PAKISTAN'S ENERGY CRISES AND IT'S CIRCULAR DEPT / PROPERTY TAX

PAKISTAN'S ENERGY CRISES AND IT'S CIRCULAR DEPT:

Pakistan has a big problem with its power sector. The power sector is the part of the economy that makes and delivers electricity. The problem is that Pakistan does not have enough electricity for its people or businesses. The country faces frequent power cuts, high electricity prices, poor service quality, and environmental damage. This problem is caused by many years of bad governance and policies in the power sector.

One of the main causes of this problem is circular debt, which is a type of public debt that builds up in the power sector because of subsidies and unpaid bills. Subsidies are money that the government gives to some consumers to help them pay for electricity. Unpaid bills are money that some consumers do not pay for electricity. Circular debt happens when an entity that has cash flow problems does not pay its suppliers or creditors. Cash flow problems are when an entity does not have enough money to pay for its expenses. Suppliers and creditors are entities that provide goods or services or lend money to another entity. When one entity does not pay its suppliers or creditors, it causes problems for other entities that are also part of the payment chain.

WHAT IS CIRCULAR DEBT?

Circular debt is a situation where one entity owes money to another entity, which in turn owes money to another entity, and so on. This creates a vicious cycle of debt that keeps growing over time.

In Pakistan's power sector, the main sources of circular debt are the electricity-making and delivering companies, such as WAPDA, DISCOs, and GENCOs. They are unable to recover their costs from consumers because of low tariffs, high losses, theft, and inefficiency. Tariffs are prices that consumers pay for electricity. Losses are the electricity that is wasted or stolen during moving or delivery. Theft is when some consumers use electricity without paying for it. Inefficiency is when some entities use more resources than necessary to make or deliver electricity. They also face delays in receiving subsidies from the government, which are often too little to cover their expenses. As a result, they owe a lot of money to independent power producers (IPPs), fuel suppliers, and other creditors. IPPs are private companies that make electricity and sell it to the government or other entities. Fuel suppliers are companies that provide oil, gas, coal, or other fuels to make electricity. Other creditors are banks or other entities that lend money to the power sector entities.

According to the latest data, the circular debt of Pakistan's energy sector has reached a very high level of Rs4.177 trillion ($23.6 billion). The circular debt in the electricity sector is Rs2.277 trillion ($12.9 billion), while Pakistan State Oil’s (PSO) debt is Rs600 billion ($3.4 billion). PSO is a state-owned company that supplies oil and gas to the power sector and other sectors. The circular debt in the gas sector is Rs1.400 trillion ($7.9 billion). The circular debt is increasing by Rs129 billion ($0.7 billion) per year.

HOW CIRCULAR DEBT AFFECTS PAKISTAN'S ENERGY SECTOR?

Circular debt has negative impacts on Pakistan's economy and society. It affects the financial health of the power sector entities, worsens the energy shortage, increases the cost of living, and harms the environment.

Circular debt makes the power sector entities financially weak, reduces their ability to invest in new capacity and maintenance, increases their dependence on expensive and imported fuels, and exposes them to default risks. Financially weak means that they do not have enough money to run their operations or pay their debts. New capacity means new power plants or equipment that can make more electricity. Maintenance means repairing or upgrading existing power plants or equipment to keep them working properly. Default risks mean that they might not be able to repay their loans or obligations.

Circular debt also reduces the confidence of investors and creditors, discourages private sector involvement, and increases the fiscal pressure on the government. Investors and creditors are entities that provide money or resources to another entity in exchange for a return or benefit. Private sector involvement means the involvement of private companies or individuals in making or delivering electricity. Fiscal pressure means pressure on the government's budget or finances.

Moreover, circular debt worsens the energy shortage, lowers the quality and reliability of service, increases the cost of production and living, and affects the welfare of consumers and businesses. Energy shortage means not having enough electricity to meet the demand or needs of people and businesses. Quality and reliability of service mean how well or consistently electricity is delivered to consumers without interruptions or fluctuations. Cost of production and living means how much money it takes to make goods or services or to buy basic needs. Welfare means well-being or happiness.

Circular debt also has environmental consequences. It forces the power sector entities to rely on inefficient and polluting sources of energy, such as oil and coal. This increases greenhouse gas emissions and contributes to climate change. Greenhouse gas emissions are gases that trap heat in the atmosphere and cause the Earth's temperature to rise. Climate change means changes in the Earth's weather patterns and conditions that affect people and nature negatively. It also causes air pollution and health problems for the people.

WHAT CAN BE DONE TO SOLVE CIRCULAR DEBT?

To solve the circular debt problem, Pakistan needs to make major reforms in its power sector. Some of the important steps include:

• Adjusting tariffs to reflect costs and eliminating subsidies
• Improving billing and collection efficiency to reduce losses and theft
• Improving governance and accountability of power sector entities
• Promoting competition and private sector involvement
• Diversifying energy sources and increasing renewable energy share
• Improving energy efficiency and conservation
• Strengthening regulatory framework and enforcement
• Mobilizing domestic and external resources for investment

These reforms require strong political will, institutional capacity, stakeholder consensus, and public support. They also need to be in line with the broader economic and social policies of the government. Only then can Pakistan overcome its power problem and achieve sustainable development.

CONCLUSION:

Circular debt is a big problem that plagues Pakistan's power sector. It is a result of poor governance and policies that have been followed for decades. It affects the financial health of the power sector entities, worsens the energy shortage, increases the cost of living, and harms the environment. To solve this problem, Pakistan needs to undertake comprehensive reforms that can improve the efficiency, reliability, affordability, and sustainability of its power sector.

