Inequalities among states have driven them to collapse, grow and conquer through the years. They have also given rise to markets and trade. Often beneficial, often detrimental; they have persisted through the ages. Why? What causes inequalities to develop among states? Why are some states stronger and more prosperous than others?
Economists and historians have spent decades pondering on the possible causes and hypotheses. The strongest hypothesis suggests that these inequalities between states arise due to institutional differences in their political systems- that some states have historically had stronger political and economic institutions than others. This is the most convincing argument and can be explained using historical examples. Specifically, differences in institutions generate political and economic inequalities between states.
Theories of Inequalities
Before exploring the importance of institutions, take a look at the various hypotheses that have tried explaining inequalities between countries. In their work titled “Why Nations Fail: The Origins of Power, Prosperity, and Poverty”, Daron Acemoglu and James Robinson explain these hypotheses. Most of the current world inequality emerged from the late 18th century after the industrial revolution. England, followed by the rest of western Europe and later by settler colonies in the United States, Australia and Canada, began industrialising rapidly. Even today, these countries are among the most prosperous in the world. Technological revolution spread rapidly among these countries and industry took root; soon, economies prospered and markets flourished.
The Geography Hypothesis
The first theory explaining this is the geography hypothesis. Once widely accepted, this theory claims that the divide between rich and poor countries exists due to geographical differences. It claims that most of the poor countries of the world lie between the Tropics of Cancer and Capricorn, while the richer nations are in more temperate regions of the world. However, this theory is weak. Its major fault lies in the fact that it does not take into account the “reverse” trends observed in the past. For example, the Indian subcontinent (present-day India, Pakistan, Bangladesh and Nepal) was more prosperous than the rest of Asia. However, today, China, Singapore and Japan are more prosperous than these countries. Furthermore, many of the world’s most prosperous countries lie between the tropics- the UAE, Singapore and China are among the strongest economies of the world.
Also, historically, countries like India, Pakistan and Ethiopia have harboured some of the world’s most successful civilizations. The Vijayanagara civilization in Southern India and the Mohenjo Daro and Harappan Civilizations in modern-day Pakistan economically surpassed many western civilizations. Thus, there exists no simple connection between economic success and geography. Another leg of this theory is that tropical countries are plagued with disease, which lowers the productivity and prosperity of the country. For example, high infant mortality rates in African countries could be linked to the prevailing poverty in the region; however, it is crucial to remember that disease is not the cause; it is the consequence of inefficient government policies and governance. Take, for instance, 19th century England- plagued with diseases that were eventually resolved through government investment in public health. Therefore, a lower disease rate is not the cause of economic success; but rather the consequence of an efficient political system. There is no connection between economic success and geography.
The second theory aims to explain inequalities between countries through cultural differences. It claims that some countries are more successful than others due to different work ethics, social norms and religion. While it is true that culture can often support institutional differences, it is not the driving force behind inequalities among countries. Like most effects of geography, culture is subject to institutional procedures, the level of trust between people, work ethics, etc., can all be influenced by institutions. This is evident by looking at countries that share similar cultures but vary in their institutional frameworks. Take, for example, North and South Korea. Despite sharing a common history before the Korean War, the two countries vary in their culture today due to stark differences in their institutions. Similarly, India and Pakistan share a common history, from the Mughal Period till the Colonial era, the two countries have shared, and still do, a common language, ethnicity and heritage. However, due to institutional differences (i.e., the Pakistani military has a stronger hold on its government), the two countries vary vastly in culture. Different regimes impose different institutions; which, in turn, create different incentives for people. This influences culture more strongly than culture influences institutions and politics.
