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Political Instability & Its Impact on Economy

The relationship between politics and economy still remains a favourite subject of economists. Pakistan’s history reveals a strong correlation between the two. Although with the changing pattern of politics and governments, the relationship never remained on the same pace. It’s a known fact that political instability deeply causes the uneven economic growth. The causes and impact of the interplay of politics in economy of Pakistan are briefly discussed here.

Introduction

Political instability has become a serious problem especially for the developing and underdeveloped countries the world over. The instability of government, inefficiency of political parties, and a weak political culture predicate a politically instable state. It has more serious repercussions for a society which is multi-ethnic, having people of diverse cultural attributes. Political stability is vitally important for the attainment of nation-building, such as political development and national integration, which has direct influence on formation of political parties.

Instability in Pakistan

Pakistan is among those few countries where political instability had badly damaged the prospects of growth despite the fact that the country is rich in natural resources. It has been an impediment to development in every sphere of life. However, when this menace takes a nation in its claws, economic development suffers the most.

A retrospective look at Pakistan’s history reveals that since independence, the country couldn’t establish a stable democratic government, and it still remains afflicted with the ills of feudalism, political wrangling and bad blood among the political activists. This has negated every chance of bringing political stability in Pakistan.

Why it is detrimental?

Political instability is detrimental to economy because it weakens governance as the government continues to strive for its survival with economy getting the least attention. Political instability shortens the horizon of the government, disrupting long-term economic policies conducive to a better economic performance. The government is forced to take short-term but populist measures to win the hearts and minds of the people. Such short-term populist measures never improve economic performance and thus, economy continues to suffer.

Political instability is associated with greater uncertainty regarding future economic policy, it certainly affects investment adversely, slows economic growth, increases unemployment and poverty, which, in turn, further fuels political instability by giving rise to violence, civil unrest and strikes. A higher degree of political instability is associated with lower productivity growth, lower physical and human capital accumulation thus weakening the foundation of long-term economic growth and prosperity.

Military’s stake in politics

It is as clear as day that the politics in Pakistan has always dominated economic decision-making in the country. Pakistan has experienced military and civil rules and a rift between civil and military has always been there. However, during the civil rule, military remained a major stakeholder in the decision-making.

Pakistan’s army has a major stake in the economic development of the country. This has gradually moved from the traditional paradigm of claiming the state’s resources from the national budget to a situation where it has built stakes in all segments of the economy such as agriculture, service and manufacturing industries. Pakistan army controls about 23% assets of the corporate sector with two foundations, the Fauji Foundation and the Army Welfare Trust, representing two of the largest conglomerates in the economy.

Military has far greater power to influence the political and economic decision making. This seems interesting’ and ironic at the same time’ that Pakistan’s economy always improved during military rule. Pakistan’s economic growth remained unprecedented under Ayub Khan and Pervez Mushurraf. Pakistan’s manufacturing, industrial and agricultural sectors performed robustly and data show that the fiscal gap reduced during military rule. Megaprojects and infrastructural development and capital investment touched highest during military regimes. Another interesting observation is that the people of Pakistan always welcomed military interventions. Probably they had seen some remedy from the gross mismanagement of economy, bad governance and rampant corruption of civil governments. A renowned analyst Ayesh Jalal opines that Pakistan Army has an instrumental role in the political process and its continuous intervention in the politics of Pakistan made it an inevitable institution of the state.

Effects on Economy

Let’s have a look at the economic side of Pakistan. A closer analysis, though, reveals that the roles of the market and state that are essential elements for the success of market-friendly strategy of development leading to equity and sustainability have, in fact, been reversed here. Large-scale private entrepreneurs in Pakistan have been protected from the forces of market competition and have been provided ample rent-seeking opportunities by government policies. Number of studies has documented the evidence of high rates of effective protection, negative value added at world prices, and high domestic resources costs.

Another observation about Pakistan’s economy is that the development was not holistic. There is big gap between developed and underdeveloped areas. Besides that, the economic managers of the country did not pay attention to the pattern of growth which was as important as was the speed of growth. It is proven elsewhere that the sectoral and regional pattern of development strategies have a great influence on income distribution and poverty reduction. If public policies favour labour-intensive activities such as labour-intensive exports, small-scale industries, and agriculture, and assist the development of neglected, highly-populated regions, poverty is reduced faster than otherwise. Poverty reduction is correlated with agricultural growth rates. Institutions responsible for economic growth take balance initiative between urban economy and ruler economy that ensures greater equality in wealth, human capital, and political power.

Present State of Economy

Heavy taxes and unemployment are crushing the people and they are forced to live below poverty line. Load shedding, high prices, terrorism are the gifts for common people. Law and order conditions are precarious and all institutions have badly failed to provide justice to a common man. A system of fair accountability would help improve the situation.

What is to be done?

For this, we need to strengthen our political system and institutions, develop an active and sustainable growth, eliminate corruption, provide timely justice, enhance employment, start steps for population control, seek consensus based political solutions, and resolve ethnic, sectarian and religious fault lines.

Pakistan’s current state of the economy and political instability raises many questions. When a strong government like the present one fails to bring political stability, it is imperative to seek for some out-of-the-box solutions. Given the nature of politics in Pakistan, it appears that political stability would continue to be a distant dream for the people of Pakistan.

It is high time that the political parties sit together and carve out policies to foster political stability in Pakistan. They must sign a Charter of Economy and agree on certain economic policies and reform agenda for the future of economic growth and prosperity of the people of Pakistan. In particular, they must agree on widening of the tax base, bringing every sector and every person earning above the threshold level under the tax net, rationalising and prioritising of expenditure bringing the budget deficit down to 3 percent of the GDP in the next three years, making the NFC Award work for fiscal stability, privatising the bleeding PSE, handling of power sector reform, addressing energy issues, to name a few.

Conclusion

No political party alone can undertake these reforms. It requires commitment from all the major political parties under the Charter of Economy. They must remember that economic stability and political stability are deeply interconnected. No amount of foreign assistance will propel growth unless conditions like a stable and honest government, market-oriented policies, and willingness to undertake reforms are in place. Aid that goes into poor policy environment does not work. Instead, it contributes to debt and restrains future economic growth.

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