Can Foreign Aid Improve Pakistan’s Political Economy?

Like many struggling countries, Pakistan’s two most critical problems are feckless leaders and a feeble state. Can donors do anything to help get such countries’ political economy moving in the right direction?

I recently convened a working group of leading Pakistani development professionals and outside experts at the Global Economic Symposium (GES) to discuss just such this question.

The group’s conclusions are summarized in this report.

As I have written previously, Pakistan is a country with immense potential as an emerging market. Given different circumstances and different leadership, Pakistan could have developed differently; given different policies now, it could yet transform itself into a vigorous state with a vigorous economy similar to India.

The working group analyzed the major obstacles to the development that Pakistan needs to build prosperity and security, and produced a series of project recommendations for aid agencies. To replicate the financial constraints that those agencies face, it prioritized projects based on a $100 million budget. The net result are six relatively low-cost projects that could start to improve Pakistan’s political economy and inspire similar initiatives.

As this is the one of the two most interesting parts of the report, let me list the projects here:

Recommended projects given a $100 million budget

The second especially interesting part is the report’s focus on the “governance ecosystem.” The report argues that donors have a better chance to improve a country’s political economy by focusing on this instead of directly trying to improve how the state works. Strengthening the institutions – things like universities, think tanks, rule of law watchdogs, citizen pressure groups, business schools, teacher training colleges, independent monitoring organizations, and civil service academies – that strengthen citizens’ ability to manage their own affairs is likely to have the largest impact.

The greater the capacity to run a ministry, to build a company, to provide quality education, to organize NGOs and to hold officials accountable, the more likely it is that those in charge will do better – both because they will be more qualified and because those out of power will have a greater ability to monitor their performance.

Trying to change Pakistan’s political culture and government capacity indirectly stands a much better chance of success than past attempts to deal directly with these issues. Extensive research over the past decade shows how difficult it can be for outsiders to build better state institutions. Donor technical advice and tutoring have generally done little to foster better governance, though part of the problem may be with how the international community itself has attempted to help.

In contrast, building up local institutions that both increases the number of high-quality human resources and enhances the accountability loops that monitor official behavior ought to, over a long enough period, change the dynamics of how the state operates. Such a strategy also works better because it allows local people, who are much more effective in navigating the local terrain, to play leading roles instead of foreigners who often know little about the country.

The report also contains good background information on Pakistan, comparing its situation with other highly populated developing countries in Asia. All are based on ancient civilizations and are in the middle of a decades-long process of modernizing their institutions and economies so as to raise the living standards of their peoples and gain a greater position in the world. All face similar challenges.

I recommend the report to anyone working on Pakistan, governance issues, and fragile states.