction. Consider. Elite power structures in Pakistan exclude the majority of the population from high quality education and access over capital, land and labour markets. This severely restricts the base for actualizing the human potential, through which entrepreneurship, investment, innovation and productivity growth can occur to sustain growth. At the same time the poverty reduction capacity of growth is constrained by the institutional environment of the State and the economy: The poor face a structure of state power, markets and public institutions, which discriminate against their access over resources, public services and government decision-making.

The tendency for increasing inequality and systemic poverty can be articulated in terms of five structural factors:

(1)        The Patron-client Governance Model. Power in Pakistan has historically been constituted by accessing public resources for arbitrary transfer to dependants. During the Raj this was done to win loyalties for the State on the basis of the unprecedented resource gratification made possible by the establishment of the irrigation system. Professor Imran Ali has examined this phenomenon in his seminal work (Punjab under Imperialism). However, after independence, economic gratification using State resources was undertaken to build political constituencies for individual politicians and State personnel. The awarding of licenses, government contracts, subsidies, and loans have been some of the typical forms of granting rent to favoured individuals and groups. Dr. Nadeem ul Haque in a penetrating analysis of Pakistan's growth model has counter posed these “licensee businessmen” with those in the informal sector facing both uncertainty and high costs resulting from the government's exclusionary policy and concludes: “It is no wonder that indigenous enterprise does not grow and wealth remains concentrated in the hands of those the government favours” (See, Nadeem ul Haque, Rethinking Pakistan's Growth Strategy).

(2)        Asymmetric Markets for Inputs and Outputs. In the UNDP, Pakistan National Human Development Report 2003, I have argued that local elite power structures in rural areas distort markets in favour of the rich and against the poor. The poor peasants face input and output markets where they have to pay a higher price for their inputs and get a lower price for their outputs compared to large farmers. The study showed that the poor peasants are losing as much as one third of their income due to asymmetric markets.

(3)        Unequal access to markets for land, labour and capital. The highly unequal distribution of land ownership in Pakistan together with wide spread tenancy, is a major structural factor in rural income inequality. This is further reinforced by distortions in the land market arising from inadequate documentation of land rights and lack of access over credit for purchase of land. Consequently, the tenant has neither the ability nor the incentive to increase productivity, thereby further accentuating income inequality.

The NHDR survey data shows that due to lack of access over the formal credit market, 51 percent of the tenants get locked into debt dependence on the landlord, and out of these, 57 percent are obliged to work as labourers on the landlord's farm without wages, while 14 percent work for a wage below the market rate. Thus the structure of power and dependence creates distortions in the labour and capital markets, which systematically deprive the poor of their actual and potential income. The consequent inefficiency in the allocation of labour and capital resources, constrains agricultural growth, increases inequality and engenders persistent poverty.

(4)        Health and Poverty. The NHDR showed that due to inadequate diet and lack of access over safe drinking water and sanitation facilities, 65 percent of the poor in the sample survey were suffering from ill health. The prevalence of disease amongst those who are slightly above the poverty line is a major factor in pushing them into poverty. Those who are already poor get pushed into deeper poverty as a result of loss of income due to absence from work, and high medical costs resulting from illness. Thus the unequal access over public health facilities and the relatively high prevalence of disease amongst the poor becomes a structural factor that further accentuates both poverty and inequality.

(5)        Lack of access over security and judicial services. The poor live in localities both rural and urban, which are inadequately policed and in case of theft or violence against their person the cost of seeking redress through the judicial system is in most cases unaffordable and where undertaken, the expenses in terms of time and money, lock the poor into permanent debt. This is another factor reinforcing inequality.

We have identified some of the structural factors that create systemic inequality and indicated how they constrain both the level of GDP growth as well as its capacity for poverty reduction. A credible strategy for sustainable growth and rapid poverty reduction would have to address these inequalities in the structures of power. Such a strategy would be predicated on changes in the following spheres of governance: (i) A democratic political system where the elected representatives of the people are pre-eminent in the power structure and where the people can participate in decision making at every tier of governance. (ii) A professionalized civil service with adequate performance based incentives to provide key public services such as safe drinking water, sanitation, health, quality education and environmental protection. (iii) A high quality police force answerable to the people at the municipal and local government levels for ensuring protection of life and property of the citizens. (iv) A judiciary that has the independence, the resources and the competence to provide justice to the citizens and checks to the misuse of executive power. (v) Establishing property rights in both rural areas and urban centers together with contract enforcement. (vi) A network of public schools in every district, tehsil and local council that can provide high quality education to the middle class and the poor. (vii) Industry specific vocational training institutes in every district to develop the largest possible pool of skilled labour force. (viii) Establishment of world-class universities and research institutes that can provide the research basis of public policy, technical change in private sector industry and the development of a knowledge based democratic culture.

The political and institutional pre-requisites for a strategy of sustainable growth with equity we have indicated, are aimed at a comprehensive transformation of the existing model of governance that engenders inequality by systematically excluding a large proportion of the population from engaging in or benefiting from the economic growth process. Economic growth can only be sustained if it unleashes the human potential of all the people. Therefore sustainable growth is only possible on the basis of equity.

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