entrepreneurship and the process of development: a framework for applied expeditionary economics in...
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Kauffman Foundation Research Series:Expeditionary Economics
Entrepreneurship andthe Process o Development:A Framework or Applied
Expeditionary Economics in PakistanFebruary 2012, 5th in the Series
Robert LooneyNaval Postgraduate School
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The opinions herein are solely those of the author and do not reflectthe opinions of the Kauffman Foundation, the Naval Postgraduate School
or any of the authors current or previous employers.
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Kauman Foundation Research Series:Expeditionary Economics
Entrepreneurship and theProcess o Development:
A Framework or Applied Expeditionary
Economics in Pakistan
February 20125th in the Expeditionary Economics Series
Robert Looney
Naval Postgraduate School
E n t r e p r e n e u r s h i p a n d t h e P r o c e s s o f D e v e l o p m e n t :A F r a m e w o r k f o r A p p l i e d E x p e d i t i o n a r y E c o n o m i c s i n P a k i s t a n
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E n t r e p r e n e u r s h i p a n d t h e P r o c e s s o f D e v e l o p m e n t :A F r a m e w o r k f o r A p p l i e d E x p e d i t i o n a r y E c o n o m i c s i n P a k i s t a n
A u t h o r s B i o g r a p h y
ii
Robert E. Looney is a distinguished proessor at the Naval Postgraduate School, Monterey, Cali. He
specializes in issues relating to economic development in the Middle East, East Asia, South Asia, and Latin
America. His current research ocuses on a comparative analysis o post-conict recovery strategies. He has
published twenty-two books on economic issues pertaining to developing and emerging economies, and he is
currently editing the Handbook o Emerging Economies or Routledge.
As an international consultant, Dr. Looney has provided advice and assistance to the governments o Iran,
Saudi Arabia, Japan, Mexico, Panama, and Jamaica, as well as the International Monetary Fund, World Bank,International Labor Ofce, Inter-American Development Bank, Stanord Research Institute, and Rand Organization.
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iiiE n t r e p r e n e u r s h i p a n d t h e P r o c e s s o f D e v e l o p m e n t :
A F r a m e w o r k f o r A p p l i e d E x p e d i t i o n a r y E c o n o m i c s i n P a k i s t a n
E x e c u t i v e S u m m a r y
Executive Summary
The purpose o this study is to develop an empirically based model to serve as a starting point or
designing development strategies or Pakistan and similar countries, where aid has produced ewtangible gains and the economy has not been able to generate sustained periods o growth. Within this
ramework, the model seeks to integrate into the entrepreneurship-led growth strategy o Expeditionary
Economics several related but diverse strands o research: the literature on governance and economic
growth, actors underpinning entrepreneurship, and the diverse orces contributing to instability. The
hope is that ultimately the analysis will yield a plan o action and a way o identiying the sequencing o
reorms that can be applied to a wide variety o conict/post-conict settings in the developing world.
The study ound that:
1. It is unlikely in Pakistans current institutional/political setting that traditional aid programs, even
with greatly expanded unding, could initiate a process o institutional development and reorm
sufcient to oset Pakistans current slow growth and cycle o violence (see Fig. ES-1).
2. However, an extensive quantitative assessment o successul country growth patterns ound that
entrepreneurial activity is a key element in driving the growth process through progressive stages
o economic development.
Poor EconomicPolicymaking
Approaches
Aid
Future ofSlowGrowth,Limited
Reforms,InternalConflict
PoorlyDesigned andDistributed
BureaucraticTop Down
NewWinners Improved
LocalStability
Weakeningof VestedInterests
IncreasedPolitical
Influenceover
Reforms
SustainedProgress inImproved
Governance
ExpandedFormal
Economy,ReducedShadowEconomy
VirtuousCircle ofGrowth
andReform
Not Reflectiveof Pakistani
Priorities
CounterproductiveAnti-American
Limited Follow-OnEffects
Empirically LittleDirect Economic
Impact
Community-Based
Bottom-up
Implementationof New
DevelopmentFramework
Consistentwith PakistaniCustoms and
Traditions
Secure Parts ofCountry TradeLiberalization
Increased BusinessFreedom
Empirical Findingson the Importance
of Entrepreneurshipin the Growth and
Development
Process
EconomicReformsFreeTrade, Business
Freedom
ExpandedEntrepreneurship
Insecure Partsof Country
Focus onExpanded
Entrepreneurship
New GrowthFramework
Slowdown inGrowth
Stalled ReformsLow Tax Base
and Investment
RisingExpectations
Failed TakeoffsCurrent Crisis
Principles ofExpeditionary
Economics
Weakening ofInstitutions
LimitedImprovements in
GovernanceEconomicFreedom
IncreasedStrength of
Vested Interests,Elites, Military,Industrialists
Periods ofMilitary Rule
Fig. ES-1. Report Overview
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ivE n t r e p r e n e u r s h i p a n d t h e P r o c e s s o f D e v e l o p m e n t :
A F r a m e w o r k f o r A p p l i e d E x p e d i t i o n a r y E c o n o m i c s i n P a k i s t a n
E x e c u t i v e S u m m a r y
3. Successul countries whose development relies on increased entrepreneurial activity appear
to sustain growth through a series o ongoing reorms initiated by this growing stakeholder
group. As a result, they are able to establish virtuous circles o increased economic liberalization,
extended entrepreneurship, expanded growth, and improved governance, which lead in turn to
urther growth and development.
4. Increased trade liberalization and improvements in the business climate are the most
important actors or stimulating entrepreneurial expansion or countries at Pakistans stage
o development.
5. Consequently, entrepreneurial eorts could be expanded in the short term without major
improvements in governance.
6. Entrepreneurship-led development could potentially create a virtuous circle o growth and
reorm in Pakistan capable o overcoming the constraints o violence, bureaucratic inertia,
and the countrys many vested interests.
7. In principle, Pakistans New Growth Framework incorporates all o the elements noted above.
8. Drawing on these fndings, the principles o Expeditionary Economics should acilitate a policy
shit toward the New Growth Framework, especially in areas where the central government has
thus ar been unable to be an eective agent or economic betterment.
9. There are numerous opportunities or the United States and European Union to contribute to
Pakistans economic revival and sustained growth.
A trend setter in Asia up to the sixties, economic management in Pakistan has steadily deteriorated
to the point where the economy has, or the past ew decades, lurched rom one nancial crisis
to the next. At the heart o the problem has been the poor management o public nances and
deep-seated unresolved structural issues in the economy that bad management and poorgovernance has exacerbated. The consequences o this secular decline in economic governance
are plain to see: macroeconomic instability, high infation, poor public services, criminal neglect
o the social sectors, widespread corruption, crippling power outages, growing unemployment,
deepening poverty and a deteriorating debt prole.1
1. Meekal Ahmed, An Economic Crisis State? in Pakistan: Beyond the Crisis State, ed. Maleeha Lodhi (New York: Columbia University Press, 2011),
169.
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E n t r e p r e n e u r s h i p a n d t h e P r o c e s s o f D e v e l o p m e n t :A F r a m e w o r k f o r A p p l i e d E x p e d i t i o n a r y E c o n o m i c s i n P a k i s t a n
T a b l e o C o n t e n t s
Table o Contents
Introduction ......................................................2
Potential Constraints on Pakistans
Economic Advancement and
Entrepreneurial Activity...................................5
Potential Competitiveness Constraints ............5
Limited Institutional
Development: Governance .............................8
Voice and Accountability ...........................10
Political Stability/Absence o Violence ........ 10
Government Eectiveness ......................... 11
Regulatory Quality .................................... 12Rule o Law ............................................... 13
Control o Corruption ............................... 13
Potential Economic Reorm Constraints ........ 14
Limited Progress in Economic Freedom ......... 15
Defciencies in
Entrepreneurial Access to Capital ................. 16
Constraints on Pakistans Growth
Potential and Entrepreneurship .................... 19
Key Dimensions o Growth
Potential and Entrepreneurship ..................... 21
Discriminant Analysis
Key Constraints on Group Advancement ...... 28
Regression Analysis
Key Linkages Surrounding
Entrepreneurship ..........................................30
Factors Contributing to
Increased Entrepreneurship .......................31
Entrepreneurship and Governance.............32
Entrepreneurship, Governance, and
the Shadow Economy ...............................38
Implications of the Model forPakistans New Growth Framework
and Expeditionary Economics .......................41
The Failure o Foreign Aid ............................ 42
Entrepreneurial Development and
the New Growth Framework ........................43
The Application o Expeditionary
Economics to Pakistan ..................................46
Policy Implications .......................................... 48
Trade Policy .................................................. 48
Inrastructure Policy ..................................... 50
Business Freedom/Removing
Constraints on Entrepreneurship .................. 51
Assessment Mancur Olsons Coalitions ..... 52
Conclusion ......................................................54
1
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2
I n t r o d u c t i o n
Introduction
As one o the central countries in the UnitedStates War on Terror, Pakistans stability has
global import. Unortunately, this stability is
increasingly threatened by the restlessness o tribal
groups in areas bordering Aghanistan, the
continued dispute with India over Kashmir, and
internal discontent among various actions within
the government and population. Without sustained
economic growth and major improvements to its
security and institutions, Pakistans situation will
likely continue to deteriorate, impairing eorts to
bring stability to Aghanistan and to South Asia as
a whole.2
Most observers are pessimistic about Pakistans
near-term uture. A leading expert, Stephen
Cohen, suggests that: Over the next fve years,
Pakistans success as a stable state, measured
along any dimension, is ar rom guaranteed, and
in act, the normalization o Pakistan remains
doubtul.3 Cohen concludes that, under the most
probable scenario, Pakistan will continue to
struggle with a chronically deteriorating economy
and ever-pressing political and regional security
challenges.