The final theory is the ignorance theory. This theory is the closest to including political and economic institutions in its explanation for inequality. It states that poor states exist because rulers and governments do not know how to eliminate poverty. It puts a lot of emphasis on markets, the First Welfare Theorem “identifies the circumstances under which the allocation of resources in a ‘market economy’ is socially desirable from an economic point of view.” The market economy is an abstraction to capture the situation similar to that of a free market, to assess how socially desirable the economic situation is. In the absence of a desirable market economy, there exists a market failure. The ignorance theory maintains that poverty exists in poor countries because of persistent market failures. It assumes that economists and policymakers do not know the correct policies to implement to avoid market failures. While this theory addresses a weakness in governance as a cause for state failure, it does not take into account different institutional constraints that governments and elites face. However, it differs from the culture and geography hypotheses as it provides a solution to the problem of inequality: by changing their approach, governments can improve the economic situation in their countries. But when nations break institutional patterns that seem to have caused poverty and finally see economic growth, this is not because their ignorant leaders have gained better understanding or received advice from better economists. For example, China switched from economic policies that caused poverty and starvation, to those encouraging economic growth. However, it was politics that determined this switch; the country moved away from communism and toward better market incentives, not better advice or a better understanding of how the economy worked.
The theories discussed above provide important insights into what might be the possible reasons behind inequalities between countries. While they address various factors, none of them directly address the idea of institutional differences and their role in inequalities between countries. To observe this, take the example of countries in the Indian subcontinent. They provide an interesting case study for various reasons:
The countries share a common past of British colonialism and came into being in 1947, thus controlling for culture and geography among other variables.
Examining these countries, especially India and Pakistan, helps us observe democratic and dictatorial regimes along with a colonial rule. This provides various institutions to examine and how they affected economic and social inequalities in these countries.
Both India and Pakistan gained independence from the British in 1947. Both aimed at adopting democracy. Modern-day India is the world’s largest democracy, with 23 governments elected into office. Pakistan has not seen a single democratically elected Prime Minister who has completed their term, the country has witnessed strong military hold on its government since 1947.
Common Past, Differing Present
Even though both the countries share a common colonial past, it is too simplistic to assume that their experiences under colonial rule were similar. British India was composed of various provinces, each with separate institutions, due to geographical and strategic reasons. While all the institutions under British India were extractive institutions (institutions where the political elite exploits the masses through political and economic power), they imposed different restrictions in different regions. In the early 20th century, the British began devolving power to the local institutions in most of these provinces. However, they did not do so in the North West Frontier Province and the Province of Punjab two major provinces that would make up a bulk of Pakistan after the partition of the two countries in 1947. Both territories were strategic military recruitment grounds for the British, which made devolution of power in these regions a security threat.
India inherited the political hubs of Delhi and West Bengal, among others, that had experience with political institutions, while Pakistan inherited military hubs. Thus, India was born with the bureaucratic apparatus in New Delhi, whereas Pakistan had to build an entire government system after 1947 under a state of emergency.
Another major institutional difference was political centralisation in both the countries. India, despite being a vast and diverse country, was geographically and politically coherent. Pakistan, on the other hand, was divided into East and West Pakistan; on either side of India. Pakistan was thus divided by 3000km of land, making political centralisation extremely difficult. Due to its diversity, India decided to create provinces along ethnolinguistic lines as a federal state. This also helped avoid ethnic tensions within the country. Each ethnic group had its own federal government. Pakistan, on the other hand, had two major ethnic groups, one each in East and West Pakistan. Not only was East Pakistan far from the resources and governance of the western half of the country, it was also forced to adopt a language spoken by a minority in the west (Urdu), sparking protests among the Bengali-speaking majority, making up 55% of the Pakistani population at the time.
Inclusive and Extractive Institutions
One could say that while India enforced inclusive institutions, set up across the country based on the cultural and societal norms of the masses in each region, Pakistan tackled the problem of extractive institutions, especially in the East. The power was in the hands of the culturally different, Urdu-speaking, political elite in the West. This is one of the reasons behind the success of Indian democracy viz-a-viz Pakistani democracy, for any economic success, institutions should be sufficiently centralised and be able to provide basic public goods and services. The institutions in East Pakistan failed to do so. Eventually, it revolted against the government and gained independence in 1971. Today, it is a separate country called Bangladesh.
