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INSTITUTIONAL CHANGE, GROWTH AND POVERTY LEVELS IN PAKISTAN: 

INSTITUTIONAL CHANGE, GROWTH AND POVERTY LEVELS IN PAKISTAN A. R. Kemal

THE INSTITUTIONAL DEVELOPMENT: 

THE INSTITUTIONAL DEVELOPMENT Transparent, participatory, and efficient working of the institutions ensure right priorities and appropriate policies Effective and efficient implementation results in high growth, better income distribution, and alleviation of poverty. Well-functioning institutions lead to higher investment levels, better policies, increase the social capital stock of a community and help in better management of ethnic diversity and conflicts

Institutional development in Pakistan: 

Institutional development in Pakistan The institutions that existed have degenerated. The institutions have been abused by the elite Mal-functioning of institutions denies the participation of poor in the decision-making process The rising poverty in turn has led to further decay in the institutions and poor are caught in the vicious circle The country needs a credible and proper institutional framework which is transparent and predictable.

The definition of Institutions : 

The definition of Institutions Institutions are rules, enforcement mechanisms, and organizations They out prohibitions on individuals Circumstances that permit individuals to undertake certain activities. Institutions are the rules, including behavioral norms, by which agents interact; and the organizations that implement rules and codes of conduct to achieve desired outcomes.

Evolution of Institutions : 

Evolution of Institutions The policies and institutions interact Policies impact the evolution of institutions, The institutions affect the policies that are adopted. Institutions work as systems; improvement in one part affects the efficiency of the whole system. Institutional development is a holistic approach where various small reforms complement each other to improve efficiency and build momentum for larger reforms. Strength of the rule of law, risk of expropriation, and the security of property rights are mainly the outcome of the institutional set-up of the country.

The Typology of Institutions : 

The Typology of Institutions Institutions may be formal, i.e., written rules, but in general they are based on the unwritten codes of conduct. Formal rules comprise constitutions, laws, property rights, charters, bye-laws, statute and common law, and regulations; and enforcement characteristics. The institutions may be informal, basically extensions, elaborations, and modifications of formal rules; socially sanctioned norms of behavior (customs, taboos and traditions); and internally enforced standards of conduct.

Informal Institutions: 

Informal Institutions The reliance on informal institutions to facilitate transactions is high in developing economies, Informal institutions go a long way towards resolving information and enforcement problems without resorting to the formal public legal systems. Informal institutions can be superior to formal alternatives, either because they are more efficient at achieving the objective or because they embody features that formal institutions are unable to provide. However, informal institutions may prevent further market development if closed networks restrict the scale and extent of possible transactions. They may also exclude potential entrants and partners.

Informal Institutions (Cont): 

Informal Institutions (Cont) Formal institutions can deal with a larger group of participants and because, if well designed, they can serve to include more people rather than exclude them. Because of the failure of the formal institutions, the poor resort to informal institutions and that adversely impact the poor. The informal legal system is particularly deleterious to the poor who possess neither the economic nor the social capital to receive adequate justice. The failure of state institutions to provide law and order and security is a function of the existent police, legal, and judicial structures and these are affected by the performance of the four domains of justice including administrative, political, judicial and policing.

Hierarchical institutions: 

Hierarchical institutions The Level 1 institutions: social norms, customs, traditions, etc. and most of the transactions regulated by expectations based on beliefs and identities. Level 2 are the formal institutions such as conventions or laws but sometimes they also include informal institutions such as rules governing access to natural resources. These institutions define and enforce property rights. Level 3 institutions relate to order and incentives and build the governance structure of a society resulting in the organizations such as local or national government, state agencies, NGOs, etc. The Level 4 institutions define the extent to which adjustment occurs through prices or quantities, and influence the resource allocation mechanism

Institutions by Nature: 

Institutions by Nature The institutions may be economic, political, legal or social The economic institutions include markets and determine production, allocation and distribution process of goods and services. Political institutions relate to holding of elections, electoral rules, type of political system, opposition and the government, measures of checks and balances and political stability. The legal institutions refer to the type of legal system, the definition and enforcement of property rights and legal origin. The social institutions relate to rules that govern access to social sectors such as health and education and social security arrangements, and gender balance.

Formulation of institutions: 

Formulation of institutions While formulating and reforming the institutions, following should be taken into consideration: The differentiation between the development of exogenous and endogenous institutions; Existence of different levels of institutions with different time horizons of change; and Importance of the local setting.

THE TRANSACTION COSTS : 

THE TRANSACTION COSTS Economic transactions comprise exchanges between buyers and sellers, between creditors and debtors, and more broadly among competitors. Political transactions comprise exchanges between rulers and constituents, between representatives and voters, and among competing political groups, etc. Transaction costs rise due to inadequate information, incomplete definition and enforcement of property rights, and barriers to entry for new participants. The institutions help manage risks from market exchange, increase efficiency, and raise returns to investment.

Rule making and rule implementation: 

Rule making and rule implementation If the formulators and implementers of the rules are the same, those benefiting from the existing institutions may encourage organizations and interest groups having stake in the existing set up to forestall the possibilities of changes in the institutions. There is a need for nondiscretionary rule implementation, and, therefore, organizations need to be made independent of political and other interventions. This may be done through establishment of autonomous and independent organizations.