A recent Rand report echoes Cohens
assessment, concluding that the near-term uture
will see a Pakistan that muddles along, neither
ailing outright nor managing to right its course.4
According to the report, uture scenarios range
rom the emergence o an increasingly technocratic
state, to an Islamist state, to the breakup o the
state along regional and actional linesany o
which would exacerbate regional instability. In themost likely scenario, Pakistan will evolve into an
authoritarian state tightly under the control o the
military and intelligence agencies.5
Shahid Javed Burki sees direct links between
the recent rise o extremism in Pakistan and
rapid increases in population, coupled with
economic mismanagement. He suggests that the
governments ocus should have been not only on
getting the economy to grow rapidlywhich it did
on occasions and during the periods when the
military was in chargebut also on ensuring that
the rewards o rapid growth were widelydistributed.6 The ailure to do so has spawned
millions o alienated youth with little aith in their
uture. They have been successully recruited to
jihadist causes. The latest o these is the
destruction o the Pakistani state.7
Failure to prudently distribute the rewards o
growth has been only one o many weaknesses in
Pakistans development policies. Pakistan is
plagued by a long-term pattern o economic stops
and starts8 and ailed takeos,9 in which rapid
growth is ollowed by periods o relativestagnation.10 Contributing to this pattern is a lack
o eective governance, in which reorms are
stied by entrenched elites who beneft rom the
status quo.11 Unless governance can be improved,
2. Robert Looney and Robert McNab, Pakistans Economic and Security Dilemma: Expanded Deense Expenditures and the Relative Governance
Syndrome, Contemporary South Asia (March 2008): 63.
3. Stephen Cohen, Keeping Pakistan From Falling Apart, World Politics Review(May 2011): 1.
4. C. Christine Fair, et al., Pakistan: Can the United States Secure an Insecure State?(Santa Monica, CA: Rand, 2010), xv.
5. Ibid.
6. Shahid Javed Burki, Roots o Terrorism, Dawn, December 15, 2009.
7. Ibid.
8. Robert Looney, Pakistans Economy: Achievements, Progress, Constraints and Prospects in Pakistan: Founders Aspirations and Todays
Remedies, ed. Haeez Malik (Karachi: Oxord University Press, 2001), 196243.
9. Looney, Failed Economic Take-os and Terrorism in Pakistan: Conceptualizing a Proper Role or U.S. Assistance,Asian Survey(November/
December 2004): 77193.
10. Looney, Failed Take-O: An Assessment o Pakistans October 2008 Economic Crisis, Pakistan Security Research Unit (PSRU), Brie No. 46,
University o Bradord, April 21, 2009.
11. Burki, Pakistans New Political Economy, Business Standard, April 22, 2011.
E n t r e p r e n e u r s h i p a n d t h e P r o c e s s o f D e v e l o p m e n t :A F r a m e w o r k f o r A p p l i e d E x p e d i t i o n a r y E c o n o m i c s i n P a k i s t a n
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12. Looney and McNab, Pakistans Economic and Security Dilemma: Expanded Deense Expenditures and the Relative Governance Syndrome,
Contemporary South Asia (March 2007): 6382.
13. Gri Witte, U.S. Aid Buys Little Goodwill: Pakistanis Say They See Scant Evidence o the Billions Spent, The Washington Post, August 24, 2010,
A1.
14. Fair, A Better Bargain or Aid to Pakistan, The Washington Post, May 30, 2009.
15. Ibid.
16. Ben Arnoldy and Assam Ahmed, U.S. Cuts Aid to Pakistan: Six Key Questions, The Christian Science Monitor, July 11, 2011.
17. Nancy Birdsall and Molly Kinder, The U.S. Aid Surge to Pakistan: Repeating a Failed Experiment? Lessons or U.S. Policymakers rom the World
Banks Social-Sector Lending in the 1990s (Working Paper No. 205, Center or Global Development, March 2010); Burki, Living Without Foreign
Assistance, Dawn, May 23, 2011.
18. Carl J. Schramm, Expeditionary Economics, Foreign Aairs (May/June 2010).
19. Ibid.
20. Nadeem ul Haque in Adil Najam, Devising A New Growth Strategy or Pakistan (7): New Growth Framework Approved, All Things Pakistan,
May 29, 2011.
21. Ibid.
3
I n t r o d u c t i o n
it will continue to pose a ormidable barrier to
sustained growth.12
It is becoming increasingly clear that traditional
oreign aid is not the solution. Not only havemassive inusions o oreign aid ailed to bring
stability to Pakistan or buy goodwill or the
United States,13 but the way these programs
are managed has corrupted and corroded the
countrys institutions.14 The top-down nature
o traditional aid programs has encouraged
corruption and rent seeking, while lessening the
need or the government to orge a bond with
its citizens by raising revenues and redistributing
those unds as services.15 Civilian aid programs
have little eect on the overall Pakistani economy,
as illustrated by a recent estimate that U.S.
withdrawal o these unds would have only a
0.14 percent impact on the GDP growth rate.16
The outcomes o oreign aid have been so
unsatisactory that both donor and recipient
groups agree that, in many respects, Pakistan
would have been better o without them.17
While ew hold out hope that traditional U.S.
oreign aid can change the direction o events
in Pakistan, the new area o Expeditionary
Economics could potentially provide a basis
or cooperation between the two countries in
their mutual quest or stability. As describedin Carl J. Schramms pathbreaking article,
Expeditionary Economics begins with the
premise that economic growth is critical to
establishing social stability, which is the ultimate
objective ocounterinsurgency campaigns and
disaster-relie eorts.18 As Schramm notes,
proven methods or achieving such economic
growth already exist in the entrepreneurialmodel practiced in the U.S. and elsewhere.19
Nadeem ul Haque o Pakistans Planning
Committee laments that the gyrations o
politics and security have kept everyone ully
engagedin act, more than ullyand issues
o long-term development planning have been
neglected not only by the media but in the public
imagination.20 He sees this situation as particularly
ironic given that the state o the economy and
its advancement are ar more likely to aect
politics and security than vice versa.21 One o a
growing number o Pakistani economists who,like Schramm, champions the replacement o
the countrys inefcient, state-run policies with
entrepreneur-led growth, ul Haque observes:
An unintended consequence o our pastpolicies has been the stiing o internal
markets, cities and communities, whichplay a critical role in ostering productivity,
innovation and entrepreneurship and
ultimately promote growth, prosperity anddevelopment. ... In the new development
ramework, the private sector should be the
growth-driver in open market environmentthat rewards efciency, innovation andentrepreneurship, while the government is
acilitator that protects public interests and
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I n t r o d u c t i o n
rights, provides public goods, enorces laws,
punishes exploitative practices, and operates
with transparency and accountability.22
This sentiment lies at the core o the PakistaniPlanning Commissions New Growth Framework,
which was ormally adopted by the National
Economic Council in May 2011. The ramework
represents a paradigm shit in Pakistans
approach toward the economy. It proposes
that the country move rom the current state-
led model o development to one that relies
on reely unctioning markets with dynamic
entrepreneurship playing the leading role in
expanding investment, developing new areas
o economic activity, and providing productive
employment or the countrys rapidly burgeoninglabor orce. While the ramework is intuitively
appealing to proessional economists, it is
admittedly theoretical at this point and, as such,
has drawn criticism that it oers a list o what
to do, as opposed to how to do.23 Critics also
note that it is vague regarding the sequencing o
its policies and reorms24 and question whether
Pakistans government has the ability and political
will to implement such an ambitious agenda.25
Criticisms aside, the key assumptions o the
ramework are basically sound. In act, countrieswhose circumstances resembled those o Pakistan
have implemented similar programs that initiated
a cumulative process o growth and reorm.26
Many Central and Eastern European countries
that successully transitioned rom communism
ollowed programs that shared key assumptions
and elements espoused by both the New Growth
Framework and Expeditionary Economics.
Pakistans New Growth Framework emphasizes
theory, while Expeditionary Economics ocuses
on the nuts-and-bolts implementation o these
economic principles by the military in conict
and post-conict settings. However, in their
basic philosophies and economic approaches,
the two are essentially complementary. Bothstress the importance o growth as a means
to achieving objectives such as stabilization.
Both see the entrepreneur as a key fgure in the
process o growth, with the state remaining in the
background as a supporting player. Integrating
the two approaches could potentially provide
a blueprint or stimulating entrepreneurship-
led growth to improve stability and security
in Pakistan and other developing countries.
