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Oct 39 min read

FROM COERCIVE TO PARTNERSHIP STATE




From Poor to Wealthy is Possible in a Single Generation


What causes some countries to achieve prosperity, while others remain poor?

Singapore, Chile, South Korea, Indonesia and even Turkey and China escaped poverty in the twentieth century and Europe, USA or Japan in the nineteenth, due to transformation of their economic and governance model.


For example, in the last fifty years, South Korea transformed from a poor country into an economic powerhouse – it’s GDP per capita grew an incredible 207x or 10.2% per annum. From being donor dependent, it is now the 15th largest donor country providing development assistance of US$ 2.4 bn per annum (Santacreu & Zhu, 2018).


Singapore's economy transitioned from a poor colonial trading port to a global financial and shipping hub. From independence in 1965, Singapore GDP per capita grew from $516 to $82,000 today.


From a poor country with GDP per capita of US$ 2,500 in 1980s, Chile has become middle income with $15,000 GDP per capita.


What is the recipe for this economic development?


The Coercive State 


All these countries started as either colonies or ruled by dictatorships, with strong central controls over economic transactions and social or political activities. They were Coercive States, and the government machinery suppressed the population socially, politically but most importantly economically in order to perpetuate the central control of economy and society. Examples are North Korea, Myanmar, Sudan and most post conflict states.


A Coercive State controls the economic landscape through its stranglehold of No-Objection-Certificates (NOCs) for even the basic economic transactions. This is also called the “License Raj”, depicting a bureaucratic monarchy, as economic activity requires government consent. A Coercive State can stop citizens from engaging in or create hurdles in economic transactions, thereby limiting their upward economic mobility. Thus, citizens remain dependent on goodwill or consent of the government and have limited self-reliance or volition IN their economic decisions. 


A Coercive State also doles-out largesse or benefits to its favored group - e.g. non-competitive bidding of the IPPs, quotas or protectionism to select business families - to ensure compliance with its rules. Thus, a Coercive State takes measures based on “sticks and some large carrots selectively bestowed” to maintain its stranglehold of the economy.


Characteristics & Behavior of A Coercive State

1

Nationalization or threat of expropriation of industry and commercial interests

2

Confiscation of assets of the citizens, e.g. foreign currency accounts or property without due process

3

State officials have significant discretion in use of their power, without any checks

4

Excessive stranglehold of bureaucracy on economic transactions through NOCs

5

Centralized bureaucracy coordinating markets through price controls etc. resulting in distorting markets to benefit favored elite groups at expense of common citizenry

In its simples form a Coercive State is still a Colonized State, where citizens are used as factor inputs to produce goods or wage wars (e.g. Latin America till late twentieth century). Thus, generating great output and wealth for the controlling government - a wealth in which the citizens do not participate or benefit from


Slavery or bondage, with no economic rights is an extreme example of Coercive State (e.g. Confederate USA) where the state controls an individual’s time and his physical effort resource (Sophia Hatz, 2019). The slave’s contribution to society is limited to what he is mandated to perform, and hence the potential of human productivity or growth is limited.


Coercive States are further characterized by:

  • Economic Inefficiency & Inequality: Coercive States are not sensitive to public opinion, implement self-centered or elite-favored policies leading to economic inequality

  • Lack accountability or Checks-and-Balances: Corruption, abuse of power in government, mismanagement of public resources and weak institutional development

  • Erosion of Individual Freedoms: Citizens have restricted civil liberties and limited means to protect themselves from state excesses and.

  • Suppression of Political Opposition: Coercive States use intimidation, violence, or judicial means to suppress opposition voices


The Providing or Patriarchal State


The next stage of governance evolution is the Providing or Patriarchal State. The best example are the Gulf states, especially United Arab Emirates, Oman and Kuwait.


UAE, and more recently Saudi Arabia, are example of states that are competently led, and provide freedoms, economic opportunity, good services and security to their people, as long as the citizens play by their rules.


Characteristic Behavior of Providing State


1

Low level of direct taxes, which means expatriates or residents can save more

2

Significant level of individual social and economic liberties, but much stricter boundaries of political expression

3

Efficient government run like corporations provide excellent public services

4

State is like a patriarch that pays for education, and even lifestyle of its local citizens

5

Carrot and stick approach, so if you end up on the wrong side of the law then there is limited control or access to justice, and civil liberties get taken away very quickly

State has a “Faustian Bargain” with residents that they will benefit from safety, good public services, infrastructure and economic opportunity to improve their lives in lieu of behaving in line with the rules, giving up their adult franchise and looking the other way from state’s strict control of media.


This is an attractive bargain for people escaping poor infrastructure, dwindling economic opportunities and stranglehold of the elites in developing countries. UAE is an exceptional example which benefits from Coercive or instable states in the region, as the most affluent of surrounding countries take advantage of security and lifestyle of Dubai to re-settle there.


Needless to say, the Providing States offers a better choice to citizens from Coercive States due to upward economic mobility at the cost of limitations on civil liberties. The challenge is that the Providing States must have natural resources to pay for the lifestyle of its citizens or to invest in infrastructure.


The Partnership State


The Partnership State evolved out of the 18th Century enlightenment movement, emphasized human self-actualization by enabling citizens to achieve their potential. The relationship between citizen and state is of trust - that citizens act as responsible members, work hard to create economic surplus which state will tax to pay for services to its citizens.


Western Europe, especially Scandinavia, are Partnership States. So is Canada, Australia and the U.S.A. The great example of Partnership State is the “American Dream” that you can be from anywhere or any background, but you can make it in U.S.A. This competitive markets-driven and citizen-centric relationship of state is captured in the U.S Declaration of Independence and the Bill of Rights.