Later down their political trajectories, the institutional differences between the two countries became a lot more evident. In the late 1970s, much after the independence and partition movements, the two countries began experiencing regime changes. From 1975 to 1977, India experienced a state of emergency under the leadership of Indira Gandhi. She declared a state of emergency after the opposition and the judicial powers raised questions about the legitimacy of her election into office for a third term. The state of emergency gave her the power to suppress civil liberties and rule by decree; it gave her the power to create and enforce laws in undemocratic ways. Under the emergency, Gandhi also jailed most of her opponents. Meanwhile, in Pakistan, Prime Minister Zulfikar Ali Bhutto had implemented a new constitution that aimed at making Pakistan more democratic. It strengthened parliamentary procedures and gave more powers to the provinces. At this point in time, the political natures of both the countries were on the brink of changing. This “cross-over” of their trajectories tried and tested the effectiveness of the institutions. By 1977, democracy had been restored in India and Bhutto had been ousted by a military coup d’etat led by General Zia-ul-Haq, returning Pakistan to complete military control.
The political forces in India were much stronger than those in Pakistan. Indira Gandhi was assassinated and Zulfikar Ali Bhutto was ousted and eventually hanged. At a point of political instability, democratic institutions proved to be much stronger in India than they were in Pakistan. This difference is the reason behind political inequalities between the two countries.
Despite political inequalities, both countries are among the most unequal and poor regions in the world. A World Bank report states that “despite not being the poorest region in the world, South Asia has some of the worst human development outcomes worldwide.” Inequality within the countries is a major consequence of political and economic institutions. It also affects the development outcomes of the two countries. Both countries face similar challenges when it comes to economic problems. The report states:
“South Asian households are periodically exposed both to individual shocks and to economy-wide shocks, such as natural calamities, food price spikes, and armed conflict. Health-related issues and calamities are the most common types of shocks in the region, affecting rural populations the most.”
The difference is, institutions in both the countries tackle these problems differently.
Political institutions have had a major impact on the economic situation of each country. Interests of political institutions have effects on the economy, the role of political institutions in balancing these interests. With weak institutions, there is little incentive for rulers not to loot. This directs the wealth towards the elite. This extractive rule is self-reinforcing. After partition, both countries had to work on developing their economies. While India implemented economic liberalisation reforms in 1991 with consultation from the IMF only once; Pakistan approached the IMF 12 times since 1988 due to political turmoil in the country.
“Since 1990, as India has moved ahead with economic liberalization and major reforms, Pakistan has become mired in episodes of political turmoil and economic crises,”
said Rajiv Biswas, Asia-Pacific Chief Economist at IHS Markit, a global information and analytics firm.
The following charts describe the Gross Domestic Product of India and Pakistan between 1980 and 2016, in current US Dollars. Today, India’s GDP is $2.264trn, while Pakistan’s is $283.7bn.
Chart A: India’s Gross Domestic Product between 1980 and 2016
Chart B: Pakistan’s Gross Domestic Product between 1980 and 2016
In conclusion, taking the example of India and Pakistan helps us evaluate how countries that share culture, geography and histories diverged along different political trajectories due to different institutions. When examined under the light of the previous hypotheses (culture, geography and ignorance), the two countries help identify the faults in these theories. Because despite sharing similar cultures and being in the same geographical location, they have witnessed extremely different political outcomes. One can credit this difference mainly to the difference in the political institutions of the two countries. These differences also exist due to the nature of extractive institutions of British colonial rule. With the example of Indira Gandhi in India and Zulfikar Ali Bhutto in Pakistan, one can observe how the institutional strength in the two countries generated political differences. India’s democratic stability has enabled it to maintain a better economic standing than Pakistan. Pakistan had to deal with immense political turmoil that stunted its economic growth. In summary, the example of these two countries proves that political institutions matter in creating inequalities between countries.
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