Key to integrating the New Growth Framework
with Expeditionary Economics is the developmento a model that places both on a sound empirical
ooting. As previously noted, the New Growth
Framework is vague with regard to the proper
sequencing o policies and reorms. Similarly,
much o the literature on entrepreneurship, a key
component o Expeditionary Economics, is vague
or anecdotal in linking policy actions to new frm
startups and increased entrepreneurial activity,
making it difcult to transer its strategies to
dierent settings.
A major goal o the present study is to developan empirical model to serve as a starting point or
designing development strategies or countries like
Pakistan, where aid has produced ew tangible gains
and the economy has not been able to generate
sustained periods o growth. More generally,
the model seeks to integrate into Expeditionary
Economics several related but diverse strands o
research: the literature on governance and economic
growth, actors underpinning entrepreneurship,
and the diverse orces contributing to terrorism/
extremism. Ultimately, it is hoped that the analysis
22. ul Haque, Devising a Growth Strategy or Pakistan (2): Towards a New Development Approach,All Things Pakistan, February 5, 2011.
23. Abid Hasan, An Unorthodox Path to Prosperity, The News, July 4, 2011.
24. Safya Atab, The Elusive Quest or Sustainable Growth, The Friday Times, May 6, 2011.
25. Pervez Tahir, A New Growth Strategy, The Express Tribune, February 11, 2011.
26. See, or example, Oleh Havrylyshyn and Thomas Wol, Determinants o Growth in Transition Countries, Finance & Development(June 1999);
and Pradeep K. Mitra and Marcelo Selowsky, Lessons rom a Decade o Transition in Eastern Europe and the Former Soviet Union, Finance &
Development(June 2002).
E n t r e p r e n e u r s h i p a n d t h e P r o c e s s o f D e v e l o p m e n t :A F r a m e w o r k f o r A p p l i e d E x p e d i t i o n a r y E c o n o m i c s i n P a k i s t a n
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P o t e n t i a l C o n s t r a i n t s o n P a k i s t a n s E c o n o m i cA d v a n c e m e n t a n d E n t r e p r e n e u r i a l A c t i v i t y
will yield a plan o action and a way o identiying
the sequencing o reorms that will be applicable
to a wide variety o conict/post-conict settings in
the developing world.
To that end, this report begins with an
overview o the various elements constraining
Pakistans growth, as well as the actors leading
up to Pakistans current crisis. Next, it oers
a model that integrates the principles o the
New Growth Framework with Expeditionary
Economics and tests whether and how
entrepreneurship-led development could initiate
a virtuous circle o economic growth, reorm,
and reduced violence in Pakistan. Finally, it
examines two contrasting solutions: expanded
oreign aid programs and implementation othe New Growth Framework discussed above.
Potential Constraintson Pakistans EconomicAdvancement andEntrepreneurial Activity
To develop an analytical ramework or applying
Expeditionary Economics to Pakistan and other
conict/post-conict countries, it is frst necessary
to identiy the constraints with the greatest
potential to impede the countrys progress at
each stage o development. In Pakistans case,
the list is long. A cursory survey o the literature
suggests a myriad o inhibiting actors. Those
most requently identifed as key development
constraints include (1) lack o competitiveness due
to limitations in actors ranging rom inrastructure
to education to technological capacity, (2) limited
governance in areas such as rule o law and
anticorruption, and (3) insufcient economic
reorms that hinder open markets and trade.
Each o these broad categories is made up
o a number o individual variables, which are
explored in depth below. The examination o
the variables is instructive, both in illuminating
the wide range o constraints the Pakistani
economy aces and in illustrating the diversity
o opinion as to the paramount actor or actors
that inhibit Pakistani growth and development.
Potential
Competitiveness ConstraintsThe World Economic Forums Global
Competitiveness Index (WEF GCI) provides an
excellent starting point or examining Pakistans
inability to sustain long-term growth. Drawing
on the work o Harvards Michael Porter,27 the
index provides a benchmark or identiying
impediments to a countrys competitiveness.28
The GCI takes into account macroeconomic as
well as the core microeconomic oundations
o national competitiveness, which it defnes
as the set o institutions, policies, and actors
that determine the level o productivityand thus income o a country.29
The WEFs approach depicts global
competitiveness as a weighted average o many
dierent components, each o which aects some
aspect o competitiveness. These components
all into twelve main groups, or 12 pillars o
competitiveness.30 These pillars are: Institutions,
Inrastructure, The Macroeconomic Environment,
Health and Primary Education, Higher Education
27. See, or example, Michael Porter, Enhancing the Microeconomic Foundations o Prosperity: The Current Competitiveness Index, in The
Global Competitiveness Report 20012002, ed. Klaus Schwab (Geneva: World Economic Forum, 2001); and Michael Porter, The Microeconomic
Foundations o Prosperity: Findings rom the Business Competitiveness Index, in The Global Competitiveness Report 20072008, ed. Klaus
Schwab (Geneva: World Economic Forum, 2007).
28. Xavier Sala-i-Martin, et. al., The Global Competitiveness Index: Measuring the Productive Potential o Nations, in The Global Competitiveness
Report, 20072008, ed. Klaus Schwab (Geneva: World Economic Forum, 2007), 3.
29. Klaus Schwab, preace to The Global Competitiveness Report 20102011, ed. Klaus Schwab (Geneva: World Economic Forum, 2010), 4.
30. Ibid.
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P o t e n t i a l C o m p e t i t i v e n e s s C o n s t r a i n t s
and Training, Goods Market Efciency, Labor
Market Efciency, Financial Market Development,
Technological Readiness, Market Size, Business
Sophistication, and Innovation.
Following Porters31 earlier work, the WEF
urther assumes that countries progress through
three distinct stages: (1) actor driven, (2)
investment driven, and (3) innovation driven.
Using regression analysis, the orum has ound
that certain pillars are more important at one
stage than at others. Institutions, Inrastructure,
Macroeconomic Stability, and Health and
Primary Education are key in the actor-driven
stage. Higher Education and Training, Goods
Market Efciency, Labor Market Efciency,
Financial Market Sophistication, TechnologicalReadiness, and Market Size predominate
during the efciency-driven stage. Business
Sophistication and Innovation play a critical
role in the innovation-driven stage.
Drawing on this ramework, the WEF is able
to classiy individual countries into one o these
three stages. Each country is assigned to a
development stage based on (1) its level o GDP
per capita measured at market exchange rates
a proxy or wages (used by the WEF because
internationally comparable data on wages andpurchasing power parity are not available or all
countries covered)and (2) the extent to which
countries are actor driven, as proxied by the share
o exports o primary goods in total exports.
The orum deems countries alling between
two stages as in transition. As these countries
develop, increasingly more weight is given to
the pillars that will assure their competitiveness
when they move on to the next development
stage. In this way, the GFI rewards countries that
do what is needed to ensure a smooth transition
and penalizes those that ail to prepare or
the next stage. Table 1 provides a summary o
the latest (2010) World Economic Forum stage
classifcations. For the purposes o this report and
its empirical model, the WEF stages have been
relabeled as Groups 1 through 5, as indicated in
parentheses under the main headings on Table 1.
As illustrated in Fig. 1, Pakistans progress
toward improved competitiveness has been
limited. According to the WEFs 20102011
Global Competitiveness Report:
Pakistan alls to 123rd place, weakening across
most areas measured by the GCI. Still at an
early stage o development, the country will
require eorts in particular to improve the
basic determinants o its competitiveness,
namely its institutions (112th), inrastructure
(110th), and macroeconomic environment
(133rd) as well as education at all levels.32
31. Porter, Enhancing the Microeconomic Foundations o Prosperity.
32. The Global Competitiveness Report 20102011 (Geneva: World Economic Forum, 2010), 30.
E n t r e p r e n e u r s h i p a n d t h e P r o c e s s o f D e v e l o p m e n t :A F r a m e w o r k f o r A p p l i e d E x p e d i t i o n a r y E c o n o m i c s i n P a k i s t a n
Fig. 1. Pakistans Progressin Improved Competitiveness
Stage of Development
1 2 3Transition12Transition
23
FactorDriven
Factor-Driven Economies
EfficiencyDriven
InnovationDriven
Institutions
Labor MarketEfficiency
Infrastructure
Goods MarketEfficiency
Innovation
FinancialMarketDevelopment
BusinessSophistication
TechnologicalReadiness
HigherEducation and
Training
MacroeconomicEnvironment
Health andPrimary
EducationMarket Size
1
0
2
3
4
5
6
7
Pakistan
Source: World Economic Forum, TheGlobal Com etitiveness Re ort 20102011, 268.
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Stage 1
(Group 1)
Bangladesh
Benin
Bolivia
Burkina Faso
Burundi
Cambodia
Cameroon
Chad
Cote dlvoire
Ethiopia
Gambia, The
Ghana
HondurasIndia
Kenya
Kyrgyz Republic
Lesotho
Madagascar
Malawi
Mali
Mauritania
Moldova
Mongolia
Mozambique
Nepal
NicaraguaNigeria
Pakistan
Philippines
Rwanda
Senegal
Tajikistan
Tanzania
Timor Leste
Uganda
Vietnam
Zambia
Zimbabwe
TransitionFrom 1 to 2(Group 2)
Algeria
Armenia
Azerbaijan
Botswana
Brunei
Egypt
Georgia
Guatemala
Guyana
Indonesia
Iran, Islamic Rep.