Evolution of Institutions: 

Evolution of Institutions WORLD BANK SUGGESTS: Design them to complement what exists—in terms of other supporting institutions, human capabilities, and available technologies; Innovate to design institutions that work—and drop those initiatives that do not; Connect communities of market players through open information flows and open trade; and Promote competition among jurisdictions, firms, and individuals.

Effective institutions: 

Effective institutions Effective institutions are incentive-compatible. They channel information about market conditions, goods, and participants. They increase competition in markets. Business people and community members also create institutions. Corporate, collateral, and bankruptcy laws are public institutions, Reciprocity between community members, and land inheritance norms are private institutions. Many private institutions exist under the aegis of public institutions.

Enforcement Rules: 

Enforcement Rules Informal institutions and private formal mechanisms generally rely on their own members for enforcement; individual agents organize themselves into informal groups, such as business associations or mutual insurance systems when the cost of collective action is low and the rules can be easily monitored. External enforcement mechanisms, such as judicial systems or third-party arbitration, are critical mechanisms for the development of integrated markets. When the state acts as an agent that shares the objectives and beliefs of its citizens—and implements rules consistent with them—it is more likely to build effective formal institutions to support market development.

Institutions and poverty: 

Institutions and poverty The poverty reflects an interaction of the failure of economic, social, legal and political processes The poor governance is manifested in corruption, inefficiency, ineffectiveness, inaccessibility, intractability, and lack of motivation and incentives and has contributed to the slow growth and increase in poverty The failure of governance and the domination of political power and state apparatus by the elite has excluded majority of the population in the institutionalized decision-making, and is almost completely irrelevant to the poor. The poor management and delivery of public services and public utilities, because of virtually no accountability and discipline and improper incentives and controls have led to poor delivery of basic public services.

Institutions and poverty: 

Institutions and poverty The police force is perceived by the poor as a symbol of immense repression and exploitation in Pakistan. For them Police is largely responsible for making difficult for the informal sector to function effectively. Various studies indicate that Police harasses small traders and vendors, especially women. The poor are denied justice, making them quite vulnerable. Their vulnerability is exacerbated by the everyday harassment, under-performance, exclusion and denial of basic rights by public officials. The local officials responsible to license and regulate economic activities extract rent from informal sector workers. Because of malpractices including corruption of the local officials, poor suffer from inadequate health, education, land management, etc.

Towards Better Governance: 

Towards Better Governance A system of checks and balances, together with citizen monitoring by elected representatives is necessary to ensure against the abuse of authority. The devolution provides an opportunity to bring local accountability to government and achieve efficiencies in the way services are delivered to the poor. Devolution assigns service delivery to the local bodies and they are accountable to the community. Devolution is expected to improve service delivery as local governments can better assess spending priorities and utilize their resources in a cost-effective manner. However, the risks need to be recognized. Given that a poorly implemented local government reform could harm rather than improve the delivery of services, it is important that it succeeds.

Access to Justice: 

Access to Justice Judicial systems need to balance the need to provide swift and affordable justice to the people. The basic problems of judicial administration relate to governance and administration; case management and delay reduction; automation and court information systems; human resources; and infrastructure. The success of judicial reforms depends on Increasing the accountability of judges; providing for incentives to perform effectively, simplifying procedures, and targeting resource increases.

Access to Justice (Cont): 

Access to Justice (Cont) Transparency or the provision of information that makes it easy to monitor judicial performance Simplifying legal procedures tends to increase judicial efficiency Judicial independence needs to be coupled with a system of social accountability. The channels for such accountability can be the free media and civil society organizations, or accountability can be built into the judicial system itself.

Police Reforms: 

Police Reforms The local control and institutionalized accountability at the grass roots, while ensuring functional autonomy of Police An independent Police Complaints Authority would also be helpful in expediting investigations into allegations of excesses and neglect by Police. More effective recourse to redress grievances and more open access to justice in their own communities, an important element for empowerment, dignity, and rights

Civil Services: 

Civil Services Perception that government is to provide jobs in public sector; Poor salary structure; Protecting status quo; Resistance to sharing the information; Centralization of decision-making; Lack of discipline; Lack of professionalism and performance orientation; Corruption; Archaic operating procedures and regulatory mechanism; Public aversion to public servants.

Civil Services (Cont): 

Civil Services (Cont) The main elements of the Government’s civil service reform strategy include: A flatter structure of civil service; Merit based recruitment and promotion criteria; Performance based compensation; Incentives to improve innovation (i.e. encourage prudent risk taking); and To increase the demand for professional skills (i.e. for training and education).

Financial Governance: 

Financial Governance Because of the misuse of discretionary power at various tiers of the government, and unfair considerations, there has been rampant corruption. The government has established the National Accountability Bureau (NAB) to investigate and prosecute cases. Besides punishing the corrupt, preventive measures such as instituting a system that collects information and raise the possibilities that corruption is detected would also be required.

Freedom of Information: 

Freedom of Information Access to information would go a long way towards transparency in the use of public funds, certainty, and predictability in the economic policies. Freedom of Information Act can go a long way in this direction. Credibility of the statistical authorities The statistical authority should be autonomous which could release the data without any clearance from any Ministry. There is a need for a long-term plan to strengthen the statistical system including training and motivation of the staff and strengthening infrastructure.