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Reconciling rhetoric and reality : putting "development" at the centre of the game Reayat, Irfan 2013

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RECONCILING RHETORIC AND REALITY: PUTTING “DEVELOPMENT” AT THE CENTRE OF THE GAME by Irfan Reayat  A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF LAWS in THE FACULTY OF GRADUATE STUDIES (Law) THE UNIVERSITY OF BRITISH COLUMBIA (Vancouver)  April 2013  © Irfan Reayat, 2013  Abstract  The thesis looks into factors that have resulted in the failure of Washington Consensus policies prescribed by International Financial Institutions (IFIs). The IFIs consider free trade, investment, privatization, and deregulation as key to removing impediments to the development of host countries. From a Law and Development perspective, the thesis argues for review of these policies, and suggests reforms in the institutional design, governance, and redefined role of IFIs and national governments. At host countries’ current stage of development the adoption of free trade policies based on comparative advantage will lock them in dead end professions or industries with low rates of return, and they will no longer be competitive in industrial production and international trade. After providing historical analysis of the economic policies of the developed countries the thesis argues that developed countries selectively adopted free trade to achieve their economic goals. The developing countries should also selectively structure creative protectionist and free trade policies. The thesis presents Pakistan as a case study and argues that in Pakistan’s specific noneconomic circumstances IFIs need to acknowledge the redefined role of the state and facilitate a rule based, institutionalized, public-private partnership model. If privatization and deregulation are considered a panacea to address Pakistan’s governance and development problems, then it needs to be done in the right way. The thesis conducts comparative analysis of privatization and deregulation in the telecommunication and banking sectors of Pakistan, Poland, Hungary, and the Czech Republic, and highlights the importance of legal and institutional design in the pre- and post-privatization eras to achieve the desired goals. In the light of the comparative studies the thesis argues for reforms in the Privatization Act and incorporation of an Appellate Court/Tribunal to review privatization transactions in Pakistan. The thesis argues that instead of ranking host countries on the pace of their privatization, the IFIs rank them on how they privatize by incorporating good governance principles in conditions associated with their development mandate. The IFIs need to follow good  ii  governance in their own governance structure as well through proper representation of developing countries.  iii  Table of Contents Abstract.................................................................................................................................... ii	
   Table of Contents ................................................................................................................... iv	
   Acknowledgements ................................................................................................................ ix	
   Dedication ................................................................................................................................ x	
   Chapter 1	
   Introduction....................................................................................................... 1	
   1.1	
   Free Trade ................................................................................................................................. 3	
   1.2	
   Comparative Advantage ........................................................................................................... 3	
   1.3	
   The Washington Consensus ...................................................................................................... 4	
   1.4	
   Aims of the Study ..................................................................................................................... 9	
   1.5	
   Outline of the Thesis ............................................................................................................... 10	
    Chapter 2	
   Globalization, Free Trade and Development: Connecting the Dots .......... 14	
   2.1	
   Introduction ............................................................................................................................. 14	
   2.2	
   Theoretical Framework ........................................................................................................... 15	
   2.3	
   Literature Review ................................................................................................................... 17	
   2.4	
   Chapter Overview ................................................................................................................... 25	
   2.5	
   What is the Role of the State? ................................................................................................. 32	
   2.5.1	
   Pakistan ........................................................................................................................... 33	
   2.6	
   Role of Law and Institutions ................................................................................................... 35	
   2.6.1	
   Department of Planning and Development, Khyber Pakhtunkhwa................................. 43	
   2.6.2	
   Department of Industries, Khyber Pakhtunkhwa ............................................................ 43	
   2.6.3	
   The Competition Act, 2010 .............................................................................................. 48	
   2.7	
   The State, Comparative Advantage, and the WTO ................................................................ 51	
   2.7.1	
   Deciphering the comparative advantage ......................................................................... 51	
   2.7.1.1	
   Engagement in activities producing increasing returns ........................................... 52	
   2.7.1.2	
   The knowledge gap .................................................................................................. 53	
   2.8	
   Appropriate Strategies for Pakistan ........................................................................................ 54	
   2.8.1	
   Options under protectionist regime ................................................................................. 54	
   2.8.2	
   Options under free trade regime ...................................................................................... 55	
   2.9	
   Conclusion .............................................................................................................................. 59	
    iv  2.9.1	
   Establishment of national, provincial, and local development authority ........................ 60	
   2.9.2	
   The national, provincial, and local development courts .................................................. 62	
   2.9.3	
   Strong role for the state ................................................................................................... 63	
   2.9.4	
   Rules and institutional model for a flexible state-market relationship ............................ 64	
    Chapter 3	
   International Financial Institutions and Development: Reconciling the Rhetoric and the Reality....................................................................................................... 67	
   3.1	
   Introduction ............................................................................................................................. 67	
   3.1.1	
   The International Monetary Fund .................................................................................... 68	
   3.1.2	
   The World Bank .............................................................................................................. 72	
   3.2	
   The East Asian Financial Crisis .............................................................................................. 82	
   3.3	
   New Mantra: The New Institutionalism ................................................................................. 87	
   3.4	
   Conclusion ............................................................................................................................ 103	
    Chapter 4	
   Organizations and Institutions in Pakistan: Understanding the Genesis to Model Institutional Change ............................................................................................... 105	
   4.1	
   Introduction ........................................................................................................................... 105	
   4.2	
   Pakistan ................................................................................................................................. 107	
   4.3	
   Revisiting the Past ................................................................................................................ 109	
   4.3.1	
   Phase one: 1947-1956 ................................................................................................... 111	
   4.3.2	
   Phase two: 1958-1971 ................................................................................................... 113	
   4.3.3	
   Phase three 1971-1989 .................................................................................................. 114	
   4.3.4	
   Phase four: 1989-1999 ................................................................................................... 117	
   4.4	
   Development Frameworks Since Independence ................................................................... 119	
   4.4.1	
   The development matrix during the 1950s .................................................................... 119	