Jamaica
KazakhstanKuwait
Libya
Morocco
Paraguay
Qatar
Saudi Arabia
Sri Lanka
Swaziland
Syria
Ukraine
Venezuela
Stage 2
(Group 3)
Albania
Argentina
Bosnia
Brazil
Bulgaria
Cape Verde
China
Colombia
Costa Rica
Dominican Republic
Ecuador
El Salvador
JordanLebanon
Macedonia
Malaysia
Mauritius
Mexico
Montenegro
Namibia
Panama
Peru
Romania
Russian Federation
Serbia
South AricaThailand
Tunisia
Turkey
TransitionFrom 2 to 3(Group 4)
Bahrain
Barbados
Chile
Croatia
Estonia
Hungary
Latvia
Lithuania
Oman
Poland
Puerto Rico
Slovak Republic
Taiwan, ChinaTrinidad and Tobago
Uruguay
Stage 3
(Group 5)
Australia
Austria
Belgium
Canada
Cyprus
Czech Republic
Denmark
Finland
France
Germany
Greece
Hong Kong SAR
IcelandIreland
Israel
Italy
Japan
Korea, Rep
Luxembourg
Malta
Netherlands
New Zealand
Norway
Portugal
Singapore
SloveniaSpain
Switzerland
United Arab Emirates
United Kingdom
United States
7
P o t e n t i a l C o m p e t i t i v e n e s s C o n s t r a i n t s
E n t r e p r e n e u r s h i p a n d t h e P r o c e s s o f D e v e l o p m e n t :A F r a m e w o r k f o r A p p l i e d E x p e d i t i o n a r y E c o n o m i c s i n P a k i s t a n
Table 1. Countries at Various Stages o Development 20102011
Source: Xavier Sala-i-Martin, et al., The Global Competitiveness Report 2010 2011: Looking Beyond the Economic Crisis inThe Global Competitiveness Report 20102011, ed. Klaus Schwab (Geneva: World Economic Forum, 2010) , 11.
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8
L i m i t e d I n s t i t u t i o n a l D e v e l o p m e n t : G o v e r n a n c e
On this basis, Pakistan alls into Group 1, the
initial, actor-driven stage o development.
Since the early to mid-1990s, Pakistans
competitive shortcomings have resulted in slowedeconomic growth relative to other developing
countries in Asia (see Fig. 2). While the country
managed to achieve a short spurt o growth in
the early to mid-2000s, this expansion was largely
consumption-demand-driven, rather than the result
o a major increase in investment-led productivity.
Even worse, this period o growth appears
to have compounded many o the problems
plaguing Pakistan today. While no detailed studies
o income distribution are available or the last
several years o Musharras regime, Burki estimates
that around 10 million Pakistanis beneftted
rom the economic growth and restructuring, 25
million would have entered the system had it not
been disrupted, and 45 million were completely
ignored.33 Furthermore, he notes that regional
inequality emerged rom the Musharra era, whose
benefts were largely confned to the central and
northern Punjab and large cities such as Islamabad,
Lahore, Karachi, Faisalabad, and Gujranwala.34
In addition to global competitiveness, the recent
literature on ailed states notes that development
may be aected by deeper determinants o
growth, including governance variables such as
corruption, political stability, and the rule o law.35
Another body o literature observes that the
various dimensions o economic reedom (or thelack thereo) have had a proound eect on the
progress o Pakistan and many other countries.36
Such studies suggest that, besides the WEFs twelve
competitiveness components, there are additional
actors that must be addressed beore Pakistan
can embark on a path o sustained growth.
Limited InstitutionalDevelopment: Governance
While rating countries on the basis o their relative
progress in improving governance is inherentlysubjective, the World Bank37 regularly provides a
set o rankings incorporating the ull extent o our
knowledge about this phenomenon. The World
Bank dataset estimates six dimensions o
governance or 213 economies over the period
19962009. These dimensions are: Voice and
Accountability, Political Stability and Absence o
Violence, Government Eectiveness, Regulatory
Quality, Rule o Law, and Control o Corruption.
The values or each o the governance fgures
range rom a low o -2.5 to a high o +2.5, with a
country sample mean o zero.
The means or the fve-group sample or
2009 (Table 2) show a airly steady progression
on each governance dimension, rom low
or Group 1 to high or Group 5. The one
notable exception to the pattern is a drop in
the Voice and Accountability dimension as
countries move rom Group 1 to Group 2.
Pakistan scores low relative to other Group 1
countries on most governance dimensions: -0.997
on Voice and Accountability versus a Group 1
average o -0.547; -2.756 on Political Stability/
33. Burki, Arithmetic o Discontent, Dawn, December 11, 2007.
34. Burki, Reaching the Disadvantaged, Dawn, December 18, 2007.
35. Dani Rodrik and Mark Rosenzweig, Development Policy and Development Economics: an Introduction, in Handbook o Development
Economics, Vol. 5, eds. Dani Rodrik and Mark Rosenzweig (Amsterdam: North Holland, 2009).
36. See, or example, J. Gwartney, J. Hall, and R. Lawson, Economic Freedom o the World 2000 Annual Report(Vancouver: Fraser Institute, 2000).
37. World Bank Governance Indicators.
E n t r e p r e n e u r s h i p a n d t h e P r o c e s s o f D e v e l o p m e n t :A F r a m e w o r k f o r A p p l i e d E x p e d i t i o n a r y E c o n o m i c s i n P a k i s t a n
Developing AsiaPakistan
Source: World Economic Forum, TheGlobal Competitiveness Report 20102011.
5,000
4,000
3,000
2,000
1,000
01980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Fig. 2. Per-Capita Income inPakistan and Developing Asia
GDP (PPP) Per Capita (Intl $), 1980200 9
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9
L i m i t e d I n s t i t u t i o n a l D e v e l o p m e n t : G o v e r n a n c e
Absence o Violence versus -0.685; -0.934 on
Government Eectiveness versus -0.714; -0.925 on
Rule o Law versus -0.761; and -1.097 on Control
o Corruption versus -0.731. Pakistan surpasses the
Group 1 mean only in its Regulatory Quality, onwhich it scored -0.499 versus -0.562 or Group 1
countries as a whole. This score notwithstanding,
poor governance places severe constraints on
Pakistans growth.
These constraints are urther exacerbated by
Pakistans high deense spending. Looney and
McNab ound that countries with high levels o
governance and institutional quality, whose deense
expenditures make up a relatively low share o
GDP, may experience increased rates o growth
i deense spending is expanded. Conversely, in
countries like Pakistan with poor institutional
quality as proxied by governance indicators
such as voice and accountability, expanding
already high levels o deense expenditures
has a negative growth impact.38 As a result,
without governance reorms, increased securityspending to combat domestic terrorism could
hamper Pakistans growth even more severely.
Interestingly, one school o thought contends
that Pakistans defcient governance structures
may themselves be a major contributing actor
to terrorism and instability. In an early study o
terrorism, Alan Krueger and Jitka Maleckova
came to the surprising conclusion that a reduction
in poverty in and o itsel, or an increase in
educational attainment, would not meaningully
reduce terrorism. Their main fnding was that
any connection between poverty, education, and
38. Looney and McNab, Pakistans Economic Security Dilemma.
E n t r e p r e n e u r s h i p a n d t h e P r o c e s s o f D e v e l o p m e n t :A F r a m e w o r k f o r A p p l i e d E x p e d i t i o n a r y E c o n o m i c s i n P a k i s t a n
World EconomicForum Stages
Voice PoliticalStability
GovernmentEectiveness
RegulatoryQuality
Rule o Law Control o Corruption
1 MeanNumber o CountriesStd. Deviation
-0.54738
0.557
-0.68538
0.813
-0.71438
0.389
-0.56237
0.443
-0.76130
0.451
-0.73138
0.388
Pakistan -0.997 -2.756 -0.933 -0.499 -0.925 -1.097
2 MeanNumber o CountriesStd. Deviation
-0.73925
0.649
-0.30025
0.787
-0.26725
0.582
-0.27822
0.710
-0.41522
0.552
-0.40225
0.723
3 MeanNumber o CountriesStd. Deviation
0.01529
0.620
0.17529
0.666
0.06129
0.412
0.13729
0.453
0.22323
0.545
0.16529
0.442
4 MeanNumber o CountriesStd. Deviation
0.65715
0.680
0.59815
0.320
0.80215
0.303
0.90215
0.331
0.72013
0.378
0.57215
0.456
5 MeanNumber o CountriesStd. Deviation
1.12732
0.547
0.76132
0.558
1.46232
0.430
1.35832
0.350
1.44328
0.454
1.48832
0.661
Total MeanNumber o CountriesStd. Deviation
0.051139
0.932
-0.038139
0.882
0.183139
0.932
0.240138
0.886
0.109116
0.989
0.097139
1.006
Table 2. Group Means on Governance Dimensions,World Economic Forum Development Stages, 20102011
Source: World Economic Forum: The Global Competitiveness Report, 2010 2011 (Geneva: World Economic Forum, 2010) .