PROPERTY TAX:

Property tax is a type of tax that you pay on the value of your property, such as land or buildings. It is usually calculated by a local government where your property is located and paid by you as the owner of the property. Property tax is used to fund public services and improvements that benefit the community, such as roads, schools, libraries, fire protection, etc.

In Pakistan, property tax is a provincial tax, which means that each province has its own rules and rates for property tax. Property tax is based on the annual rental value of your property, which means how much rent you could get if you rented out your property. Property tax rates and valuation tables vary by province and by type of property. Generally, residential properties have lower tax rates than commercial properties, and urban properties have higher tax rates than rural properties. Property tax rates also depend on whether the property is rented out or self-occupied, with rented properties having higher tax rates than self-occupied properties.

Property owners have to pay property tax every year to the provincial excise and taxation department. They can pay their property tax online or through designated banks. Property owners can also apply for exemptions or discounts for the property tax if they meet certain criteria, such as being senior citizens, widows, disabled persons, etc.

TYPES OF TAXES:

Types of taxes related to property in Pakistan that are collected by the Federal Board of Revenue (FBR). These include:

Capital Value Tax (CVT): This is a tax that you pay when you buy a property. It is 2% of the recorded value of the property.

Capital Gains Tax (CGT): This is a tax that you pay when you sell a property and make a profit. The tax rate depends on how long you have owned the property and how much profit you have made. The tax rate ranges from 5% to 20%.

Withholding Tax (WHT): This is a tax that both the buyer and the seller pay when they transfer a property. The tax rate depends on whether they are income tax filers or not. The tax rate for filers ranges from 1% to 2%, while the tax rate for non-filers ranges from 4% to 5%.

These taxes are part of the income tax system in Pakistan and are used to fund federal government expenditures.

Changes and Updates in Property Tax System in Pakistan in 2023

In 2023, there are some changes and updates in the property tax system in Pakistan that you need to be aware of. These are:

Deem Tax: This is a new tax that is imposed on unused or additional properties worth more than Rs. 25 million. The government assumes an income of 5% of the fair market value of such properties and taxes it at 20%. This means that you have to pay 1% of the value of your extra properties as deem tax every year. This does not apply to your first property whether house or plot. This measure aims to discourage hoarding of properties and encourage productive use of land.

Capital Gain Tax Period: The period for capital gain tax has been increased from 4 years to 6 years. This means that if you sell your property within one year, you have to pay 15% tax on your profit; if you sell it after two years, you have to pay 12.5% tax; if you sell it after three years, you have to pay 10% tax; if you sell it after four years, you have to pay 7.5% tax; if you sell it after five years, you have to pay 5% tax; if you sell it after six years, you have to pay 2.5% tax; and if you sell it after seven years or more, you don't have to pay any capital gain tax.

Advance Tax Rate: The rate of advance tax on sale and purchase of property has been increased for both filers and non-filers. For filers, the rate has been increased from 1% to 2%; for non-filers, the rate has been increased from 4% to 6%. This means that both the buyer and the seller have to pay more advance tax at the time of transfer of property.

These changes are expected to generate more revenue for the government and also to regulate the real estate sector in Pakistan. However, they may also have some negative impacts on the property market, such as reducing the demand and supply of properties, increasing the cost of transactions, and discouraging investment and development.

Reasons and Impacts of Changes and Updates in the Property Tax System in Pakistan in 2023

The main impacts of these changes and updates in the property tax system in Pakistan in 2023 are:

Positive impacts: These changes and updates may have some positive impacts on the property market and the economy, such as:

Increasing tax revenue for the government: These changes and updates may increase tax revenue for the government, which can be used to finance public services and improvements that benefit the community.

Curbing tax evasion and corruption: These changes and updates may curb tax evasion and corruption in the real estate sector, which can improve governance and trust in the system.

Promoting economic growth and development: These changes and updates may promote economic growth and development in the country, which can improve living standards and well-being of the people.

Negative impacts: These changes and updates may also have some negative impacts on the property market and the economy, such as:

Reducing demand and supply of properties: These changes and updates may reduce demand and supply of properties, as they increase the cost of transactions and discourage investment and development. This may lead to lower sales volume, lower prices, lower profits, lower returns, lower growth, etc.

Increasing inflation and interest rates: These changes and updates may increase inflation and interest rates, as they increase the money supply and demand in the economy. This may lead to higher costs of living, higher costs of borrowing, higher risks of defaulting, lower savings, lower investments, etc.

SOLOW MODEL AND ECONOMIC OVERVIEW

SOLOW MODEL:

The Solow model is a way of thinking about how an economy grows over time. It says that the economy produces one good using machines and workers. The more machines and workers there are, the more the economy can produce. But machines wear out over time and need to be replaced, and workers also increase over time as the population grows. So the economy needs to save some of its production to invest in new machines and keep up with the growing population. The Solow model tries to figure out how much the economy can produce, save, invest, and consume in the long run when everything is stable and does not change. It also tries to see how changes in technology, saving rate, population growth, and depreciation affect the long-run outcomes of the economy.

GRAPHICAL REPRESENTATION:

 

 

The horizontal axis shows how many machines each worker has. This is called capital per worker. The more machines each worker has, the more they can produce and save. But machines also wear out over time and need to be replaced. And more workers are born over time and need more machines to work with. So, the economy needs to balance between having enough machines and having too many machines.