   4.4.2	
   The development matrix during the 1960s .................................................................... 119	
   4.4.3	
   The development matrix during the 1970s .................................................................... 120	
   4.4.4	
   The development matrix during the 1980s .................................................................... 121	
   4.4.5	
   The development matrix during the 1990s .................................................................... 123	
   4.5	
   Internal Organizations/Interest Groups ................................................................................. 124	
   4.5.1	
   Feudal structure ............................................................................................................. 124	
   4.5.2	
   The military ................................................................................................................... 126	
   4.5.3	
   The bureaucracy ............................................................................................................ 128	
   4.6	
   External Factors .................................................................................................................... 133	
   4.6.1	
   Relations with neighbours ............................................................................................. 133	
    v  4.6.1.1	
   Wars on Kashmir ................................................................................................... 133	
   4.6.1.2	
   Cold War and War on Terror ................................................................................. 133	
   4.6.2	
   International financial institutions and Pakistan............................................................ 135	
   4.6.2.1	
   Structural Adjustment Facility Program 1988 ....................................................... 137	
   4.6.2.2	
   Standby agreement 1993 ........................................................................................ 138	
   4.6.2.3	
   Extended Structural Adjustment Facility 1997 ...................................................... 141	
   4.6.2.4	
   The Musharraf regime and the IMF ....................................................................... 142	
   4.6.2.5	
   The Zardari regime and the IMF ............................................................................ 143	
   4.7	
   Conclusion ............................................................................................................................ 147	
    Chapter 5	
   Privatization: Conceptual Basis and Techniques ...................................... 154	
   5.1	
   Introduction ........................................................................................................................... 154	
   5.2	
   Privatization: A Definition.................................................................................................... 154	
   5.3	
   Why Privatize? ...................................................................................................................... 156	
   5.3.1	
   Arguments against state-owned/public enterprises ....................................................... 157	
   5.3.2	
   Arguments in favour of state-owned/public enterprises ................................................ 163	
   5.3.3	
   Objectives of privatization ............................................................................................ 168	
   5.4	
   How to Privatize?.................................................................................................................. 170	
   5.4.1	
   Direct privatization ........................................................................................................ 170	
   5.4.2	
   Competitive bidding ...................................................................................................... 172	
   5.4.3	
   Non-competitive bidding ............................................................................................... 174	
   5.4.4	
   Capital dilution or capitalization ................................................................................... 175	
   5.4.5	
   Management-Employee Buyouts (MEBOs).................................................................. 176	
   5.4.6	
   Mass privatization ......................................................................................................... 178	
   5.4.7	
   Indirect privatization ..................................................................................................... 180	
   5.4.7.1	
   Management contracts ........................................................................................... 181	
   5.4.7.2	
   Lease contracts ....................................................................................................... 181	
   5.4.7.3	
   Concessions ............................................................................................................ 181	
   5.4.7.4	
   Contracting out/outsourcing/subcontracting .......................................................... 181	
   5.5	
   Conclusion ............................................................................................................................ 182	
    Chapter 6	
   Privatization in Pakistan and Central Eastern Europe: A Comparison of Telecommunications and Banking Sector Reforms ......................................................... 185	
   6.1	
   Introduction ........................................................................................................................... 185	
   6.2	
   Origins of Privatization in Pakistan ...................................................................................... 187	
    vi  6.3	
   Objectives/Purposes of Privatization in Pakistan ................................................................. 187	
   6.4	
   Sectors Targeted for Privatization in Pakistan ...................................................................... 189	
   6.5	
   Privatization of the Banking Sector in Pakistan ................................................................... 190	
   6.5.1	
   Habib Bank .................................................................................................................... 190	
   6.5.1.1	
   Factors leading to privatization of Habib Bank ..................................................... 191	
   6.5.1.2	
   Issues with the privatization of Habib Bank .......................................................... 192	
   6.5.2	
   Allied Bank Ltd ............................................................................................................. 193	
   6.6	
   Privatization of the Banking Sector in Central Eastern Europe............................................ 195	
   6.6.1	
   Hungary ......................................................................................................................... 196	
   6.6.2	
   Poland ............................................................................................................................ 198	
   6.6.3	
   The Czech Republic ...................................................................................................... 200	
   6.7	
   Comparative Analysis of Banking Sector Privatization in Pakistan and Central Eastern Europe ............................................................................................................................................ 203	
   6.7.1	
   Policy perspective .......................................................................................................... 203	
   6.7.1.1	
   Goals and objectives .............................................................................................. 204	
   6.7.1.2	
   Sequence and pace ................................................................................................. 205	
   6.7.1.3	
   Technique/method .................................................................................................. 207	
   6.7.2	
   Legal perspective ........................................................................................................... 211	
   6.8	
   Privatization of the Telecommunications Sector in Central Eastern Europe........................ 217	
   6.8.1	
   Poland ............................................................................................................................ 219	
   6.8.1.1	
   Policy perspective .................................................................................................. 220	
   6.8.1.2	
   Legal reforms ......................................................................................................... 221	
   6.8.1.3	
   Privatization of TPSA ............................................................................................ 225	
   6.8.2	
   Hungary ......................................................................................................................... 228	
   6.8.2.1	
   Privatization of Magyar Telekom Tavkozlesi Reszvenytarsasag (MATAV) ........ 230	
   6.8.3	
   The Czech Republic ...................................................................................................... 231	
   6.9	
   Privatization of the Telecommunications Sector in Pakistan ............................................... 237	
   6.9.1	
   Pakistan Telecommunication Authority (PTA) ............................................................. 238	
   6.9.2	
   National Telecommunication Corporation (NTC) ........................................................ 238	
   6.9.3	
   Frequency Allocation Board (FAB) .............................................................................. 238	
   6.9.4	
   Pakistan Telecommunication Corporation Limited (PTCL) ......................................... 239	
   6.9.4.1	