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V o i c e a n d A c c o u n t a b i l i t y
terrorism is indirect, complicated, and probablyquite weak. Instead o viewing terrorism as adirect response to limited market opportunitiesor ignorance, they suggest that terrorism isa response to political conditions and long-standing eelings, either perceived or real, oindignity and rustration.39 While subsequentstudies have refned this position, Kruegerand Maleckovas fndings are still the startingpoint in country-by-country assessments othe actors contributing to terrorism.40
Voice and AccountabilityIn the critical area o Voice and Accountability,Pakistan scores the lowest o the South Asiancountries (see Fig. 3). Despite steady improvementin the post-Musharra years, which saw the countryrise rom the 11th percentile in 2000 to 21st by2009, it still lagged below the 2009 Asian average41o 36th percentile and Indias 60th percentile.
Pakistans inability to achieve greater voiceand accountability no doubt contributes to the
countrys current economic malaise. Burki42contends that, as a result, the political systemhas not been able to fnd a way to reconcile thedierent economic interests o the countrysvarious competing groups. For example, theruling Pakistan Peoples Party opposes the levyingo taxes on its strong agricultural base, whilethe Karachi-based Muttahida Qaumi Movementargues against taxing urban services, and thePakistan Muslim League (Nawaz) avors taxprotection or the merchant class. The resultingpolitical stalemate means that no new orms odirect taxation are available to the country.43
Political Stability/Absence of ViolencePakistan, like the other South Asian countries,
is especially defcient in political stability/absenceo violence (see Fig. 4). While all our SouthAsian countries score considerably below theAsian average (which is not particularly high byinternational standards), Pakistans score wasby ar the worst. From the 16th percentile in2000, Pakistan experienced a steady decline
39. Alan Krueger and Jitka Maleckova, Education, Poverty, Political Violence and Terrorism: Is there a Causal Connection?(Cambridge, MA: NationalBureau o Economic Research, July 2002).
40. See also Krueger and Maleckova, Education, Poverty and Terrorism: Is there a Causal Connection?Journal o Economic Perspectives (Fall
2003): 11944.
41. Asian countries included in the World Bank governance data set are: Bangladesh, Brunei, Cambodia, China, Hong Kong, India, Indonesia,
Japan, North Korea, South Korea, Laos, Malaysia, Myanmar, Pakistan, Papua New Guinea, Philippines, Singapore, Sri Lanka, Taiwan, Thailand, and
Vietnam.
42. Burki, Pakistans New Political Economy, Business Standard, April 22, 2011.
43. Ibid.
E n t r e p r e n e u r s h i p a n d t h e P r o c e s s o f D e v e l o p m e n t :A F r a m e w o r k f o r A p p l i e d E x p e d i t i o n a r y E c o n o m i c s i n P a k i s t a n
Total AsiaPakistan
India Bangladesh Sri Lanka
Source: World Bank, Worldwide Governance Indicators,http://info.worldbank.org/governance/wgi/index.asp.
70
60
50
40
30
20
10
1996 2000 2003 2005 2007 2009
Fig. 3. Voice and Accountability Fig. 4. Political Stability, Absence o Violence
Total AsiaPakistan
India Bangladesh Sri Lanka
Source: World Bank, Worldwide Governance Indicators,http://info.worldbank.org/governance/wgi/index.asp.
45
40
35
30
25
20
15
10
5
01996 2000 2003 2005 2007 2009
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11
G o v e r n m e n t E e c t i v e n e s s
on this measure until it eventually leveled o at
the 1st percentile in 2007. Bangladesh rankedin the 8th percentile and Sri Lanka in the 12th.
As might be anticipated, empirical evidence44
suggests that addressing the countrys politicalinstability is a prerequisite or urther economic
advancement. In addition, political instability
and policy instability (see Fig. 5) ranked secondand third (ater corruption) as major concerns
o businessesno doubt contributing to thecountrys low rates o private capital ormation
and inows o direct private investment.
Government Effectiveness
As shown in Fig. 6, Pakistan also scores low
in government eectiveness, a key measure o
the ability o countries to carry out development
programs and eectively implement budgets.Ater averaging in the high thirties rom20032007, the country had allen to the 19th
percentile by 2009, considerably below the Asian
average o 51st and Indias 54th percentile.
Economist Safya Atab notes some o the
economic shortcomings that have stemmed
rom the lack o government eectiveness
and decision making in recent years:
There is no energy plan (not even a
conservation strategy) and little attempt toresolve the circular debt issue that plagues
44. Muhammad Nadeem Qureshi, Karamat Ali, and Imran Raf Khan, Political Instability and Economic Development: Pakistan Time-Series
Analysis, International Research Journal o Finance and Economics (2010).
E n t r e p r e n e u r s h i p a n d t h e P r o c e s s o f D e v e l o p m e n t :A F r a m e w o r k f o r A p p l i e d E x p e d i t i o n a r y E c o n o m i c s i n P a k i s t a n
Fig. 6. Government Eectiveness
Fig. 5. Pakistan: The Most Problematic Factors or Doing Business
Percent of responses
Note: From a list of fifteen factors, respondents were asked to select the five most problematic for doing business in their country and to rank thembetween 1 (most problematic) and 5. The bars in the figure show the responses weighted according to their rankings.
Corruption 18.4
Government instability/coups 16.4
Policy instability 9.8
Inflation 9.6
Inefficient government bureaucracy 8.9
Crime and theft 7.9
Access to financing 5.2
Tax rates 5.0
Inadequate supply of infrastructure 4.7
Inadequately educated workforce 3.6
Tax regulations 3.6
Poor work ethic in national labor force 3.1
Foreign currency regulations 1.8
Poor public health 1.3
Restrictive labor regulations 0.6
Source: World Bank, Worldwide Governance Indicators, http://info.worldbank.org/governance/wgi/index.asp.
0 5 10 15 20 25 30
Total AsiaPakistan
India Bangladesh Sri Lanka
Source: World Bank, Worldwide Governance Indicators,http://info.worldbank.org/governance/wgi/index.asp.
60
55
50
45
40
35
30
25
20
151996 2000 2003 2005 2007 2009
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R e g u l a t o r y Q u a l i t y
the sector. Worst o all, there seems to be no
planning or criseswhat happens i crude
oil prices spike in the short run, or example?
Agricultural policy is supposed to be aprovincial subject but the ederal government
doesnt seem to have even a guiding
ramework or the sector. Its not clear
what the priorities areis the priority to
get the support price right or to invest in
storage, or instance? Is the attempt to
deregulate agricultural markets and set
up commodity exchanges going to go
anywhere, or has it been quietly shelved?
There is no attempt to introduce new
orms o direct taxation. I there is anybackground work on the pros and
cons o imposing agricultural income
tax, or dierent orms o capital gains
taxes, it has not been made public.
Cuts in expenditures have been made since
the oods, but it is mainly development
spending that has been axed, not
nonsalary current expenditures.
Cutting the Public Sector Development
Projects (PSDP) is probably the rightway to go, but the government
needs to be more transparent about
what its going to axe and why.
In spite o the obvious fscal crisis, there has
been little attempt to restructure loss-making
state-owned enterprises. The government
has given in to pressure on at least two
occasions when such attempts were made in
the Karachi Electric Supply Company (KESC),
though the government has a minority share
in the utility and Pakistan International Airlines(PIA). For the KESC, the governments action
was unpardonable. Imposing on a private
entity in order to reemploy sta on the basis
o a 26 percent shareholding is absurd.45
The precipitous drop in government
eectiveness in recent years has led StephenCohen to conclude that the bureaucracy and
other state structures are largely incapacitated and
unable to respond to the countrys demographic
and economic challenges. As a result, the
countrys eective governance and ultimate
viability now depend on a combination o massive
oreign assistance and remittances o overseas
Pakistanis.46 Pointing to Pakistans inclusion in
the Top 10 o the Failed State Index, he predicts
that the consequences will be disastrous or
uture stability and governance, translating into a
chronic incapacity to integrate security, political,
economic, and administrative requirements in a
central and long-term decision-making process.47
Regulatory Quality
Pakistans perormance (see Fig. 7) in improving
regulatory quality has been somewhat better than
its eorts in other governance areas. Starting rom
a low o the 18th percentile in 2004, the country
had increased its score to the 33rd percentile by
2009 (albeit down rom 39th in 2006). This score
was still somewhat below the Asian average othe 50th percentile and Indias 44th percentile.
Burki notes that, even though Pakistan has done
relatively well in improving regulatory quality in
recent years, Pakistans regulatory system remains
seriously underdeveloped or a country o its size.