The vertical axis shows how much each worker can produce and save. This is called output per worker and saving per worker. The more each worker can produce and save, the more the economy can grow and improve its living standards. But producing and saving also require using up resources and sacrificing consumption. So the economy needs to balance between producing and saving enough and producing and saving too much.

The curved line shows how much each worker can produce with different numbers of machines. This is called the production function per worker. It shows how productive the economy is with different levels of capital per worker. The production function is curved because each additional machine adds less and less to production. This is called diminishing returns to capital. It means that having more machines is good, but not as good as having fewer machines.

The straight line that goes up shows how much each worker can save with different numbers of machines. This is called the saving function per worker. It shows how much of the output per worker is saved and invested in new machines. The saving function is straight because it depends on a fixed percentage of output per worker. This is called the saving rate. It means that the economy saves the same fraction of its production regardless of how many machines it has.

The straight line that goes down shows how much each worker needs to save to keep the same number of machines over time. This is called the depreciation plus population growth function per worker. It shows how much of the capital per worker is lost due to machines wearing out and workers increasing. The depreciation plus population growth function is straight because it depends on a fixed percentage of capital per worker. This is called the depreciation rate plus the population growth rate. It means that the economy loses the same fraction of its machines regardless of how many machines it has.

The point where the two straight lines cross is called the steady state. At this point, each worker has enough machines to produce and save the same amount over time. The steady-state shows the long-run equilibrium of the economy, where everything is stable and does not change. The steady-state depends on the saving rate, the depreciation rate, the population growth rate, and the production function. It means that the economy can reach a certain level of output per worker and consumption per worker in the long run, but not more than that.

Economic overview

Pakistan's economy depends on several sectors, including agriculture, industry, and services.

Here is a breakdown of the sectors:
 
1. Agriculture:
Agriculture accounts for 21% of Pakistan's GDP.
Sustainable growth of the agriculture sector is vital for food security and rural development in Pakistan.

2. Industry:
Industry accounts for 19% of Pakistan's GDP.
 
3. Services:
Services account for 60% of Pakistan's GDP.

According to provisional estimates, Pakistan's economy in FY2022 has witnessed an estimated GDP growth of 5.97%. The projected real GDP growth rate for Pakistan in 2023 is 3.5%.
Pakistan's economy has been in crisis for months, predating the summer's catastrophic floods. Inflation is high, the rupee's value has fallen sharply, and its foreign reserves have now dropped to the precariously low level of $4.3 billion, enough to cover only one month's worth of imports, raising the possibility of default. An economic crisis comes around every few years in Pakistan, borne out of an economy that doesn't produce enough and spends too much, and is thus reliant on external debt. Every successive crisis is worse as the debt bill gets larger and payments become due. This year, internal political instability and the flooding catastrophe have worsened it. There is a significant external element to the crisis as well, with rising global food and fuel prices in the wake of Russia's war in Ukraine.

Analysis of why GDP IS all-time low:

Precarious economic situation: Pakistan's economy has been in crisis for months, predating the summer's catastrophic floods. Inflation is high, the rupee's value has fallen sharply, and its foreign reserves have now dropped to the precariously low level of $4.3 billion, enough to cover only one month's worth of imports, raising the possibility of default.

Reliance on external debt: Pakistan's economy is reliant on external debt, and every successive crisis is worse as the debt bill gets larger and payments become due. This year, internal political instability and the flooding catastrophe have worsened it.

Significant external element: There is a significant external element to the crisis as well, with rising global food and fuel prices in the wake of Russia's war in Ukraine.

Political instability: Politics has consumed much of Pakistan's time and attention, and the country's turn to political instability has worsened the economic situation.

Lack of production: Pakistan's economy doesn't produce enough and spends too much, leading to a reliance on external debt.

In conclusion, Pakistan's economy is dependent on several sectors, including agriculture, industry, and services. The current GDP of Pakistan is not mentioned in the search results. The GDP growth rate for Pakistan in 2023 is projected to be 3.5%, and the projected consumer prices growth rate is 19.9%. The reasons for the all-time low GDP include a precarious economic situation, reliance on external debt, significant external elements, political instability, and a lack of production.

 

CPEC GWADAR:

HISTORY:

The idea of CPEC has a history as the dialogues of bridging Pakistan’s deep-water ports on Arabian Sea with Chinese Border began in1950s. The construction of Karakoram Highway and Gwadar in 2006 was a part of this notion. The formal talks on CPEC and its initial sketch were materialized in the Parvez Musharraf’s era but could not progress on the grounds of political instability. Zardari’s led, Pakistan People’s Party’s government proposed it again, although it was formally launched during Nawaz Sharif’s led Pakistan Muslim League (Nawaz)’s government in 2015.

Why did China specifically invest in Pakistan? and how much invest in Pakistan?