   Issues with the privatization of PTCL .................................................................... 239	
   6.10	
   Comparative Analysis of Telecommunications Sector Privatization in Central Eastern Europe and Pakistan ....................................................................................................................... 243	
    vii  Chapter 7	
   Conclusion ..................................................................................................... 250	
   Bibliography ........................................................................................................................ 256	
    viii  Acknowledgements I would like to acknowledge the guidance, comments, support, and patience of my supervisor, Professor Ljiljana Biukovic. Professor Biukovic’s detailed comments have been of immense help in the completion of this thesis. I would also like to specially acknowledge the support and contribution of Professor Doug Harris, Associate Dean of the Faculty of Law, University of British Columbia. This thesis was not possible without their support and patience. I would also like to thank my parents, Reayat Khan and Bibi Hafiza, my wife Nighat Afsar, and my children Usman Reayat and Arsalan Reayat for their unwavering support, patience, love and tolerance for four long years. I am very thankful to my wife Nighat Afsar who has always been present for me and for my children when I was locked in the cycle of working and writing my dissertation. It has been a long and arduous journey, which I could not have completed without their formidable support, unfaltering patience, and tolerance. I started this journey with my landing in Canada in 2007. When I look back at these four years, I can proudly say that my stay at UBC and my research in the UBC Faculty of Law has been a significant phase of my life. It has broadened my mental horizon and given me a different perspective on life, my academic endeavours, relationships, goals, and ambitions in life and, more importantly, it has humbled me. I also dedicate this thesis to all international students hailing from diverse academic cultures studying at UBC. They are making a significant contribution to the research culture of UBC and to Canadian society.  ix  Dedication I dedicate this thesis to my parents, Reayat Khan and Bibi Hafiza, to my wife Nighat Afsar, and to my children Usman Reayat and Arsalan Reayat.  x  Chapter 1  Introduction  Since its independence from India in 1947 on the basis of religious ideology (Islam), Pakistan has been immersed in problems originating in internal weaknesses, the intervention of powerful industrialized countries, and the policies of International Financial Institutions (IFIs) and trade organizations including the International Monetary Fund (IMF), the World Bank (WB), and the World Trade Organization (WTO). Internally, Pakistan suffers from military takeovers; political instability; social, ethnic and cultural discord; weak institutional structure; incompetent leadership; lack of respect for democratic values; bad governance; absence of rule of law; and rampant corruption in the whole state machinery. The country does not have reliable infrastructure, and the existing one has been obliterated by natural disasters and man-made disasters in the form of suicide bombs and terrorist attacks. Externally, the country has been in a number of shaky alliances with the West (the United States, the United Kingdom, and their allies), first to fight a proxy war in Afghanistan during the Cold War, and more recently as part of the alliance led by the United States in the “War on Terror”. This has produced mixed results for the country and the people. Although Western countries injected huge amounts of capital into Pakistan for its cooperation in the two wars and service to the strategic interests of the United States, the environment inside the country was not propitious for long-term sustainable development. Moreover, Pakistan is surrounded by India, China, Afghanistan, and Iran. India and Pakistan have been archrivals and have fought three major wars over the disputed Kashmir region. Recently, the two countries were on the verge of war due to the Mumbai terrorist attacks in India and the interference of India in Afghanistan and Pakistan. Pakistan is currently at the crossroads of the international war on terrorism and, in spite of making substantial contributions to it, remains under constant international pressure to do more.1  1  U.S. Chairman Joint Chief of Staff Admiral Mike Mullen categorized Pakistan as an epicentre of Global Terrorism. For details see Daily Dawn Pakistan (13 January 2011), online: <http://www.dawn.com/2011/01/13/pakistan-%E2%80%98epicentre%E2%80%99-for-global-terrorism-mikemullen.html>.  1  These factors have reduced Pakistan’s capacity to deal with internal and international politics and hostile elements effectively. The interplay of these factors has impeded the country’s ability to take independent decisions and Pakistan is trapped in a vicious circle of economic and political instability, dependency on foreign capital, poverty, and underdevelopment. To make matters worse, the country’s revenue is mostly dependent on foreign capital from developed countries and international financial organizations like the IMF and the WB. The objectives of the IMF, WB, and WTO have been in a constant flux since the organizations’ creation, resulting in a deeper role and engagement in developmental efforts and governance of borrowing countries. The incorporation of development as one of their core objectives has also given these institutions immense power and control over borrowing countries, making their role more problematic and complex. The expansive role of the IMF and the WB is due to a number of factors, but mainly to the conditions attached to the loans and the inability of the borrowing countries to pay them back. These conditions are usually focused on neoliberal policy reforms in the borrowing countries, commonly known as the “Washington Consensus”, that secure repayment: implanting neoliberal ideas like free trade, privatization, competition, protection of property rights, enforcement of contract, deregulation, and liberalization. These institutions’ objectives and policy conditions are influenced by the ideas of free trade as propagated by Adam Smith, the theory of Comparative Advantage as propagated by David Ricardo, and the Washington Consensus. These theories have been the linchpins of international financial architecture, international trade, and the globalization phenomenon, promising prosperity for some countries and development for others.2 Unfortunately, the  2  For different views on globalization, see William Greider, One World Ready or Not: The Manic Logic of Global Capitalism (New York, NY: Touchstone, 1997); Thomas L. Friedman, The Lexus and The Olive; The World is Flat (New York: Farrar, Strauss & Giroux, 1999); Ha Joon Chang, The Real History of Free Trade in Anwar Shaikh, ed. Globalization and the Myths of Free Trade: History, theory, and empirical evidence (London: Routledge Taylor and Francis, 2007) 23; Antony Angie, “Time Present and Time Past: Globalization, International Financial Institutions, and The Third World” (1999) 32 N.Y.U.J. Int’l L. & Pol. 243; Nancy Birdsall, “Life is Unfair: Inequality in the World” (1998) 111 Foreign Policy 76. For important critical examinations of globalization, see Anne Orford, “Locating the International: Military and the Monetary Interventions After the Cold War” (1997) 38 Harv. Int’l L.J. 443; B.S. Chimni, “Marxism and International Law: A Contemporary Analysis” Econ. & Policy Weekly (6 February 1999) 337; David Kennedy, “Background Noise?: The Underlying Politics of Global Governance” (Summer 1999) Harv. Int’l Rev. at 52; Richard Falk, “State of Siege: Will Globalization Win Out?” (1997) International Affairs 123; Philip Alston, “The Myopia of 2  results of these policies are not promising and the policies have not fulfilled the muchtrumpeted goal of development for poor countries. It is, therefore, imperative to shed light on the ideological basis of these policies. 1.1  Free Trade  Adam Smith advanced the theory of free trade in 1776. The theoretical explanation of free trade rests on the concept of free exchange of goods amongst national markets across the globe without any artificial hindrance. The rationale of free trade is that it prevents the rentseeking tendencies of domestic producers and encourages efficient production and fair competition.3 After Adam Smith, the case for free trade was further strengthened by thinkers like James Stuart Mill (1824), Robert Torrens (1808) and David Ricardo, who solidified the case for free trade through the theory of Comparative Advantage. 1.2  Comparative Advantage  The Theory of Comparative Advantage postulates that international trade can be mutually beneficial for both countries even if one of the countries has absolute advantage in all tradable commodities.4 This theory is the vital intellectual pillar of international trade  the Handmaidens: International Lawyers and Globalization” (1997) 8 E.J.I.L. 435; Benedict Kingsbury, “Sovereignty and Inequality” (1998) 9 E.J.I.L. 599; For an important historical perspective on some of these issues, see Nathaniel Berman, “In the Wake of Empire” (1999) 14 Am. U. Int’l Law Rev. 1521; Paul Krugman & Anthony J. Venables, “Globalization and the Inequality of Nations” (1995) 110:4 Quarterly Journal of Economics 857; Kevin H. O’Rourke & Jeffery G. Williamson, eds., Globalization and History (Cambridge, MA: MIT Press, 2001). 