Institutional Change, Growth, and Poverty Levels in Pakistan (The Presidential Address)

It is now well-recognised that institutions matter in the growth process both directly and indirectly. Well-functioning institutions lead to higher investment levels, better policies, increase in social capital stock of a community, and better management of ethnic diversity and conflicts [see for example North (1990, 1994); Jutting (2003); Rodrik, et al. (2002); Dollar and Kray (2002); World Bank (2002); Aron (2000); Chu (2001) and Frischtak (1995)]. That the decay of institutions has led to poor governance—and the urgent need for improved governance in Pakistan particularly—has been well-documented in DRI/McGraw-Hill (1998); Pakistan (1999) and Hassan (2002). Transparent, participatory, and efficient working of institutions ensures correct priorities and appropriate policies; their effective and efficient implementation results in high growth, better income distribution, and alleviation of poverty. Institutional development has been very slow in Pakistan, and more often than not these have been abused by the èlite to extract rent [Hussain (1999)]. Over the last three decades, and especially in the 1990s, even the institutions that existed have degenerated. Poor governance resulting from the mal-functioning of institutions has denied the poor any participation in the decision-making process, and they have failed to derive any benefit from the rising levels of per capita incomes.1 The rising poverty in turn has led to further decay of institutions and the poor are caught in the vicious circle [see Hassan (2002)].