Notes in Circulation # 5

Conflicting claims: the relationship between political instability and the economy

Many people are worried about how political instability is creating an inconducive environment for the Pakistani economy. Khaleeq Kiani writes in Dawn that “The prime minister has not been able to hold a meeting of the federal cabinet for almost a month against the normal weekly schedule. Among the lost list of items on the agenda of the scheduled but cancelled cabinet meeting on March 1 included a mid-year review of the federal budget 2021-22 and key economic indicators.” What’s missing here is the part of the story in which the political instability is actually endogenous to the economy. That is, it is a consequence of the interaction of economic actors (which are also power centers) which are making competing and conflicting claims on economic resources.

To understand this better, consider the idea that people and groups across the economy are trying to persuade others of something or the other: “Pay me more”, “give us better terms for this loan”, “increase the budget for this particular project”, etc. In doing so, people are essentially making conflicting claims on finite (but not necessarily scarce) economic resources. For example, disagreement about minimum wage is essentially capital and labor making conflicting claims on resources. But there are a variety of power centers in the economy making such claims: industrialists, landed elite, finance and banking sector players, small traders, workers, etc. Champions of different causes like education and health or different regions might try to promote policies which benefit their respective causes. In the Pakistani case, the military is another important power center which makes claims on economic resources.

The state of tension and relations among these various power centers constitutes the structure of the economy. Political instability arises out of the this structure. That is, it is a structural problem. Economic cycles also arise out of the structure of the economy. When Parkin and Bokhari write in the Financial Times that the Prime Minister was “trapped by the same economic cycles he had vowed to end”, what they are describing is the Prime Minister being trapped within the structure of the economy. It is important to understand why this is the case. Imran Khan’s election to the Prime Minister’s office did not fundamentally challenge let alone change the structure of the economy. It was in fact a consequence of the existing structure of the economy. This might seem like an odd idea, but there is little question about the way multiple power centers aligned themselves to bring Imran Khan into power. These power relations are the structure of the Pakistani economy. And so it should not surprise us if economic and political crises come hand in hand, because they have the same source and are grounded in the same dynamics.

The question then is how we want these relations to be managed and these tensions resolved. This can be done in a variety of ways. One of them is to not do anything about them, and leave them unmanaged. That can lead to a breakdown in relations and the tensions resolving themselves through social upheaval, large scale crises and socio-economic trauma. These are then usually followed by emergency measures. But it is also possible to deliberately manage and transform the structure. Various power centers can negotiate and agree to settlements which ease these tensions. The postwar welfare state in Europe was such a negotiation and settlement.

The implications for Pakistan are that we cannot and should not be surprised when economic and political cycles keep on repeating themselves. Of course they repeat themselves! Because the underlying relations and tensions between power centers (especially the government and the military) remain unsettled and unresolved. The underlying structural problems and puzzles are the same as before. It is only their manifestation which might be somewhat different than before, but the underlying dynamics are consistent. Thus what is needed is a new social contract. That is, an agreement among the power centers about how we wish to organize and govern our society — how we wish to govern ourselves. This is a tall order. But the reward is proportionate: a modicum of the economic and political stability which we long for.

Notes in Circulation # 4

Mearsheimer and the character of Pakistan’s political economy

Political scientist John Mearsheimer has been getting a lot of attention following the Russian invasion of Ukraine. While his realist view (in the social scientific sense rather than the literal sense) has been picked apart by Smolenski and Dutkiewicz, it is understandable why it might be popular right now with any one who has a bone to pick with the US and NATO. Blaming the US and NATO for the Russian invasion of Ukraine, as Mearsheimer does in a recent interview, sits well with the Government of Pakistan’s story that it has adopted an “independent” foreign policy, refused to bow to the US or broadly speaking Western pressure, and is hence maintaining a neutral stance over on the matter of the Russian invasion of Ukraine.