3  Adam Smith, An Inquiry into the Nature and Causes of The Wealth of Nations, ed. by Edwin Cannan (Chicago: University of Chicago Press, 1967) vol. 1 at 478 [first published 1776]. For detailed analysis of Adam Smith’s Free Trade read Douglas A. Irwin, Against the Tide: An Intellectual History of Free Trade (Princeton, NJ: Princeton University Press, 1996) at 75-86, 87-98; Hla Myint, “Adam Smith’s Theory of International Trade in the Perspective of Economic Development” (1977) 44 Economica at 231-248; Nathan Rosenberg, “Some Institutional Aspects of the Wealth of Nations” (1960) 1968 Journal of Political Economy at 557-570; Andrew S. Skinner, “The Shaping of Political Economy in the Enlightenment” (1990) 37 Scottish Journal of Political Economy at 145-65; George J. Stigler, “The Successes and Failures of Professor Smith” (1976) 84 Journal of Political Economy at 1199-1213; Jacob Viner, “Adam Smith and Laissez Faire” (1927) 35 Journal of Political Economy at 198-232; Arthur I. Bloomfield, “Adam Smith and the Theory of International Trade” in A.S. Skinner & T. Wilson, eds., Essays on Adam Smith (Oxford: Clarendon Press, 1975) 472; Adam Smith, The Theory of Moral Sentiments, ed. by A.L. Macfie & D.D. Raphael (Oxford: Clarendon Press: 1976); John H. Jackson, The World Trading System. Law and Policy of International Economic Relations (Cambridge, Massachusetts: MIT Press, 1989) at 111. 4  Elaborated in David Ricardo, Principles of Political Economy and Taxation (London, U.K.: J. M’Creery, 1817). Also read David Ricardo, The Works and Correspondence of David Ricardo, ed. by Piero Sraffa (Cambridge: Cambridge University Press, 1951).  3  architecture. The theory in its simplest form is based on a two-country model of international trade, trading two products coupled with one type of inputs for both products. The model defines international trade in terms of productivity and variance in the comparative costs of production between the two countries. Further, the rate of exchange for traded goods or the price of goods in terms of the other is determined by the comparative costs of their production in the countries under examination. The existence of such terms of trade results in the efficient production and export of goods by a country in which that country has comparative advantage, and importation of goods that cannot be produced efficiently within the country. Ricardo concluded that international trade is the result of the existence of comparative advantage rather than absolute advantage.5 After the demise of the Soviet Union and the fall of the Berlin Wall, in order to exterminate the remains of Communism in developing and underdeveloped countries, the industrialized countries—dominating the IFIs—decided to implement a new set of policies in borrowing countries that were unable to pay back their debt during the debt crisis. To enable the defaulting countries to pay back their loans, Washington-based institutions/IFIs (the IMF and WB) introduced a set of policies commonly referred to as the “Washington Consensus”. These institutions subsequently incorporated these policies into their conditions for borrowing countries as they transitioned from planned to market economies. 1.3  The Washington Consensus  The Washington Consensus is a term coined by John Williamson in 1989 that refers to a set of policy prescriptions suggested by the IMF and WB for use in Latin American countries. The minimal role of the state, deregulation, and economic and trade liberalization; privatization of dysfunctional state enterprises; protection of private property; and assigning the goals of development, public welfare and prosperity to the market have been the defining features of the Washington Consensus. The set of policy reforms that IFIs prescribed for development in Latin America consisted of the following:  5  For further elaboration of the Theory of Comparative Advantage, see “The Case for Open Trade”, accessed 14/03/2010 online: World Trade Organization <http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact3_e.htm>.  4  i.  Fiscal Discipline  ii.  Investing public expenditure priorities in areas that have the potential of producing high economic returns  iii.  Reforms in taxation sector i.e. lower the rates and broaden the base  iv.  Liberalization of interest rates  v.  Competitive exchange rates  vi.  Liberalization of trade  vii.  Liberalizing inflows of foreign direct investment  viii.  Privatization  ix.  Deregulation (to abolish barriers to entry and exit)  x.  Protection of Property Rights.6  Notwithstanding the pros and cons of the above tenets, the straightjacket/one-size-fits-all approach by IFIs for implementation of the Washington Consensus policies in all borrowing countries substantially aggravated the financial crisis in Latin America, Russia, East Asia, and Pakistan. Similarly, the various trade agreements forced on poor member countries by the WTO made it obligatory to follow the principles of liberalization, privatization, deregulation, open competition, and free transfer of goods and services across borders. The principles of free trade, national treatment, and non-discriminatory clauses enshrined in the WTO have been the obligation of poor countries and the right of developed countries. Comparatively speaking, the infant industrial and manufacturing sector of the poor/developing countries is at a huge disadvantage to developed countries due to the latter’s scientific knowledge and technological superiority. The non-adherence to the cardinal principles of the WTO, discriminatory attitudes, and the exploitation by industrialized countries of cheap labour in poor countries resulted in mass protests against free trade and globalization in Seattle (1999), as well as in Quebec and Genoa.  6  John Williamson, “What Should the World Bank Think about the Washington Consensus?” (2000) 15:2 World Bank Research Observer at 251-264.  5  The IFIs’ conditionalities and the WTO agreements have precipitated development crises in the poor/developing member countries and have secured the interests of international corporations and individuals based in industrialized countries with huge financial and capital investments in poor countries. The crises in poor countries have mainly been attributed to the archaic and obsolete legal and institutional structure in the borrowing countries, rather than to IFI policies that further extended their mandate to include good governance through policy, institutional and legal reforms. Pakistan, due to its commitment under WTO agreements and IFI conditionalities, had to privatize state-run enterprises. To comply with the performance requirements of the condition, the government of the time had to take quick and substantial steps showing progress towards implementing privatization, deregulation, and trade liberalization policies. For instance, there was fast-paced privatization of the telecommunications and banking sectors in Pakistan. Privatization was pushed on the basis that it would improve the efficiency and performance of the privatized units and increase economic efficiency. Instead, it has only worsened the situation. The Government of Pakistan, in a rush to get capital from IFIs, blindly and hastily complied with these conditionalities without giving any regard to due process, laws, development, poverty alleviation, and the stakeholders’ participation in the privatization process. The post-privatization performance of these enterprises shows that privatization has little impact on either the overall development of the country or relief for the public. Government officials with vested interests made the situation worse. They were able to buy assets cheaply and receive kickbacks from interested parties, restricting stakeholder access and participation in the privatization process. The IMF, in setting conditions for the loan or aid and giving time limits to the borrowing government, which forces the government to rush privatization and ignore due process, promotes corruption and bad governance practices, negating its own goals of development and good governance. The failure of Washington Consensus policies brings into the limelight the lack of coordination between the national/local and international/global elements (IFIs, the WTO and industrialized countries) interacting at the deepest level, and raises some genuine  6  concerns. It is, therefore, pertinent to know whether the ideological framework based on the Washington Consensus, free trade, and comparative advantage, and the implantation of institutions to facilitate development through free trade, privatization, liberalization, deregulation, and foreign investment by the IFIs, is in consonance with the realities of the poor countries. What are the limits to IFI interference through conditions in the governance of the borrowing countries? What is the role of the state in this framework to promote development? What should be the structural and institutional framework in the state for the regulation and enforcement of such policies? How can we measure development in the poor countries? Should there be any state regulation of the economy? Or should it be left to independent regulatory authorities (the market regulating itself)? What is the relevance and effectiveness of an independent regulatory authority in the light of the political and social conditions specific to the borrowing countries? This research intends to answer the above questions from the law and development perspective focusing on law, New Institutional Economics, and Development Economics. Development Economics, as compared to neo-classical and free market economics, is the branch of economics that deals primarily with the economic aspects of development processes in low-income countries. It does not confine itself to one approach, such as economic growth, or trade, or structural change in promoting development, but rather relies on multiple approaches. For example, it may incorporate social, political, cultural, or legal and other factors to devise a specific plan. It aims to provide education, health, and infrastructure to the population as well as to improve governance for delivery of civil services. Unlike neo-classical and free market theories, Development