He argues that this situation stems rom the act
that regulation in Pakistan has evolved more in
response to special interests rather than to citizen
needs and demands. While this pattern may
change with the devolution o authority to the
provinces, Burki cautions that the weaknesses inthe existing regulatory system could complicate
eorts to distinguish between unctions that can
45. Atab, Democracy, Three Years Later, The Friday Times, April 1, 2011.
46. Stephen Cohen, Keeping Pakistan From Falling Apart, World Politics Review(May 2011): 1.
47. Ibid.
E n t r e p r e n e u r s h i p a n d t h e P r o c e s s o f D e v e l o p m e n t :A F r a m e w o r k f o r A p p l i e d E x p e d i t i o n a r y E c o n o m i c s i n P a k i s t a n
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48. Burki, Devolution and Regulatory Changes, Dawn, April 25, 2011.
49. Nadeem-ul-Haq Links High Growth Rate to Economic Reorms,Associated Press o Pakistan, July 6, 2011.
50. Hassan Abbas, Pakistan 2020: A Vision or Building a Better Future,Asia Society Pakistan Study Group Report, May 2011.
13
C o n t r o l o C o r r u p t i o n
only be perormed at the ederal level and those
that can be more efciently handled locally.48
Nadeem ul Haque cites regulatory quality
as key to improving Pakistans productivity.Ul Haque notes that state enterprises like
PIA, Pakistan Railways, and power sector
organizations could improve productivity
signifcantly, and thus contribute to national
economic growth, through regulatory reorms.49
Rule of Law
In the critical area o rule o law, Pakistan again
alls short o other South Asian countries (see
Fig. 8). The country ranked in the 31st percentile
in 1996, declined to the 20th percentile in 2004,
improved slightly to the 22nd percentile, then
dipped to the 19th percentile by 2009. In 2009,
the average or Asian countries as a whole was
the 48th percentile, with India ranking in the
56th, and Sri Lanka the 53rd. Between 2004
and 2009, Bangladesh was able to increase its
ranking rom the 17th to the 28th percentile.
A study by the Asian Society highlights the
importance o Pakistans improving its rule o
law. The Asia Societys Pakistan 2020 Study
Group concluded that seven core issues needed
to be addressed to ensure a sound uture or
the country by 2020. The recommendations
included (1) strengthening democraticinstitutions, (2) strengthening the rule o law,
(3) improving human development and social
services, especially in health and education,
(4) developing the energy inrastructure, (5)
assisting the victims o the 2010 ood in their
recovery, (6) improving internal security, and
(7) advancing the peace process with India.50
Control of Corruption
Corruption, the fnal World Bank measurement
o governance, has ollowed an erratic pattern in
Pakistan during the past two decades (see Fig. 9).
Starting in the 7th percentile in 1996, Pakistan
gradually improved its score to the 30th percentile
in 2003, declined again to the 14th and 15th
percentiles in 2004 and 2005 respectively, and
rose to the 26th percentile in 2007. Since then the
countrys ranking has allen (2009) to the 13thpercentile, the lowest rank among the South Asian
countries. For reerence, the Asian average in 2009
E n t r e p r e n e u r s h i p a n d t h e P r o c e s s o f D e v e l o p m e n t :A F r a m e w o r k f o r A p p l i e d E x p e d i t i o n a r y E c o n o m i c s i n P a k i s t a n
Total AsiaPakistan
India Bangladesh Sri Lanka
Source: World Bank, Worldwide Governance Indicators,http://info.worldbank.org/governance/wgi/index.asp.
65
60
55
50
45
40
35
30
25
20
151996 2000 2003 2005 2007 2009
Fig. 7. Regulatory Quality Fig. 8. Rule o Law
Total AsiaPakistan
India Bangladesh Sri Lanka
Source: World Bank, Worldwide Governance Indicators,http://info.worldbank.org/governance/wgi/index.asp.
65
60
55
50
45
40
35
30
25
20
151996 2000 2003 2005 2007 2009
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was the 42nd percentile with India slightly higher at
the 47th percentile. Ominously, the perception o
corruption in Pakistan is worsening, with the police,
land administration institutions, the judiciary,
education, and local governments regarded asthe most corrupt public-sector institutions.51
As shown in Fig. 5, businesses cite corruption
as their major concern in doing business in
Pakistan. Furthermore, according to Transparency
Internationals 2009 report, corruption prevents
the poor rom participating equally in political
decisions, rom enjoying equality under the law,
rom seeing their needs reected in policies and
budgets and rom accessing public goods and
services Decisions on ood and energy security,
natural resources, technology and investments
are oten compromised by corruptionwith atalconsequences.52 Signifcantly, the government
o Pakistan has barred Transparency International
rom conducting surveys in the country or
the organizations next annual report.53
Potential EconomicReorm Constraints
In addition to arguments linking poor growth
and development, instability, and even terrorismto governance ailures, an equally valid claim
can be made that these processes stem rom a
poor country record in economic reorms and
associated progress toward economic reedom.
Jennier Bremer and John Kasardas terrorism
and economic transitions model suggests that
ailure to enact needed economic reorms can
result in inefciencies and a lack o incentives or
entrepreneurship while preventing more dynamic
growth patterns. The resulting economic malaise
spurs a vicious circle o instability, low investment,
low growth, and urther widespread discontent.54
Bremer and Kasarda view transition as occurring
in three phases (see Fig. 10). The frst phase
typically begins when a low-income country
rapidly begins to industrialize, launching an
agrarian-industrial transition and the complex
transormations in urbanization, income growth,
and economic diversifcation that accompany it.
A process similar but not identical to Rostows55
takeo occurs. I growth is sustained or a decade
or more, the country may reach the second
transition phase, in which industrial production
per capita can increase as much as threeold,
growth in low-value-added manuacturing israpid and sustained, and rising incomes lead to
the emergence o a middle class. Assuming this
middle phase is successul, the country will likely
reach the advanced phase in ten to twenty years.
Countries that are currently in the advanced phase
include Brazil, Poland, Russia, and Turkey.56
In contrast, Pakistan remains stalled in the
frst stage o this model, along with countries
E n t r e p r e n e u r s h i p a n d t h e P r o c e s s o f D e v e l o p m e n t :A F r a m e w o r k f o r A p p l i e d E x p e d i t i o n a r y E c o n o m i c s i n P a k i s t a n
P o t e n t i a l E c o n o m i c R e o r m C o n s t r a i n t s
51. Heritage Foundation, Economic Opportunity and Prosperity: The 2011 Index o Economic Freedom (Washington, D.C.: Heritage Foundation,
2011).
52. Transparency International, Transparency International Corruption Perceptions Index, (Berlin: Transparency International, 2009).
53. Siddiqi Hammad, No Corruption Survey in Pakistan This Year, Center or International Private Enterprise Development Blog, July 7, 2011, http://
www.cipe.org/blog/?p=8649.
54. Jennier Bremer and John Kasarda, The Origins o Terror: Implications or U.S. Foreign Policy, Milken Institute Review(Fourth Quarter 2002):
3448.
55. W.W. Rostow, The Stages o Economic Growth: A Non-Communist Maniesto (Cambridge: Cambridge University Press, 1960).
56. Bremer and Kasarda, The Origins o Terror.
Total AsiaPakistan
India Bangladesh Sri Lanka
Source: World Bank, Worldwide Governance Indicators,http://info.worldbank.org/governance/wgi/index.asp.
60
50
40
30
20
10
01996 2000 2003 2005 2007 2009
Fig. 9. Control o Corruption
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57. Ibid.
58. Gwartney, et al., Economic Freedom o the World 2010 Annual Report.
59. Heritage Foundation, The 2011 Index o Economic Freedom.
60. Ibid.
15E n t r e p r e n e u r s h i p a n d t h e P r o c e s s o f D e v e l o p m e n t :
A F r a m e w o r k f o r A p p l i e d E x p e d i t i o n a r y E c o n o m i c s i n P a k i s t a n
L i m i t e d P r o g r e s s i n E c o n o m i c F r e e d o m
like Egypt, Iran, and Saudi Arabia. According to
Bremer and Kasarda, these countries are trapped
in this stage due to their ailure to adopt choice-
based systems encompassing both market-based
economic reorms and democratic politicalinstitutions and organizations. Without the
adoption and proper sequencing o such reorms,
they cannot progress up the ladder to more
sophisticated production structures and, as a result,
will ace rising popular discontent and instability,
along with the threat o terrorist insurrection.57
Limited Progress inEconomic Freedom
No indices o the prevalence o choice-based
systems exist. However, the Fraser Institutes
Economic Freedom o the World58 and the Heritage
Foundation and The Wall Street Journals Index
o Economic Freedom59 are good proxies in that
they measure the relative progress o countries in
moving toward a deregulated, limited government,
ree-market environment. The Heritage Foundation
dataset was chosen or this study because
it contains a larger sample o countries.