•    The China-Pakistan Economic corridor, commonly known as CPEC is the bystander of the finest friendly relationship between Pakistan and China.
•    It is a fateful project under which a huge network of roads and highways, infrastructure and energy sector related construction is under progress, costing $46 billion, invested by People’s Republic of China in Pakistan.
•    This project is often subjected as a strategic game changer for Pakistan’s economy along with entire region.
•     CPEC is an extravagant extension of China’s maestro ideology of One Belt, One Road.
•   OBOR is a proposition objected to connect with different countries through road and railway network to revel in massive trade breaks There are total 6 corridors that have to be built under OBOR stratagem of China from which CPEC is one of them.
•    CPEC embraces a significant scope in China’s 13th five-year plan. According to estimations, China imports 60% of the total oil of Middle East countries. It has to use a longer route that costs China a huge amount of money and time. Excessive travelling costs and delivery time provide a major break to China’s competitors in trade that may include Japan, USA etc.
•    It hampers China’s performance to compete in global market arena. This economic corridor is designed to connect Pakistan through its Gwadar Port to the autonomous region of Xinjiang in the North-West China through the huge road, highway and railway networks. It will also connect Pakistan to the fast growing and vibrant markets of Middle East, Africa and Europe; and will generate enormous trade opportunities for the country.
•   CPEC divides into two routes, Eastern and Western, from Islamabad Motorway (M1) that connect Gwadar Port to Western region of China. The network of roads and highways through both the routes do not only connect Gwadar Port with China but also renovate the intramural road map of Pakistan.
•     Using the CPEC route for its oil imports from middle east and for trade of other goods, China can save a huge chunk of time and money.
•    This is the main reason for China to invest in a country like Pakistan that is already facing enormous challenges within country and on its border line too.
•   The significance of CPEC is remarkable as its impacts on development and growth of both the countries, Pakistan and China, will change the fate of entire region. Its socioeconomic impacts on Pakistan have started to emerge with the generation of employment opportunities for its citizens though.

 Full capacity of Gwadar port:

Gwadar port is being built in phases. When completed, it will have three 200-meter-long berths and one Ro-Ro (roll on-roll off) facility. At present the port has the capacity to handle 50,000 deadweight tonnage (DWT) bulk carriers drawing up to 12.5 meters.

Balochistan region:

The CPEC has not benefited the people of Balochistan while people of other provinces enjoy the fruits of the mega project. This has led to widespread protests as the Chinese are viewed as encroachers who are squeezing out all the wealth from the region. This has resulted in a surge in the deadly attacks by Baloch separatists on CPEC facilities.

Balochistan has been at the crossroad of conquerors and invaders throughout the ages. The strategic importance of corridor cannot be fully gauged without analyzing to that with perspective of the province of Baluchistan. Balochistan itself carries huge amount of minerals and natural resources such as oil and gas . In analyzing it clash of interests between the following must be looked into:

•       Iran

•       Afghanistan

•       India

•       China

•       America

•       Europe, Russia& Japan

        Pakistan desperately needs to pay attention to improve security situation to fully attract Chinese counterpart and exploit to the fullest the true potential of the corridor. Due to security problem, China withdrew its investments worth $12 billion from Gwadar in 2009.  Law and order situation can be major impediment to develop this corridor.

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WHY NATIONS FAIL By Daron Acemoglu and James A. Robinson (CHAPTER 7)

 

THE TURNING POINT

TROUBLE WITH STOCKINGS

In “Trouble with Stockings,” Acemoglu and Robinson explain how the English priest William Lee invented a knitting machine in 1589. But Queen Elizabeth I and King James I both denied him a patent because they worried that it would put knitters out of business.

Two hundred years after Lee showed the queen and king his invention, similar textile machines drove the Industrial Revolution. Acemoglu and Robinson’s point is clear: England couldn’t industrialize in the 16th century because its political institutions weren’t inclusive enough. In fact, similar processes prevented industrialization all over the world for many centuries. Had other countries developed institutions like England’s, the authors imply, they would have been able to industrialize much earlier.

Acemoglu and Robinson repeatedly emphasize that historical events always depend on earlier events. Thus, while the Magna Carta and formation of Parliament couldn’t create inclusive institutions on their own, they did make it easier for England to develop these institutions later on, since they put checks on the monarchy’s power and made it possible for diverse groups to have a voice in the English government.

The War of the Roses actually began as elite infighting under extractive institutions: the aristocracy and monarchy both wanted more power for themselves. However, neither side won outright, so England had to form a kind of hybrid government that balanced power between the Crown and Parliament. In fact, precisely because it had to balance power in this way, the English government was already taking crucial first steps toward inclusiveness. The first step to building inclusive institutions, then, can simply be for multiple competing groups to win a meaningful voice in the government. Acemoglu and Robinson also return in this section to the crucial concept of centralization. Readers are likely to associate it with absolutism, probably because dictators often try to expand their power and impose it as widely as they can. However, the authors emphasize that centralization is really just the expansion of the state, so it isn’t always associated with absolutism. In Henry VIII’s case, centralization actually backfired: he wanted to increase his own power, but instead, he increased the state’s overall power while decreasing his control over the state.

Parliament’s anti-monopoly rules were fundamentally selfish: they were designed to help the merchant elite increase its profits. Of course, Charles I also clearly wanted to increase his own power and profits. Thus, Parliament wasn’t inching England toward inclusive institutions because it believed in democracy or pluralism. Instead, it did so because it had to gradually take power away from the king in order to pursue its own interests. This naturally created a more balanced, less concentrated system of power. Parliament also could have tried to overthrow the king and set up an extractive dictatorship of its own but it wasn’t powerful or unified enough to do so.

England’s transformation from extractive to inclusive institutions was a long process that unfolded slowly over the course of many decades. Parliament used its limited power over revenue to sabotage the king’s war effort. This shows how even slightly pluralistic institutions can stop absolutism by checking leaders’ power. Meanwhile, the English Civil War wasn’t merely a conflict between two different factions: it was also a fight between two different visions of government. Of course, the Parliamentarians didn’t intend on extending power to commoners, women, or really anyone but themselves. However, their victory still created more pluralistic institutions because they at least divided power between multiple groups.