The Partnership State is an enabler of citizens actualizing their potential by creating standard rules for all - so-called a level-playing field for citizens to compete in markets - within an environment of national cohesion and harmony. The Partnership State enforces accountability and individual responsibility for violating the law, but also protects individuals from excesses of the state and the powerful. Habeas Corpus, protection of property rights, will of people through one-person-one-vote, supremacy of constitution, freedom of expression and markets driven outcomes are principles of Partnership State.


Characteristic Behavior of Partnership State


1

Civil liberties, personal freedoms especially in pursuing economic opportunity

2

Limitation on state power to exploit citizens, especially from extracting property rights

3

Taxation is taken as the price that citizens pay for living in a free society, and provision of social security and public services

4

Small Government: Limited state intervention in terms of quotas, price fixing or licensing and economic activity is driven by competitive market forces.

5

Citizens cooperate and abide by the rules of law or constitution in lieu of having civil liberties, right to elect their rulers, public services and a social safety net.

Pakistan’s Stuck as a Coercive State


A stifling legacy of the British colonization is the dreaded ‘No-Objection-Certificate” that a business has to secure to engage in economic activities. The NOC is essentially a veto of government bureaucrats over citizen’s economic freedoms. Bureaucracy has significant discretion and arbitrary powers, and so NOC is not only a cause of delay, but also a source of harassment of the public and extortion of rents.


The proliferation of NOC, also called the license-raj, was cut down by Indian reforms in 1993. It resulted in unleashing of India’s entrepreneurial potential, while in Pakistan, the stranglehold of bureaucracy continues. For citizens to be economically empowered, size of government must be made smaller to loosen its hold on economic activity. There is little appetite within political parties for the 1993 India type reforms


Characteristics of Pakistan’s Coercive State:


  • State control of economy, similar to North Korea, results in downward spiral to more poverty, discontent and suppression.

  • State power is unchecked by a subservient judicial system. For example, expropriation of private property through administrative orders of the state happens with judicial consent

  • Citizens seek political asylum or immigrate for better opportunities in meeting their aspirations in Providing States (UAE, Oman) or Partnership States (USA, Canada etc.).

  • Suppression of individual liberties like habeaus corpus, unlawful detention of citizens


As a result, citizens mistrust the Coercive State, under-report their wealth or income and keep funds offshore away from the reach of the State.


Due to distrust of the Coercive State, citizens withhold their entrepreneurial creativity, re-investment of capital or withdraw their capital from the country. Coercive State is deprived of growth which requires foreign direct investment (FDI) and trust of local entrepreneurs to re-invest their capital.


Due to low tax collection, un-accountability and mismanagement, the Coercive State is unable to provide quality education or healthcare. The citizens are forced to find private alternative solutions, and this creates further distance between the citizens and the Coercive State. Citizens may also refuse to comply with the laws if they view the state as unjust, illegitimate and not providing services for their taxes.


The impact of Coercive State in Pakistan is a low “Malthusian Growth” or stunted wealth generation. As a result, there is an exorbitant burden of taxes on existing taxpayers, increasing discontent. This leads to the next cycle of immigration, hiding personal wealth from the state, protests and social movements. This cycle of instability can continue, until the state defaults or fragments into smaller sustainable and cohesive units.


Pakistan’s Path from Coercive to Partnership State


To attract FDI, world-class talent and customers requires a smaller and trustworthy government. A government with constraints on its use of power – constraints can be built through the constitution as the US constitution does through 1st to 10th Amendments or an active and vigilant judicial system backed by a Bill of Rights - so citizens can trust that their life and property can be safe from the excesses of state officials.


A Partnership State offers a better alternative by combining personal liberty with economic liberty to pursue aspirations for the citizen, the family, the community and the country. Economic freedoms will encourage investment of capital, entrepreneurship, ideas and effort to create local businesses that are engines of growth, rather than flight of capital abroad.


A Partnership State is a smaller government with limits to its power, so individuals are free to pursue their economic interests without threat of state usurping their rights. Without this Partnership between State and Citizens, Pakistan’s economy will not generate the wealth or innovation for taxes or exports to escape its fiscal and balance of payments deficit.


Pakistan’s Coercive State is a failing state, and has created these results:

  • 25 Million children out-of-school

  • 130/139 on Rule of Law Index

  • 110/140 in Competitiveness Ranking

  • 142/146 in WEF Gender Gap Ranking

  • 161/192 on UNDP Human Development Index


Pakistan’s Providing State never took off, as the ruling groups did not have the vision, strategy or competence to deliver the public services, nor the social or economic development agenda, even while having significant control of resources and limited check on their decision-making. In economics, tourism, sports, national security and human development, the State officials failed its citizens.


The only viable and sustainable option is a Partnership State, with our government stepping back from its excessive centralized bureaucratic control of the economy and having more self-governance for decision-making and markets for determining the outcomes.


Creating a level playing field in a competitive market economy where outcomes are driven by character and competence, and not lobbying or licensing, and state is a check on citizens playing by the constitution or preventing excessive greed, we can tap into people’s inherent aspiration to improve their lives. A Partnership State of Free People, Free Markets and Small Government is responsible for greatest innovation, greatest success in reducing poverty, and creation of most powerful states in the industrial and now the digital age.



Bibliography


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I am Malik Ahmad Jalal, an operator-investor, and former investment banker at Golman Sachs. I am thrilled to have you on board our newest audio venture: AOT.

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