Economics relies on both public and private resources for the successful implementation of any development program. In this context, I intend to analyze the role of IFIs and the national governments of borrowing countries in working for the frequently acclaimed goals of promoting development and alleviating poverty, and to propose a collaborative and cooperative approach between IFIs, national governments, and the public. This approach places the national government at the centre for structuring and initiating reform in the countries, with the support and assistance of the IFIs.  7  While emphasizing a collaborative approach, the research also aims to analyze the policies of IFIs and their impact on the legal edifices of borrowing countries. I will argue that if law/legal reforms can be used as a tool by developed countries in international trade agreements under the WTO, and the conditions attached to the IFI loans to borrowing countries are to implement a neoliberal agenda, they can also be used as a tool to give legal sanctity and protection to the development of the population in the debt-ridden countries. An example of such a law would be a National Sustainable Development Act in Pakistan, and the insertion of conditions in the Act ensuring that the proceeds from any privatization, foreign, or national investment projects in any part of Pakistan should address the needs of the people in the area. All the legal, institutional, and policy reforms and decisions of the government would then be subservient to this law. Notwithstanding the passage of various United Nations resolutions7 on promoting development, demonstrations against globalization at the WTO and G8 summit have highlighted the disconnect between the reality and the policies of the IFIs and WTO. The incorporation of development as an IFI and WTO objective and the signs of gains from increased volume of trade validate the argument for increased trade (in terms of volume) across the globe but invalidate the claim of progress towards the development goals intended through trade, privatization, liberalization, and deregulation. As a result, there is an urgent need to bring about essential changes in the policy, legal, and institutional structure of IFIs and the WTO, as well as the governance structure of borrowing countries, to take development objectives out from the domain of “soft law” and put them at the heart of any policies, laws, and institutional reforms in a country. These development objectives should  7  UN Declaration on the Right to Development, UN GAOR, 41st Sess. Annex, Agenda Item 101, 97th Plenary, UN Doc. A/RES/41/128 (4 December 1986), online: http://www.un.org/documents/ga/res/41/a41r128.htm; UN World Conference on Human Rights, Vienna Declaration on Human Rights, UNGAOR AT 23-24 UN Doc. A/CONF. 157/24 Part One, 12th July, 1993; Rio Declaration on Environment and Development, adopted at the conference held in Rio De Janeiro from 3 to 14 June 1992. The declaration places human beings at the centre of all efforts directed towards the promotion of sustainable development and recognizes the sovereign right of the states to exploit their own resources in pursuance of their own environmental policies and development. The declaration specifically declared the importance of the right to development to equitably meet the needs of present and future generations. A conference held from 2-4 September 2002, in Johannesburg, South Africa under the auspices of the UN Department of Economic and Social Affairs, Division of Sustainable Development adopted another declaration, which recognized the importance of all the previous declarations and the UN Millennium Development Goals (eight goals) to achieve by 2015. For details please visit <http://www.un.org/millenniumgoals/>.  8  also be the determining factors in all agreements entered into between these organizations, regional financial agencies, and national governments. 1.4  Aims of the Study  The primary aims of this dissertation are as follows: (a) To critically analyze the ideological foundations of economic globalization, the international economic institutions (responsible for global economic integration), and their prescribed policies and impact on the legal and governance structure of the borrowing countries from a Law and Development perspective. (b) To evaluate the impact of the IFI policies and elaborate the failure of their policies in the borrowing countries. To contend that the IFIs’ prescribed Washington Consensus policies—i.e. privatization, deregulation, and liberalization—will be a failure unless the policies pushing legal, institutional, and economic reforms are compatible and context-specific to the country, with development of the people at the heart of all such reforms. The compatibility of such reforms is dependent on the understanding of the laws and rules in force; the working of the existing institutional structure enforcing these laws; and the political, social, economic, and cultural structure of the host country. In this context, this refers to the appropriate legal, institutional and policy reforms for privatization in Pakistan. (c) To provide a brief historical, political, and economic analysis of Pakistan and its nation building efforts and to identify the interest groups, institutions and organizations contributing to the underdevelopment of Pakistan. Such analysis is important in order to understand the institutional context and cultural patterns impacting policy formulation, legislation and the institutional structure.8  8  Pitman B. Potter, “Selective Adaptation, Institutional Capacity, and the Reception of International Law Under the Conditions of Globalization” in Pitman. B. Potter & Ljljana Biukovic, eds. Globalization and Local Adaptation In International Trade Law (Vancouver: UBC Press, 2011) 3, accessed 18/11/2011 online: <http://www.ubcpress.ca/books/pdf/chapters/2011/GlobalizationAndLocalAdaptationInInternationalTradeLaw. pdf>.  9  1.5  Outline of the Thesis  Chapter 2: Globalization, Free Trade and Development: Connecting the Dots… Chapter 2 will focus primarily on the critique of neoliberal approaches to development through the lens of law, development economics, and Professor Douglas C. North’s conceptual analysis of institutions, institutional change, and economic development. I argue that development policies are context specific, and I briefly analyze the protectionist laws enacted by leading developed countries like the United Kingdom and the United States. Further elaborating on protectionism, I identify India and China as countries initially following protectionist policies then gradually transitioning towards more free market policies. After analyzing the economic laws and policies adopted by developed and newly developed countries and their historical and economic context, I argue for a selective protectionism by the developing countries like Pakistan; substantial opening of markets by developed countries; transfer of knowledge; and equitable distribution of profits in any project involving foreign direct investment. Due to the local political, social, and institutional realities of countries like Pakistan, I argue for a substantive government role and regulation in structuring and implementing any development policy in the country. While doing so I do not exclude the vital role of the market and the private sector, but suggest legalized, institutionalized public-private partnership structure ensuring transparency, openness, and accountability through checks and balance systems; and impact analysis on development of the stakeholders, their direct and substantive participation, and that of the public. The creation of such institutional structure should be the product of law rather than the good will of the government or the private sector. It is in this context that the IFIs have an important role to play. Chapter 3: International Financial Institutions and Development: Reconciling the Rhetoric and the Reality Chapter 3 gives a brief analysis of the origin of the IFIs and the transformation of their objectives since their creation. This chapter explains that with every international crisis, the IFIs have managed to increase their power and engagement with the developing countries. Recently, with the development crisis in the poor countries, the IFIs have incorporated development, promoting good governance and best practices in their objectives. The 10  incorporation of development as one of their objectives has further expanded their involvement in the policymaking and legal structures of borrowing countries. Unfortunately, their deeper involvement in policy formulation and implementation has proved fruitless due to multiple factors but primarily to their straightjacket approach: implementation of neoliberal policies in an unfavourable social, political, and economic environment without adequate legal and institutional structures in place. It also points to the problematic expansion in their objectives, i.e. in the incorporation of development. These institutions claim to work for the development of the poor countries, but the conditions attached to their aid demonstrate that these institutions are in fact instruments of the industrialized countries to control underdeveloped countries. Chapter 3 then illustrates the regressive impact of neoliberal policies in a hostile environment through a critical analysis of the impacts of such policies on the East Asian countries during financial crisis. Chapter 4: Organizations and Institutions in Pakistan: Understanding the Genesis to Model Institutional Change Chapter 4 explains the evolution of the social, political, and economic structure of Pakistan and the development strategies adopted by the country since its creation. It also traces the development of relationships between the IFIs (the IMF and the WB), the nature of the programs suggested by them, and their impacts on Pakistan. The chapter culminates in the identification of internal factors impeding the economic progress of the country. Chapter 5: Privatization: Conceptual Basis and Techniques Chapter 5 explains the defining components, objectives, and alternatives to privatization. It explains various techniques/methods of privatization, and their respective pros and cons. It illustrates that a “one-size-fits-all approach” is inappropriate for privatization of state-owned enterprises in different sectors of the economy. Proper assessment of the productivity of the enterprise and other factors helps in selecting proper privatization technique. The proper privatization technique helps achieve the real objectives of the privatization process.  