The Glorious Revolution definitively tipped the balance of power away from the monarchy and toward Parliament. However, this didn’t necessarily have to make England more pluralistic instead, Parliament could have banded together to impose new extractive institutions on the country. One reason this didn’t happen was that Parliament was made up of businessmen who engaged in international trade, competed with one another, and cared more about protecting their property and wealth than about taking power for themselves. In fact, the authors suggest that representative bodies like Parliament are generally more likely to create pluralistic institutions because they represent multiple groups whose interests don’t align.

Acemoglu and Robinson again stress that political institutions don’t have to include everyone or be truly egalitarian in order to create economic prosperity. Instead, they just need to be inclusive enough that their members choose a competitive market over monopolies. The wealthy men who dominated the English Parliament stood to benefit more from competition than monopolies, so they chose to create inclusive economic institutions. In turn, Acemoglu and Robinson argue, such competitive markets make political institutions more egalitarian over time. Moreover, because Parliament was theoretically supposed to represent the people, petitions could have some effect on its decisions. Thus, the Glorious Revolution gave commoners a proverbial foot in the door of politics they didn’t have true representation, but their concerns were at least heard, and when they banded together, they had a certain amount of political power.

Again, just like pluralism, centralization and the expansion of the state were crucial to building inclusive institutions. This is because they allowed the state to actually enforce its decisions. Thus, while tax bureaucracy might seem like an irrelevant topic, it was actually an important political tool in 17th and 18th century England because it helped Parliament collect taxes as fairly as possible. In turn, Parliament was able to fund the country’s pro-business activities and establish the rule of law (which is the idea that the law applies to everyone, thereby preventing elites from abusing their power).

Parliament didn’t invest in transportation and privatize land because it wanted to help enrich the whole population rather, it did so to increase profits for its members and their close allies. However, Parliament represented a wide range of businessmen and not just a tiny group of oligarchs. Therefore, the best way to protect their profits was not by using the state’s power to gift them land, resources, and labor (like in post-independence Mexico), but by protecting their equal rights to participate in a competitive market.

While protectionist policies made the market less competitive internationally, they made it more competitive domestically. English textile manufacturers therefore had a strong incentive to grow, which is why they eagerly adopted industrial technologies. Translating this into the language of Acemoglu and Robinson’s theory, inclusive economic institutions created an inclusive and competitive market. Private property rights let entrepreneurs reap the benefits of their investments, and a level legal and economic playing field allowed the best products and firms to succeed. In other words, the competitive market incentivized innovations.

The Industrial Revolution highlights how inclusive economic institutions spur innovation and growth by protecting intellectual property. While the German political system punished and stifled innovation, the English patent system encouraged and rewarded it. By protecting Watt’s patent rights, England empowered him to spread his invention as widely as possible and rewarded him for doing so. What’s more, by protecting other inventors’ patents, too, the English government made it possible for Watt to learn about their inventions and build on them. This same effect rapidly improved loom technology, too: inventors knew they would receive credit and profit for their individual contributions, so they could freely work together and build off of one another’s ideas.

Strong property rights and an equal economic playing field let virtually any English male take up trades like roadbuilding. These inclusive economic institutions rewarded whoever did the best job, not whoever had the most power or access. In fact, effective amateurs replacing lackluster professionals and wool factories replacing domestic weavers are both classic examples of creative destruction. In both cases, new technologies made old ones obsolete. While this disrupted old social arrangements and put many people out of work, it ultimately made the economy more efficient and productive.

Again, while they didn’t include everyone (or even most of society), inclusive political institutions in England made it possible for more people to gain political rights over time. But this was primarily because of the inclusive economic institutions they created. The Industrial Revolution enriched new classes of people, allowing the basic conflict behind the Glorious Revolution to repeat itself: new aristocrats demanded and seized power for themselves, which made the political system a little bit more inclusive, too.

English history supports Acemoglu and Robinson’s theory of economic change: political changes during critical junctures created inclusive political institutions, which built inclusive economic institutions, which in turn spurred innovation and generated sustainable economic growth. If other nations had built the right institutions earlier in history, the authors suggest, they might have been able to industrialize in the same way.

As in every society, in 17th century England, conflict over power was the engine behind political change. While Acemoglu and Robinson argue that different groups are always competing for power, including the masses and the elite, the masses didn’t take power in the Glorious Revolution. Instead, a pluralistic group of elites did. However, this shift moved English institutions far enough toward inclusiveness that it built inclusive economic institutions in the short term and an egalitarian democracy in the long term.

Like everything in history, the Glorious Revolution was contingent it depended on human decisions, earlier historical events, and the small institutional differences they created. In other words, were it not for the Black Death, the Roman Empire, or even the defeat of the Spanish Armada, the Glorious Revolution might not have happened, and the Industrial Revolution might not have kicked off in England.