To measure economic reedom, the Heritage
Index takes ten dierent actors into account:(1) trade policy, (2) fscal burden o government,
(3) government intervention in the economy, (4)
monetary policy, (5) banking and fnance, (6)
capital ows and oreign investment, (7) wage
and prices, (8) property rights, (9) regulation,
and (10) the inormal market. These actors are
designed to measure the openness o countries
to competition, the degree o state intervention
in the economy, and the ability o the courts to
enorce rules and property rights. The Heritage
Foundation emphasizes that countries must score
well in all ten o the actors in order to improve
their economic efciency and, consequently,the living standards o their people.60
In the 2011 Heritage Foundation Index o
Economic Freedom, Pakistans score was 55.1,
compared to highest-ranking Hong Kong at
89.7. Pakistan ranked twenty-ourth o orty-
one countries in the Asia-Pacifc region, with
an overall score that was below both the
Source: Robert Looney, Failed Economic Take-Offs andTerrorism in Pakistan,Asian Survey(November/December 2004).
10+ Years 1020 Years
Proper Management,Increased Globalization
Institutional Development
Sustained Growth, LowValue-Added Manufacturing
Industrialization, IncomeGrowth, Economic
Diversification
Turkey
Malaysia, Brazil
Korea, Singapore
Argentina
IndonesiaIndia, China
P ak is ta n E gy pt , Ir an
Saudi Arabia
Market Reforms
Increased EconomicFreedom
Weak Governance
Financial Crisis
Despair, ViolenceTerrorism
Institutional Rigidities
Command-Based Systems
Rent-Seeking
Improvement in Standardof Living/Quality of Life of
Large Segments of the Population
Choice-Based Systems
First Phase
Middle Phase
Advanced PhaseFirst World
Third Phase Stalled
Transition
First Phase Stalled
Transition
Growth-Limiting Policies
Fig. 10. Transitions and Institutional Constraints
Fig. 11. Overall Economic Freedom Score
Pakistan
India Bangladesh Sri Lanka
Source: Heritage Foundation, Index of Economic Freedomdatabase, 2011.
70
65
40
55
50
45
401995 1997 1999 2001 2003 2005 2007 2009 2011
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16E n t r e p r e n e u r s h i p a n d t h e P r o c e s s o f D e v e l o p m e n t :
A F r a m e w o r k f o r A p p l i e d E x p e d i t i o n a r y E c o n o m i c s i n P a k i s t a n
L i m i t e d P r o g r e s s i n E c o n o m i c F r e e d o m
world and regional averages. While Pakistans
aggregate Economic Freedom ranking compared
relatively avorably to those o Bangladesh, Sri
Lanka, and India (see Fig. 11), the country made
ew gains in the overall liberalization o theeconomy, as indicated by the act that its score
in 2011 was slightly lower than in 1995.61
On the positive side, Pakistan has pursued
reorms to improve its entrepreneurial environment
and acilitate private-sector development. In
addition, the country made signifcant gains in
recent years in liberalizing restrictions on trade (see
Fig. 12), although its progress in this area lagged
behind Indias by a wide margin. However, in other
areas, Pakistans progress lags considerably. Its tax
system is complex and inefcient, though reorms
have been undertaken to cut tax rates, broaden thetax base, and increase transparency. The judicial
system suers rom a serious backlog and poor
security, and corruption taints both the judiciary
and civil service. In addition, restrictions on oreign
investment and state involvement in the economy
are serious drags on economic dynamism.62
An examination o the group means by World
Economic Forum groupings (Tables 3 and 4) shows
a pattern similar to that ound in the governance
dimensions: countries show steady progress in
economic reorms as they move rom Group 1 to
Group 5. The one major exception is in the fscal
area, where lower levels o government spending
and taxes are considered reer. Given the expansion
o government spending in the advanced countries,Groups 4 and 5 score low on this dimension.
In contrast with the governance indicators,
Pakistan compares slightly avorably with other
Group 1 countries. Overall, it scored 55.1 versus
54.3 or Group 1 countries. For Business Freedom
it scored 70.9 versus 55.5; or Fiscal Freedom,
80.5 versus 77.1; and or Government Spending,
88.8 versus 75.2. It should be noted, however,
that the Heritage Foundation considers low
government spending and minimal tax rates
as a sign o economic reedom. While many
would agree that this measure makes sense
or developed economies, critics o Pakistans
economic management contend it is precisely these
attributes that have created the countrys current
crisis o growing income inequality, crumbling
inrastructure, and an educational system incapable
o meeting the needs o a modern economy.
On the negative side, Pakistan scores below
the Group 1 norm in the areas o Trade Freedom
(67.0 versus 69.5 or Group 1 countries), Monetary
Freedom (63.6 versus 70.0), Investment Freedom
(40.0 versus 41.2), Financial Freedom (40.0versus 43.3), Property Freedom (30.0 versus
30.2), Freedom rom Corruption (24.0 versus
27.0), and Labor Freedom (46.3 versus 57.6).
Defciencies in EntrepreneurialAccess to Capital
The Milken Institutes Capital Access Index (CAI)
provides an additional perspective on Pakistans
progress in supporting entrepreneurship and a
modern economy. This index scores the ability o
entrepreneurs to gain access to fnancial capital
in countries around the world. The CAI measures
not only the breadth, depth, and vitality o capital
markets, but also openness in providing access
61. Ibid.
62. Ibid.
Pakistan
India Bangladesh Sri Lanka
Source: Heritage Foundation, Index of Economic Freedomdatabase, 2011.
80
70
60
50
40
30
20
101995 1997 1999 2001 2003 2005 2007 2009 2011
Fig. 12. Trade Freedom
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17E n t r e p r e n e u r s h i p a n d t h e P r o c e s s o f D e v e l o p m e n t :
A F r a m e w o r k f o r A p p l i e d E x p e d i t i o n a r y E c o n o m i c s i n P a k i s t a n
D e i c i e n c i e s i n E n t r e p r e n e u r i a l A c c e s s t o C a p i t a l
Source: Heritage Foundation, Index o Economic Freedom database, 2010.
Source: Heritage Foundation, Index o Economic Freedom database, 2010.
World EconomicForum Stages
OverallFreedom
Score
BusinessFreedom
TradeFreedom
FiscalFreedom
GovernmentSpending
MonetaryFreedom
1 MeanNumber o CountriesStd. Deviation
54.30038
5.867
55.46038
11.605
69.53738
7.503
77.05137
9.418
75.16837
15.816
69.88637
5.591
Pakistan 55.2 71.7 67.0 80.5 88.8 69.4
2 MeanNumber o CountriesStd. Deviation
57.26024
9.639
65.15024
16.136
74.79224
10.320
82.20424
11.229
71.66724
15.905
66.32924
7.024
3 MeanNumber o CountriesStd. Deviation
61.89029
6.263
67.11029
9.410
78.09029
7.970
80.51729
7.884
71.89329
16.450
71.92829
4.942
4 MeanNumber o CountriesStd. Deviation
68.91014
4.936
72.55014
9.822
84.13614
7.166
80.69314
9.408
63.22914
17.512
72.87914
4.184
5 MeanNumber o CountriesStd. Deviation
73.19032
6.899
85.47032
10.272
86.39132
3.562
64.23432
14.439
49.12832
19.451
78.61332
3.810
Total MeanNumber o CountriesStd. Deviation
62.330137
10.057
68.380137
15.860
77.696137
9.818
76.059138
12.693
66.496136
19.661
72.055138
6.649
World EconomicForum Stages InvestmentFreedom FinancialFreedom PropertyRights FreedomromCorruption
LaborFreedom
1 MeanNumber o CountriesStd. Deviation
54.30038
5.867
55.46038
11.605
69.53738
7.503
77.05137
9.418
75.16837
15.816
Pakistan 55.2 71.7 67.0 80.5 88.8
2 MeanNumber o CountriesStd. Deviation
57.26024
9.639
65.15024
16.136
74.79224
10.320
82.20424
11.229
71.66724
15.905
3 MeanNumber o CountriesStd. Deviation
61.89029
6.263
67.11029
9.410
78.09029
7.970
80.51729
7.884
71.89329
16.450
4 Mean
Number o CountriesStd. Deviation
68.910
144.936
72.550
149.822
84.136
147.166
80.693
149.408
63.229
1417.512
5 MeanNumber o CountriesStd. Deviation
73.19032
6.899
85.47032
10.272
86.39132
3.562
64.23432
14.439
49.12832
19.451
Total MeanNumber o CountriesStd. Deviation
62.330137
10.057
68.380137
15.860
77.696137
9.818
76.059138
12.693
66.496136
19.661
Table 3. Group Means on Economic Freedom Dimensions l,World Economic Forum Development Stages, 20102011
Table 4. Group Means on Economic Freedom Dimensions II,World Economic Forum Development Stages, 20102011
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63. Farhan Bokhari, Pakistan Stability Hinges on Reorm,gulnews.com, April 24, 2011.
18E n t r e p r e n e u r s h i p a n d t h e P r o c e s s o f D e v e l o p m e n t :
A F r a m e w o r k f o r A p p l i e d E x p e d i t i o n a r y E c o n o m i c s i n P a k i s t a n
D e i c i e n c i e s i n E n t r e p r e n e u r i a l A c c e s s t o C a p i t a l
without discrimination, a measure o global
progress in the democratization o capital.