11  Chapter 6: Privatization in Pakistan and Central Eastern Europe: A Comparison of Telecommunications and Banking Sector Reforms Chapter 6 focuses on the implantation of privatization and deregulation policies (conditions attached to the aid given by the WB and IMF) and shows that the privatization and deregulation policy prescribed by the IMF and WB was inconsistent with the local conditions. The chapter offers a comparative analysis of privatization in the telecommunication and banking sectors in Pakistan and privatization of the same sectors in Poland, Hungary, and the Czech Republic, through the lens of North’s theoretical framework of Institutions, Institutional Change, and Economic Development. The comparative analysis underlines the points of distinction between these countries and suggests regulation of privatization through legal, institutional, and policy reforms in Pakistan. The mismatch and inconsistency of these policies in Pakistan can be attributed to internal problems such as the lack of a legal and institutional framework, and to the IFIs’ disregard for the impact of such policies on overall development, good governance, and institutional structure in Pakistan. Conclusion The thesis culminates in the proposition of selective protectionism for the development of industrial and research sectors in developing countries and substantial openness from developed countries under the special and differential treatment agreements and development provisions of the WTO. The institutional and legal environments of host countries like Pakistan are not favourable for liberalization. The social, cultural, political, and economic structure of Pakistan demands the presence of strong government to erect a strong institutional and legal edifice for the sustainable development of markets. All the reforms initiated should be research based and context specific. For example, from a Pakistani perspective, the policies of privatization and deregulation will not promote liberalization. The failure of the efforts stems from the fact that the privatization law does not provide any standard for the identification of sectors to be privatized; does not provide any mechanism for the participation of stakeholders or members of the civil society in any public entity to be privatized; and fails to create any forum for review to analyze the whole process and conclusively determine the appropriate model of privatization for the country. 12  My argument for the legal and institutional reforms stems not from the desire to promote the neoliberal agenda, but from the concern that Pakistan has corrupt leadership, is rife with political and economic instability, experiences poverty and inequality, suffers from bad governance, and has no rule of law, as well as a lack of accountability and transparency. Only strong institutional and creative legal reforms can stimulate the economic development of a country like Pakistan. The legal reforms should focus on ensuring participation of the stakeholders, the members of civil society, and the local public in institution building. The legal reforms should enact such provisions of law that make development goals/objectives justiciable, i.e. the cause of development would be enforceable in the court of law. The research argues for selective protectionism and rule-based state-market structure complemented by appropriate legal and institutional reforms in Pakistan, after thorough research in its proper context. The legal reforms should target specific problems (address the root causes instead of the symptoms) and structure the accountability mechanisms based on checks and balances to make the development and decision-making process more transparent, open, and deliberative. However, the research also emphasizes the need for such reforms in the laws, rules, policy making, and institutional structures of the IFIs and the industrialized countries, as they are directly involved in the development efforts of countries like Pakistan.  13  Chapter 2  2.1  Globalization, Free Trade and Development: Connecting the Dots  Introduction  Globalization is mainly associated with the economic integration of countries and has its ideological genesis in free trade (based on Comparative Advantage), free markets, free investment, and the ideology of free market capitalism. The logical matrix of market capitalism rests on the assumption that the creation, integration, and promotion of free trade and free markets between nations will encourage competition. The competition will lead to efficient utilization of available resources, which will consequently promote economic development and prosperity. The proponents of globalization termed it the newfound recipe for global development and prosperity.1 Developing countries around the world were persuaded/forced (the forceful implementation of neoliberal ideas on poor countries with the purpose of integration is another feature of globalization) by international financial/trade institutions (IFIs), such as the International Monetary Fund (IMF) and the World Bank (WB), and international trade organizations, such as the World Trade Organization (WTO). In the last two decades, these institutions and the brand of globalization promoted by them have come under increased scrutiny.2 At the heart of the globalization debate is the role of  1  Jagdesh Bhagwati, Thomas L. Friedman, David Dollar, and institutions like the IMF, the World Bank and the World Trade Organization are the key proponents of globalization based on free trade and free flow of capital. 2  These institutions facilitated the creation of the free market by implementing policies of mass deregulation of market, investment, minimum government interference, mass privatization of the national enterprises, and reduction of trade barriers in the borrowing countries. Strict adherence to these principles was termed essential for the creation of a favourable environment to deeply integrate the markets of the borrowing countries with the rest of the world, and to promote competition and attract foreign investment in the borrowing countries, which will qualitatively change their livelihoods. These policies were considered a panacea to the development quandary of the poor countries. However, these policies have actually worsened the development dilemma of the borrowing countries. For a detailed critique of globalization and the IFIs, see Chakravarthi Raghavan, Recolonization: GATT, The Uruguay Round & The Third World (Penang, Malaysia: Third World Network, 1991); Jeremy Brecher & Tim Costello, Global Village or Global Pillage: Economic Reconstruction from the Bottom Up, 2ed. (Boston, MA: Southend Press, 1998); John Gray, False Dawn: The Delusions of Global Capitalism (London: Granta Books, 1998); George Soros, The Crisis of Global Capitalism (New York: Public Affairs, 1998); Graham Dunkley, The Free Trade Adventure: The Uruguay Round and Globalism: A Critique (Victoria, Australia: Melbourne University Press, 1997); William Reider, One World Ready or Not: The Manic Logic of Global Capitalism (New York: Simon & Shuster, 1997); Jo Marie Griesgraber & Bernhard G. Gunte, eds., World Trade: Toward Fair Trade and Free Trade in the Twenty-First Century (London, Chicago, IL: Pluto Press, 1997); Hans-Peter Martin & Harald Schumann, The Global Trap: Globalization and The Assault on Prosperity and Democracy, trans. by Patrick Camillar (Montreal: Black Rose, 1998); Arthur MacEwan, Neo14  these IFIs; their policies and their impact on the role of the state governance and the institutional structure of the borrowing countries; issues of development, international trade, and foreign investments; and impact on their industrial, financial, and business structure. 2.2  Theoretical Framework  Through the interdisciplinary framework of institutional economics, law, and development, the research in hand will analyze the complexity of globalization as framed by IFIs, the institutional and legal response (adaptation) of the local countries to such policies, and globalization’s impact on the poor countries. The defining components of the law and development framework are legal theory, economic development theory, and international development practice, because this approach refers to theories and practices adopted for the promotion of economic and social progress through legal and institutional reforms and capacity building.3 Within the theoretical framework of law and development, through the lens of Development Economics, I will critically analyze the theory of Comparative Advantage and elaborate the detachment of its theoretical assumptions from the realities of the poor countries and its inappropriateness for the poor countries at their current stage of development. Therefore, there is a need to review the fundamental principles of non-discrimination and national treatment in the WTO trade agreements. I contend that there is no single recipe for the remedy of the economic and development ills of all the developing/poor countries across the globe. The failure of experiments with Washington Consensus (neoliberal) ideas of free trade, privatization, deregulation, development etc., as pushed by IFIs in the borrowing countries and recent global economic crises in the economic core of the world, have prompted the policy makers, academics,  Liberalism or Democracy? (London, New York: Zed Books, 1999); Dani Rodrik, Has Globalization Gone Too Far? (Washington, DC: Institute of International Economics, 1997); Lori Wallach & Michelle Sfroza, The WTO: Five Years of Reasons to Resist Corporate Globalization (Canada: Seven Stories Press/Open Media, 1999); Joseph E. Stiglitz, Globalization and Its Discontents (New York & London: W.W. Norton, 2002); and Raj Bhala, Trade, Development, and Social Justice (Durham, NC: Carolina Academic Press, 2003). 