 

WHY NATIONS FAIL By Daron Acemoglu and James A. Robinson (CHAPTER 6)

 

DRIFTING APART

HOW VENICE BECAME A MUSEUM

In the section “How Venice Became a Museum,” Acemoglu and Robinson explain how, starting around 800, Venice became “possibly the richest place in the world” by trading with growing European empires and building inclusive economic institutions. Venice’s rise shows how economic and political institutions build on each other in a positive feedback cycle. The city’s inclusive laws helped its economy grow, and this growth gave non-elite Venetians the power to make their political system more inclusive, too. The city was then able to pass even more inclusive economic laws. In particular, the commenda system was an inclusive economic institution because it gave young entrepreneurs the opportunity to build wealth and capital over time. Of course, like in virtually all other societies before the 20th century, Venice didn’t include everyone in politics or the economy, but it was still relatively inclusive because it didn’t reserve wealth and power for an exclusive group of elites.

Venice’s history shows that a nation’s luck can abruptly turn. This is an important reminder about the “contingency” of history: people decide the fate of their own societies, not destiny. After all, Acemoglu and Robinson emphasize that elites and the masses are always fighting overpower, which means that societies can always become either more inclusive or more extractive (depending on which side wins). In Venice, the elites got the upper hand. They rolled back all of the Great Council’s reforms and ended Venice’s inclusiveness.

This chapter returns to key questions about how and why institutions transform. The short answer is that people change them. It’s especially likely that people will transform institutions during periods of great historical change. What’s more, the state of institutions at these moments of change has a huge impact on their future as either inclusive or extractive societies. Venice, for instance, ended up becoming more of a museum than a powerful economic hub because its institutions had become extractive when the Industrial Revolution hit. In contrast, despite its long history as a backwater, England ended up driving the Industrial Revolution because it had the right kind of institutions at the right time.

Venice and the Roman Empire rose as they became more inclusive and fell as they became more extractive. This shows that, even though inclusive institutions tend to reinforce themselves, elites often try to dismantle (break down) them and create extractive institutions instead. Thus, the authors imply that citizens in inclusive nations should never let down their guard by assuming their institutions are safe.

The murder of Tiberius Gracchus might initially seem unusual because, as the authors have repeatedly argued, extractive institutions tend to cause political infighting not inclusive ones. Rome’s political institutions were relatively inclusive because, although they were by no means egalitarian, they were somewhat pluralistic. In other words, Roman institutions represented multiple groups, even if they didn’t represent everyone. The archaeological evidence suggests that these institutions promoted economic growth, which supports the authors’ overall thesis about institutions causing prosperity.

Despite Rome’s relatively inclusive political institutions, its economic institutions became more extractive over time, especially outside of the capital. As the authors argued in their second chapter, this kind of contradiction between inclusive and extractive institutions tends to cause unrest and transformation, until all the institutions become either inclusive or extractive. Rome went down the latter path. In fact, Gracchus’s murder was part of the elite campaign to make political institutions more extractive and prop up the extractive economic institutions that preserved their privilege.

As in Venice, Roman elites won out over the masses and established increasingly extractive institutions the Empire to benefit themselves. Again, this shows that institutions don’t always move in one direction. Rather, history is contingent. People’s decisions, historical conditions, and sheer luck can lead to unpredictable outcomes.

Acemoglu and Robinson’s hypothesis about why there was no serious, sustained economic growth anywhere in the world between the Neolithic Revolution and the Industrial Revolution. The rulers knew that innovations would replace existing technologies, causing rapid economic growth but also disrupting the existing social and economic order. Emperors and their allies rejected these innovations because the status already benefited them, while they stood to lose if someone else’s technology became essential to the functioning of society. Therefore, under strict extractive institutions, innovations could never get the traction they needed to spread, transform the economy, and start widespread growth.

The Roman Empire’s complex financial tools were really economic institutions. They gave Romans although just a small number of them the tools that they needed in order to buy and sell goods in a marketplace with others. But the Empire’s withdrawal shows how this kind of market relies on the state: it cannot exist unless the government creates institutions to protect it. Thus, when the Roman Empire retreated, England’s economy didn’t stagnate it declined.

Acemoglu and Robinson use England’s historical lack of technological and economic sophistication to emphasize the contingency of history. Its dominance wasn’t destined rather, it was the result of other earlier historical events, plus a large dose of good luck.

Ethiopia is an important case study because it followed a very similar trajectory to Western Europe, despite the fact that Ethiopia is almost completely isolated from Western Europe. Therefore, any similarities between Ethiopia and Western Europe’s trajectories must surely come from overlaps in their institutions, not historical links between the two regions. In both cases, major expansionist empires with highly centralized power structures collapsed, creating critical junctures that produced similar effects in both societies.

The authors conclude that pre-18th century institutions had an important influence on the Industrial Revolution, although they certainly didn’t ensure that it would happen. This is an important part of historical contingency: earlier events set the stage for later ones that actually determine the outcome of history. Older institutions made it possible for merchants to build inclusive institutions during the Industrial Revolution and launch economic growth in England and the US, but these people still had to actually build these institutions.

 

 

RAVI URBAN DEVELOPMENT AUTORITY (RUDA):

ESSAY 

The Punjab government recently directed the Lahore Development Authority to lay the groundwork for establishing an independent Ravi Urban Development Authority (RUDA). Initially, the new government body was being planned under the aegis of the LDA, however, this plan was later scrapped. Reportedly, if the new authority is developed as an independent government entity, then it will have its own governing body and it will be responsible for establishing a new city along the Ravi riverfront. Previously, the RUDA was supposed to be similar to the WASA and the Traffic Engineering and Planning Agency. Now it will be a separate authority and the LDA has already been directed to prepare the paperwork for the purpose.