The seven components o the CAI are:
Macroeconomic environment: the avorableness
o conditions or running and fnancing a
business, based on such variables as ination,
interest rates, tax rates, and fnancial
sophistication relative to international norms;
Institutional environment: the extent to
which institutions support and enhance
business fnancing activities, based on
variables that include the enorceability
o property rights, the impartiality o the
judicial system, the efciency o bankruptcy
procedures, and the levels o corruption;
Financial and banking institutions: the
involvement o deposit-taking institutions
in fnancing businesses, based on such
variables as the extension o credit to the
private sector, the soundness o fnancial
institutions, the ease o access to bank loans,
and the efciency o the banking system;
Equity market development: the importance
o equity fnancing o business operations,
based on such variables as stock market
capitalization relative to GDP, stock market
liquidity, and changes in the number o listings;
Bond market development: the importance
o bond fnancing or businesses, based
on variables such as the value o private
and public bonds relative to GDP and
securitized asset issuance relative to GDP;
Alternative sources o capital: the level o usage
o diverse fnancing sources, such as venture
capital, credit cards, and nonpublic stock
oerings or other private placements; and
International unding: the availability o oreign
capital to businesses in a particular country,
based on such variables as the volatility o
exchange rates, international reserve holdings,
portolio and oreign direct investment, capitalinows and outows, and sovereign ratings.
According to the 2009 CAI, Pakistan ranked
seventy-ourth out o 122 countries with a scoreo 3.93. In contrast, India ranked orty-ourth, witha score o 5.51, Sri Lanka ranked seventy-second,and Bangladesh ranked eighty-fth. While Pakistanshowed some progress rom 2002 to 2006, itsscores have since been in decline, whereas India hashad a airly dramatic increase over time in this keymeasure (see Fig. 13). Pakistan did, however, makerelatively good progress in several o the CapitalAccess subcomponents (Table 5), including equitymarket development (ranked ortieth) and bondmarket development (ranked orty-fth). On theother hand, the country was considerably behind
in macroeconomic environment (ranked 110th)and international unding (ranked ninety-third).
In sum, the progress made by Pakistanin the critical areas o competitiveness,governance, economic reorm, and capital accessremains disappointing, with retrogressionsoccurring in several key areas. Even duringperiods o rapid growth, the country wasunable to make signifcant gains.
I the models o economic stagnation andterrorism developed by Bremer and Kasarda
play out along expected lines, the countrysuture is dire. The situation has been bestsummed up by long-time Financial Timescolumnist Farhan Bokhari. Observing thecountrys ever-shiting political alliances andinfghting, he notes that such developments:
only work to reinorce the largely taintedview o Pakistans prevailing political order,built to protect and promote the countrysvested interests across its urban and ruralbelts. Pakistans survival, prosperity and
stability depend undamentally on the
ability o its ruling class to reorm thecountry on multiple ronts. Without givinga new direction to Pakistans economybacked by reorms surrounding internalmanagement and governance, the countrysoutlook will largely remain unchanged.63
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Capital Access Index: Summary Rank Score
Pakistan 74 3.93
India 44 5.51
Sri Lanka 72 3.96
Bangladesh 85 3.48
Macroeconomic Environment
Pakistan 110 3.75
India 63 5.83
Sri Lanka 113 3.50
Bangladesh 99 4.17
Institutional Environment
Pakistan 70 4.82
India 71 4.76
Sri Lanka 56 5.35
Bangladesh 110 3.24
Financial and Banking Institutions
Pakistan 72 3.90
India 46 5.10
Sri Lanka 62 4.40
Bangladesh 69 4.00
Equity Market Development Rank Score
Pakistan 40 5.17
India 14 6.50
Sri Lanka 40 5.17
Bangladesh 33 5.50
Bond Market Development
Pakistan 45 4.25
India 33 5.25
Sri Lanka 76 2.50
Bangladesh 62 3.50
Alternative Sources o Capital
Pakistan 74 1.75
India 18 6.25
Sri Lanka 72 2.00
Bangladesh 86 0.75
International Funding
Pakistan 93 2.75
India 25 5.50
Sri Lanka 76 3.42
Bangladesh 97 2.50
19E n t r e p r e n e u r s h i p a n d t h e P r o c e s s o f D e v e l o p m e n t :
A F r a m e w o r k f o r A p p l i e d E x p e d i t i o n a r y E c o n o m i c s i n P a k i s t a n
C o n s t r a i n t s o n P a k i s t a n s
G r o w t h P o t e n t i a l a n d E n t r e p r e n e u r s h i p
I the country is to move ahead, where should
the emphasis lie in developing a reorm strategy
to overcome the impediments posed by the
countrys governance/institutional structures?
The next section addresses this issue through
the development o an empirically based model
structured to identiy the nature and sequencing othe most urgent reorms.
Constraints on PakistansGrowth Potential andEntrepreneurship
It is unrealistic to expect that the Pakistani
government, or any government or that matter,
could address all the potential constraints identifed
in the previous section. Hausmann, Rodrik,
and Velasco suggest that a better approach is
Pakistan
India Bangladesh Sri Lanka
Source: The Milken Institute, Capital Access Index, 2010.
6.0
5.5
5.0
4.5
4.0
3.5
3.02001 2002 2003 2004 2005 2006 2007 2008 2009
Fig. 13. Progress inEntrepreneurial Access to Capital
Source: Compiled rom: James R. Barth, Tong Li, Wenling Lu, and Glen Yago, Capital Access Index 2009 : Best Markets or Business Access to
Capital(Santa Monica, CA: Milken Institute, April 2010).
Table 5. Financial Sector Development
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64. Ricardo Hausmann, Dani Rodrick, and Andres Velasco, Getting the Diagnosis Right: A New Approach to Economic Reorm, Finance &
Development(March 2006).
65. Preliminary analysis suggested that, while the Milken Institute Capital Access dataset provided some interesting insights to the Pakistani
situation, because o its relatively narrow ocus it did not contribute a signifcant amount o inormation over and above that provided by theother three datasets.
66. World Bank, Enterprise Snapshots (WBGES), 2010, which comprises the number o newly registered limited liability companies per 1,000
working-age people (ages 1564).
67. Data compiled in Friedrich Schneider and Andreas Buehn, Shadow Economics and Corruption All Over the World: Revised Estimates or 120
Countries, Economics: the Open Access, Open-Assessment E-Journal(October 27, 2009).
68. Ibid.
69. Friedrich Schneider with Dominik Enste, Hiding in the Shadows: The Growth o the Underground Economy(Washington, D.C.: International
Monetary Fund, 2002).
20E n t r e p r e n e u r s h i p a n d t h e P r o c e s s o f D e v e l o p m e n t :
A F r a m e w o r k f o r A p p l i e d E x p e d i t i o n a r y E c o n o m i c s i n P a k i s t a n
to identiy and address the one or two most
binding present constraints. To this end, they
propose that each country use a decision tree
methodology (see Fig. 14) to identiy binding
constraints and policy options. Their rameworkocuses on the short term, identiying constraints
as they emerge rather than attempting to
anticipate uture impediments to growth.64
While this approach provides a good starting
point, the goal o the present study is to develop
a model that addresses both entrepreneurship
and growth, which are unlikely to ace the
same constraints simultaneously. Furthermore,
given Pakistans history o stalled growth and
ailed takeos, it is crucial to identiy the correct
sequence o reorms necessary to frmly set the
country on the path to development and keep itthere. It is hoped that the model that emerges can
oer direction, not only to Pakistan, but to broad
classes o countries acing similar circumstances.
As the basis or the model, the World Economic
Forum Competitiveness Indicators (WEF), theWorld Bank Governance Indicators (WB), and the
Heritage Foundation Index o Economic Freedom
(EF) were merged into a single database.65
Added to this were the World Banks database
on entrepreneurial activity66 and the size o the
shadow economy (percent o GDP) in individual
countries.67 The shadow economy is relatively
large in Pakistan, averaging around 37.1 percent o
GDP.68 It is included in part to track the countrys
movement toward an efcient competitive
economy, since the literature on entrepreneurship
and growth stresses the necessity o transorming
inormal/shadow activities into ormal entities withhigher productivity and taxpaying potential.69
C o n s t r a i n t s o n P a k i s t a n s
G r o w t h P o t e n t i a l a n d E n t r e p r e n e u r s h i p
Source: Ricardo Hausmann, Dani Rodrik, and Andres Velasco, Getting the Diagnosis Right, Finance and Development(March 2006).
Low human capital
Low social returns
Government failures
Low appropriability High cost of finance
Low return toeconomic activity
Possible causes
Market failures Bad local financeBad international
financePoor geography Bad inf rast ructure
Micro risks:property rights,
corruption, taxes
Macro risks:financial, monetary,
fiscal instability
Informationexternalities:
self-discovery
Coordinationexternalities
Low domestic saving Poor Intermediation
Fig. 14. Growth Constraint Decision Tree
Time for a checkup
A decision tree, such as the one below, can help identify the biggest obstacles to growth.
Problem: Low levels of private investmentand entrepreneurship
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70. See the classic work by Irma Adelman and Cynthia Tat Morris, A Factor Analysis o the Interrelationship Between Social and Political Variables
and Per Capita Gross National Product, Quarterly Journal o Economics (November 1965) or a