3  David M. Trubek, “Developmental States and the Legal Order: Towards a New Political Economy of Development and Law”, University of Wisconsin Legal Research Paper No. 1075 (February 2009) accessed 13/08/2011 online: <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1349163>.  15  scholars, and regulators etc. to review and redefine the relationship between the state and the market with reference to the goals of development. The new orthodoxy of the New Developmental State or New Developmentalism in the law and development attempts to redefine the market-state relationship by providing a hybrid legal model. The hybrid legal model incorporates provisions specific to the requirements of the market economy and also includes provisions accommodating state concerns to regulate economy when needed, i.e. a mix of state-led economic law and market-led economic law. However, so far there is no clearly defined theoretical model of the New Developmental State with hybrid laws, regulations, and institutions that can be implanted practically. As a result, law has an important and challenging part to play in defining the role of the state and establishing an institutional network regulating the state-market relationship. The dual role of law in the New Developmental State—incorporating the state as a facilitator (through state intervention) and empowering markets—appears to involve two conflicting objectives. This results in the most challenging task for academics, policy makers, reformers, and legislators to structure new relationships in the public and private spheres between actors and institutions, for the successful execution of development strategies. So far there is no consensus on the structure of the New Developmental State and the role of law in such a state. The present research gives a specific legal and institutional model for structuring public-private partnership through critical analysis of privatization in Pakistan. This chapter contends that as the ideological foundation of the IFIs is faulty, the policies formulated, and the laws and institutions put in place based on such ideological basis, will not address the development conundrum of the poor countries. The chapter therefore stresses the need to form an institutional nexus or network at the national and international levels to create development fusion in the development countries and sincerely work for its achievement. The motivation to analyze neoliberal policies and development crises of poor countries from a law and development—Development Economics (economic theory)—and New Institutional Economics perspective originates in my desire to formulate a deep and effective legal critique of the market fundamentalism embedded in the policy prescriptions of the IMF,  16  WB, and WTO agreements. Critical analysis from an economic theory perspective will help create a more effective legal design to promote law as an instrument of social justice and development. It will also help unravel the intricacies of the interface between law, economics, and development. This perspective offers diversity in its approach to deal with the development of poor countries: it incorporates social, political, cultural, institutional, and legal factors in its approach to structure any development strategy or plan. Various phases of law reforms in developing and poor countries were structured by the dominant economic models of development. Development Economics, unlike those mathematical/economic models, does not overlook the economic realities. In this context, it is pertinent to briefly explain the specific views of prominent development economists on the development strategies and the development dilemma of the poor countries. 2.3  Literature Review  Friedrich List (1789-1846), a German economist of the nineteenth century, recommended infant industry protection (IIP) as an important strategy for countries in the early stages of development.4 He theorized that the employment of such a strategy would help the country immensely to improve its manufactured exports. However, List did not recommend this strategy for a prolonged period. He underlined four stages in the development of international trade and industrialization: a)  expansion of imports of manufactured goods;  b)  beginning of domestic production through protection;  c)  satisfaction of domestic market; and  d)  expansion of exports.  After attainment of certain stage of development, the country will join the international association for the purpose of trade and resultantly protection will cease.  4  Friedrich List, The National System of Political Economy, trans. by Sampson S. Lloyd (London: Longman Green, 1885).  17  Similarly, Raul Prebish, Latin Political economist and one of the strong proponents of Import Substitution Theory (IST), contended in the 1950s that notwithstanding the expensive nature of the policy it is still the most desirable one for developing countries. Most developing countries at that time were exporters in primary products, lacked industrial infrastructure, and had to confront hostile external market conditions. Prebish constructed his arguments on the Prebish-Singer thesis. Prebish introduced his theory of declining terms of trade in his book The Economic Development of Latin America in 1950.5 Both Prebish and Singer, after examining economic data over a long period of time, came to the conclusion that the terms of trade for primary commodities have the tendency to decline. The obvious outcome of this tendency was the income elasticity of demand: if income increases, the demand for manufactured goods increases as compared to primary products. It is, therefore, essential for developing countries to diversify their economic structure and engage in economic manufacturing activity (producing goods which can attract more demand) through protectionism. However, Prebish favoured protectionism for a reasonable duration to develop specific sectors. He opposed protectionism as a permanent feature in the economic tools used by the country to develop and industrialize. Ha-Joon Chang,6 a heterodox economist specializing in Development Economics, employs a broader approach that places the economic history of the developed countries and socialpolitical factors at the centre of the economic practices focusing on development. In his book Kicking Away the Ladder he argues that all developed countries in the past practised protectionist policies when they were at the same stage of development as developing countries are today. Chang argues for the industrial development of developing countries through asymmetric protectionism. While employing a historical approach and arguing for the pursuit of protectionist policies for development countries, Chang also identified the fact that today’s developed countries did not develop due to good institutions but rather the institutions evolved with the passage of time. Chang contends that the institutions in 5  For details also read Joseph L. Love, “Raul Prebisch and the Origins of the Doctrine of Unequal Exchange” (2003) 15:3 Latin American Research Review 45, online: <http://www.jstor.org/stable/2502991>. 6  Ha Joon Chang, Kicking Away The Ladder: Development Strategy in Historical Perspective (London: Anthem Press, 2005); Ha Joon Chang, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism (New York: Bloomsbury Press, 2008); Ha Joon Chang, 23 Things They Don’t Tell You about Capitalism (New York: Bloomsbury Press, 2010). 18  industrialized countries were not necessarily good in the sense described by the Washington Consensus, but were good enough to protect industry and achieve development goals. As a result, it is important for developing countries to ensure good governance, but it is also equally important to understand the nature, structure, need, and what kind of institutional structure would be good for poor countries. Similarly Erik S. Reinert, in his work How Rich Countries Got Rich and Why Poor Countries stay Poor7, has criticized capitalist neoliberal ideas on various grounds, the most important of which is the protectionist policies and state intervention of developed countries in the past when they themselves were in the early stages of development. He highlights the inherent flaws of neoliberal ideas based on assumptions that can be applicable in an ideal world but will be utopian in the real world. In his work he basically stresses the importance of economic practices promoting industrialization and a manufacturing sector, resulting in technological innovation and increasing returns for the poor countries. Reinert suggests protectionism for developing countries, but he differentiates between bad and good protectionism. He illustrates the difference between bad and good protectionism through East Asian and Latin American protectionist policies. He contends that good protectionism should be temporary for the purpose of protecting new industry. Reinert’s good protectionism has the following features: i.  Encouragement of new learning.  ii.  A basis on a Schumpeterian view of the world—market-driven “creative destruction”.  iii.  Encouragement and maintenance of domestic competition, maintaining local control of the core technology.  iv.  