Sustainable development goals:

The unsustainability of the Project from an ecological, environmental and financial perspective argued by the Society seems to reflect a myopic view of the ever-changing and developing world, especially in view of the ever-increasing population of Lahore, a provincial capital. It is submitted that the Project has been conceived in line with the Sustainable Development Goals (SDGs) of the United Nations (UN). Under the 2030 Agenda of the UN, the economic, social and development dimensions of “sustainable development” are to be integrated in harmony. They are to be construed as a whole and not in a fragmented manner. One goal should not encroach upon other goals and if we examine SDG 17 (global partnerships and cross-sector collaboration), the Project aims to accomplish a majority of the goals listed under it by providing state-of-the-art infrastructure and facilities, sustainable communities, job opportunities and further healthcare and educational opportunities to its residents. Moreover, the Society’s argument with regard to the Project’s potential detrimental effects to the environment is also frail as the Project intends to plant vegetation around the current barren lands of River Ravi and help with its sanitization and treatment, which even the River Ravi Commission has, to date, been unsuccessful with.

Sustainable development is no doubt an evolving concept and it is noteworthy to mention that under our domestic law the Supreme Court of Pakistan has taken a pragmatic approach in its landmark judgment pertaining to an environmental issue

Ecosystem

The Project also claims to value the ecosystem of River Ravi and appears committed to legally resolving any environmental impediments for the betterment of its development. Moreover, its concept is not only in sync with the hortatory non-binding goals of the United Nations but is also supported by the doctrine of precedent of our Supreme Court.

The argument that the channelization of River Ravi is against the principles of sustainable development and ecological sustainability has little weight at this point. Whether or not any purported channelization of River Ravi will affect the ecology of the River is a question to be determined by the relevant experts and consultants in the field. Their recommendations in this regard shall be implemented in the execution of the Project. During the Environment Impact Assessment (EIA) process, such reports should be presented to the concerned agencies for their approval under the Punjab Environment Protection Act 1997 (PEPA 1997).

Moreover, the Society’s argument that riverbanks are an integral part of the river ecosystem and the hydraulics of rivers where there is no defined edge should be maintained, is to be decided upon after comprehensive reports by the relevant experts and consultants in the field. During the EIA process, such reports will be presented to the concerned agencies for their approval under PEPA (Pakistan Environmental Protection Act).

The reality of River Ravi is that it is currently a “sewage nullah”, as quoted by the Prime Minister. The benefits of implementing the project outweigh the environmental concerns being stressed upon by the Society. Any environmental damage apprehended at this point is pure conjecture. A proper EIA should be carried out before the execution of the Project and all matters pertaining to the environment and ecology of River Ravi and its surrounding topography should be addressed through the proper medium, as per the regulatory laws of our land. The Project is essential for the sustainable development of Punjab and will save River Ravi from further damage.

Drawbacks of RUDA

The bulldozers came at the crack of dawn, and they came with no warning. As they rumbled through farmland with the watery September sun at their backs, they were accompanied by a small army of private guards and officials from the Ravi Urban Development Authority (RUDA). Tenants and landowners that farm the land watched on with resignation while their crops were destroyed, and waterways blocked. 

The Ravi Riverfront Project is many things. At its best, it is a vein, bloated, misguided attempt that many environmentalists and hydrological experts have called an impending ecological and social disaster. At its worst, it is an uncaring attempt to turn the Ravi and its embankments into a playground for real estate developers that intend to treat it as a cash-cow for at least the next two decades

For better or worse, it has become a bone of contention with political undertones. A pet project of former prime minister Imran Khan, it was declared illegal and unconstitutional by the Lahore High Court last year and has recently been given reprieve by the Supreme Court. That verdict in addition to the PTI back in charge in Punjab may be what is behind the latest attempt by RUDA to seize lands that they claim they have legally acquired and which the owners of these lands say have not been.

CONCLUSION:

WHY NATIONS FAIL By Daron Acemoglu and James A. Robinson (CHAPTER 5)

"I'VE SEEN THE FUTURE AND IT WORKS":
GROWTH UNDER EXTRACTIVE INSTITUTIONS

In this chapter’s first section, “I’ve Seen the Future,” Acemoglu and Robinson note that most societies have had extractive economic and political institutions but have still managed to achieve some economic growth. However, this growth is based on existing technologies, while growth in inclusive societies is based on technological change.

Extractive political and economic institutions are designed to benefit the elite class that holds power in society. These institutions do not benefit the majority of citizens (who are better served by inclusive institutions). Specifically, extractive political institutions give the elite a monopoly on power by excluding the majority of society from government. In turn, the elite class uses these political institutions to create and sustain extractive economic institutions that enrich its members. These extractive economic institutions are harmful to the majority of society: they impoverish it, restrict its economic rights, and limit its opportunities.

Like most economists, Acemoglu and Robinson believe that free, open markets are the most efficient way to allocate limited resources because they allow everyone to pursue and fulfill their individual preferences. In contrast, while centrally planned economies can excel in certain sectors, they can’t meet the economy’s overall needs. However, unlike many economists, the authors also emphasize that building effective markets doesn’t mean keeping the government out of the economy instead, governments actually have to create free markets through economic institutions that give people the means to innovate and invest.

The authors repeat that inclusive institutions create economies based on innovation, which grow because the people who participate in them have incentives to succeed. In other words, the engine of growth is within the economy itself, which is why this growth is sustainable. On the other hand, extractive institutions create economies based on compulsion, which only grow because elites reshape them.