But there is another idea in the Mearsheimer interview which stood out to me as relevant to developments in Pakistan: “Military might is built on economic might. You need an economic foundation to build a really powerful military.” This idea, on the face of it, does not seem very problematic or controversial. But it is not self-evident, and it should be questioned and cannot be taken for granted. Its opposite — that there are economic gains to be found in the capture and control of external markets using military might — is not just a well known theory (see Rosa Luxemberg on “Militarism as a Province of Accumulation”) but arguably an important historical fact (hint: colonialism). Military might may very well be built on, among other things, economic might (although it remains a problem for champions of Pakistan’s nuclear capabilities to explain how this particular case of military might is possible even though the country is economically impoverished). But that is almost besides the point. The issue is that it is a tempting jump from “military might is built on economic might” to “therefore a military should concern itself with the economic management of a country”. This leap is even more problematic than the proposition that economic might is the sole foundation stone of military might. This is the leap or jump which the traditional security apparatus in Pakistan has made in the NSP document. It appears to be at the foundation of the subsuming of Pakistan’s economic management by the traditional security apparatus.

But this leap is in fact counter-productive for the evolution of the economy. An economy needs breathing room and room to expand. Control (military or otherwise, but especially by militaries) can lead to anxiety and can quickly turn into a chokehold on the free spirit of enterprise as society becomes less free and open. This is a problem because open societies are better for innovation and business. The entrepreneurial spirit – which is central to the flourishing of economies and to which so many pay lip service today – is incredibly averse to being controlled. Economist Joseph Schumpeter, who gave us a very good description of the character of the entrepreneur in his Theory of Economic Development ([1934] 1983), helps us understand why. It is because the entrepreneur has “the dream and the will to found a private kingdom, usually, though not necessarily, also a dynasty.” Second, they have “the will to conquer: the impulse to fight, to prove oneself superior to others, to succeed for the sake, not of the fruits of success, but of success itself.” Third, they are motivated by “the joy of creating, of getting things done, or simply of exercising ones energy and ingenuity.”

To understand the relevance of Schumpeter’s characterization of the entrepreneur, we have to consider another important work of social science. Sociologist Peter Evans has argued in Embedded Autonomy: States and Industrial Transformation (1995) that the autonomy of a state to create and implement industrial policy is embedded in (1) state’s external relations with society, and (2) the state’s internal coherence. (For my present argument I will disregard the second). State-society relations can be characterized on a spectrum of types, with the two poles being developmental and predatory. Now, given the non-controversial claim that the citizen’s levels of confidence and trust in the Pakistani state are low, I would conjecture that — and I am yet to talk to someone who disagrees with me on this — state-society relations in Pakistan cannot be characterized as developmental. If state-society relations in Pakistan are predatory, it would help explain why the entrepreneurial spirit has not flourished a great deal. But it would also tell us why in such a context the cause of the entrepreneur ought to be championed: in the face of a state which is clearly not developmental, entrepreneurs are radicals. [“Startups are brave to operate in Pakistan — because the govt really doesn’t get them”]

But regardless of the need for room to breathe, you do need control and management in an economy as well, without which you cannot protect capitalism from its inherent, self-destructive tendencies. This is also the problem about which Keynes was writing in the early twentieth century: how do we exercise control and manage an economy on the one hand without letting it capitalism run completely free and wild, and on the other without succumbing to authoritarianism? This gets us into the specific form of control. Authoritarian control is not the only kind. There is such a thing as democratic control, and this brings us back to the character of Pakistani democracy, which is on display today for all to see with a political crisis threatening to become a constitutional one as the Prime Minister struggles to remain in office.

Encouragement of entrepreneurs and tech start-ups is necessary but insufficient. Anyone interested in anticipating Pakistan’s economic future must figure out what the character of Pakistan’s political sphere is. In particular, where do power and sovereignty lie in the national political sphere? This is the key, because political culture and the location of sovereignty are crucial in shaping the evolutionary path of the economic sphere. (See Frank Dobbin’s Forging Industrial Policy (1994).) Observers of Pakistan’s political economy should expect, I think, Pakistan’s economic evolution in the foreseeable future to be consistent with the effectiveness (or lack thereof) of ideas and vision articulated in the NSP document.

[The quotes from the Schumpeter book are from the end of Chapter II: The Fundamental Phenomenon of Economic Development.]