The Soviet Union understood the importance of innovation and took many steps to spur it along, but these attempts failed. Because Stalin’s whims controlled the economy, the authors suggest, citizens expected instability in the Soviet Union’s economic future. As a result, they couldn’t trust that their investments would be safe or that they’d be rewarded for their efforts or innovations. In fact, the authors argue that Stalin’s policies actually punished innovation and hampered creative destruction. This further supports the authors’ belief that extractive institutions are inherently hostile to innovation and stifle long-term economic growth.

The authors argue that only the free market can properly reward innovation and not government compensation schemes, which can’t even measure true innovation to begin with.

The Lele and Bushong provide a kind of natural experiment, much like North and South Korea or the two halves of Nogales. The only difference is that neither of them have inclusive institutions. Still, they share practically the same culture and geography, but neither of these factors can explain why the Bushong have a more prosperous economy.

The Kuba Kingdom shows that extractive institutions still produce more growth than no institutions at all. While extractive institutions don’t incentivize growth in general, they do give elites an incentive to increase growth as long as that growth doesn’t interfere with their power. After all, the more surplus there is, the more elites can extract and keep for themselves. Shyaam’s policies exemplify this: he restructured society so that the people he ruled would make more of what he wanted. Even though his kingdom collapsed, it left a lasting legacy among the Bushong.

In extractive societies, Acemoglu and Robinson repeatedly argue, power is the primary road to wealth and status, so leaders tend to be overly preoccupied with increasing and protecting their power. The archaeological record suggests that Maya leaders focused all their energy on war (and none of it on innovation), which is clearly consistent with the authors’ theory.

The authors link together all of the conclusions that they have reached in this chapter so far. Extractive institutions can create a very specific, limited form of economic progress. In particular, they are very effective at uniting disorganized peoples and territories, then directing them toward the goals of a single ruler or small group of elites. This explains why all of the earliest complex societies were extractive and gave rulers nearly unfettered power. But it also explains why most of them were eventually overthrown by other extractive institutions. 

WHY NATIONS FAIL By Daron Acemoglu and James A. Robinson (CHAPTER 4)

SMALL DIFFERENCES AND CRITICAL JUNCTURES: THE WEIGHT OF HISTORY

THE WORLD THE PLAGUE CREATED

In this chapter, the author tries to explain why different countries build different kinds of institutions in the first place. The Black Death exemplifies one of their key principles: institutions tend to change during crises, because institutions have to adapt and respond to them. Specifically, in England the Black Death tipped the scales in the ongoing conflict between the elites and the masses. By redistributing power, the Black Death made it possible for the people to create more inclusive institutions.

The differences between England and Eastern Europe underline a second important principle about historical change: not every nation will respond to the same crisis (or critical juncture) in the same way. In fact, nations often diverge over time precisely because their institutions respond to the same critical stages in different ways. While the Black Death tipped the balance of power toward the masses in England, it did the opposite in Eastern Europe. Notably, this happened because England was slightly more inclusive and less extractive than Eastern Europe before the Black Death. In other words, the Black Death multiplied existing institutional differences, leading to a major divergence.

“Institutional drift” the differences between nations that accumulate over time doesn’t always lead to transformation. Rather, it only truly matters when those nations hit a critical juncture. But when they do, institutions transform. This is Acemoglu and Robinson’s explanation for why different nations have diverged over time. In particular, it explains how nations can make the leap from extractive to inclusive institutions. Virtually all nations start with extractive institutions run by and for a small elite, but at critical junctures, the pluralistic and democratic elements in those countries can sometimes overthrow extractive institutions and replace them with inclusive ones.

Contingency really just means that things could have been otherwise history didn’t have to go the way it did. Contingency is important because it’s empowering: it suggests that people’s actions and decisions often do change the course of history. By emphasizing the contingency of history, Acemoglu and Robinson emphasize that nations can overcome poverty if their people and leaders make the right choices and overthrow extractive institutions. In contrast to Acemoglu and Robinson’s theory, which acknowledges contingency, the geography and culture hypotheses suggest that the root cause of poverty is some inherent factor that’s outside of people’s control. They thus imply that people don’t have the power to reform and improve their own countries.

The idea of contingency suggests that, depending on the behaviour of key actors, the same crisis in the same nation could make institutions either far more inclusive or far more extractive. Clearly, people shouldn’t court crisis in the hopes of building more inclusive institutions, since inclusiveness depends on a lot more than simply experiencing a critical juncture.

Acemoglu and Robinson attribute sub-Saharan Africa’s poverty to a series of patterns that have kept its institutions highly extractive over time. The slave trade, colonialism, and modern dictatorships all stopped both centralization and pluralism—which are the two key factors for inclusive political institutions. But the authors point out that these different phases of sub-Saharan African history weren’t completely random or separate: rather, they were possible mainly because institutions were already extractive. In other words, the slave trade made it easier for Europeans to colonize sub-Saharan Africa, and this colonialism made it easier for independent African leaders to maintain extractive institutions. Thus, sub-Saharan Africa hasn’t just been unlucky: rather, it has been stuck in a cycle of extractive institutions.

Ottoman and European colonialism impoverished the Middle East by creating extractive institutions, like insecure property rights and unsurpassable barriers to entry in every major industry. This stifled innovation and kept Middle Eastern economies frozen in time. Like in Africa and Latin America, then, successive governments maintained the same extractive institutions over time, keeping the region in a cycle of poverty. It's no coincidence that these extractive institutions determine how oil wealth gets distributed nearly all of it goes to the elite.