Massive investment in education/industrial policy, matching the demand for educated people with industry needs.  7  Erik S. Reinert, How Rich Countries Got Rich...And Why Poor Countries Stay Poor (New York: BBS Public Affairs, 2007).  19  v.  Strict pursuance of meritocracy—capital, jobs, and privileges distributed according to qualifications.  vi.  Equality of land distribution.  vii.  Even income distribution.  viii.  Profits created through Schumpeterian rent seeking.  ix.  Intense cooperation between producers and local suppliers.  x.  Regulation of technology transfer—oriented towards maximizing knowledge transferred.  In his description of his theory of his “Other Canon”, Reinert identifies twenty-six points differentiating the standard canon from his Other Canon. For the purpose of this thesis I will reproduce three important points: 1) Both theory and policy recommendations are highly context dependent. 2) Knowledge produced has costs and is protected. This production is based on incentives of the system, including law, institutions, and policies. 3) Economics is an inherently unstable and conflict-rich discipline. Achieving stability is based on man’s policy measures. However, Reinert vehemently stresses the importance of the structure and nature of activities and contends that with change in the nature of activities, mentalities and institutions will change. I strongly support the qualitative change in the nature of activities but recommend that in poor countries like Pakistan, with bad governance and broken institutions, it is important that establishment of strong institutional structure and good laws should precede or at least be in tandem with efforts to change the nature of economic activities. Laws and institutions can become the fountain of good protectionism in these countries. Joseph E. Stiglitz, in his books Globalization and Its Discontents and Making Globalization Work, has criticized the role of the IFIs and their policies of free trade based on privatization,  20  deregulation, and unjust agreements signed by member countries under the WTO.8 In Roaring Nineties, he analyzes the flaws of market fundamentalism by highlighting the negative impact of unbridled markets in the United States and other countries. Ultimately, he makes recommendations for an important role for the state in promoting responsible markets and free trade by making it more fair and responsive to the development needs of poor and developing countries. Jeffery Sachs, in his 2005 book The End of Poverty: Economic Possibilities of Our Time,9 while criticizing the role of the IFIs in the development of poor countries, emphasized the importance of financial aid for poor countries to eradicate poverty as measured, i.e. $1 per day. Sachs overemphasizes the role of financial and capital aid but also contends that right policies and key interventions have vital roles in the reduction of extreme poverty. For instance, if good seed, irrigation, and fertilizers are provided to farmers in Africa it would qualitatively increase their crop yield and as a result increase their income and reduce poverty levels. Similarly, if free insecticide-treated bed nets were provided it would effectively reduce the number of deaths from malaria. American economist William Easterly specializes in neoliberal economic growth and foreign aid. In The Elusive Quest for Growth,10 he analyzed the causes of underdevelopment in poor countries and criticized financial aid as a tool to promote development. He elaborates on the fact that since World War II, many development models and large amounts of foreign aid have been employed in poor countries with negligible progress to show for it. The supply of foreign capital is followed by the inability of poor countries to pay back their loans, which results in further supply of foreign capital in the form of debt relief, but still there has been no substantial progress. Consequently, Easterly demands state intervention and granting of incentives to poor countries to address the situation.  8  Joseph E. Stiglitz, Globalization and its Discontents (New York: W.W. Norton, 2002); Joseph Stiglitz, Making Globalization Work (New York: W.W. Norton, 2006); Joseph Stiglitz, Roaring Nineties: A New History of the World’s Most Prosperous Decade (New York: W.W. Norton, 2003). 9  Jeffery D. Sachs, The End of Poverty: The Economic Possibilities of Our Time (New York: Penguin, 2005).  10  William Easterly, The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics (Cambridge, Massachusetts & London: MIT Press, 2002).  21  Dambissa Moyo, in her book Dead Aid,11 also criticizes the role of foreign aid in promoting development. She contends that continuous and unaccountable foreign aid has resulted in a dependency relationship between poor African countries and donor agencies. She contends that for real and long-term development to take place, the development initiatives need to be taken on by the governments of these countries, and that cutting off foreign aid will force these governments to look for alternative financial resources and make them more accountable. Similarly, Paul Collier, in Bottom Billion,12 identified four traps: wars (73 percent of the poor countries have been involved in a war in one way or another); exploitation of natural resources (such as oil reserves in Nigeria), which accounts for about thirty percent; countries landlocked with bad neighbours like Chad; and bad governance in a small country, which happens too often in the African Continent. Collier illustrates statistically that a huge portion of the bottom billion live in 58 countries: 70% in Africa and the rest in Central Asia. He further contends that since the 1990s, more than four billion people in poor countries have moved out of the poverty trap, but most of them are still struggling. The countries where the poorest reside have experienced negligible growth since the 1970s. Collier has also criticized the role of foreign aid in initiating development in the poor countries. In his view, unlimited foreign aid has resulted in diminishing returns for borrowing countries, and Collier advocates for the enactment of laws or charters in those countries to devise a framework for development, democracy, investment, and post-conflict situation. Amartya Sen, a Nobel Prize-winning economist, was prominent among his contemporaries for focusing on issues economists usually see as marginal. His most influential work includes Collective Choice and Social Freedom, which was published in 1970 and addressed problems related to individual rights, justice, equity, rule of majority, availability of information about individual conditions, inspired researchers, famine, better health treatment of women and children, and public welfare. All of these concepts, which are alien to  11  Dambisa Moyo, Dead Aid: Why Aid is not working and How There is a Better way for Africa (New York: Farrar, Strauss and Giroux, 2009). 12  Paul Collier, The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It (New York: Oxford University Press, 2007).  22  neoliberal thinkers, appeared prominently in Sen’s work. His latest works include Freedom as Development and The Idea of Justice,13 which is a brilliant effort to highlight the issues that remain in the blind spot of standard neoliberal economic thought. He gives compelling analysis of the modern economics problem from the perspective of human freedom and offers a sound moral framework for analyzing market economics and free trade. In order to enable neoliberal ideas to work effectively for public welfare another development economist, Dani Rodrik, highlighted the importance of contextualizing the development strategy and stressed the vital role of institutions. Rodrik, an economist from Harvard University, focuses primarily on policy design in the realm of economic development.14 His research examines the determinants of good economic policy and he suggests that policy must be structured in the proper context to be successful. Rodrik initiates his reforms process by running a diagnostic test to identify the problem, prioritizing the problem, and then suggesting a solution responsive to the needs of the people and sensitive to local institutions. In his analysis of the structure of international institutions like the World Trade Organization (WTO), Rodrik strongly recommends a multi-pronged strategy for developing and poor countries, emphasizing that poor countries should not just restrict their demands to market access in lucrative markets of the developed countries but also should look into tax credits, subsidies, and import taxes. He stresses the need to give poor countries the power to experiment with their own institutional restructuring and the space to devise their own solutions to their development problems, and the importance of institutional structures being tailored and sensitive to local demands.  13  Amartya Sen, Development as Freedom (New York: Anchor Books, 1999); Firoze Manji, Book Review of Development as Freedom by Amartya Sen (2010) Oxford University, Department of Continuing Education, online: <http://socialtheoryblog.files.wordpress.com/2010/04/developementasfreedom-by-manji.pdf>; Amitrajeet A. Batabyal, Book Review of Development as Freedom by Amartya Sen (2000) 12:2 Journal of Agriculture & Environmental Ethics at 227-229, online: <http://springerlink.com/content/r5m6328t6878lw21/fulltext.pdf>; Sabina Alkire, “Structural Injustice and Democratic Practice: The Trajectory in Sen’s Writings” (2006) 19:1 Library of Ethics and Applied Philosophy at 47-61, online: <http:www.springerlink.com/content/r712246564q32153/>; Amartya Sen, The Idea of Justice (Cambridge, MA: Harvard University Press, 2009); Steven Poole, Book Review of The Idea of Justice by Amartya Sen The Guardian (7 November 2009) Page 8, online: <http://guardian.co.uk/books/2009/nov/07/amartya-sen-justice-book-review>. 14  Dani Rodrik, One Economics. Many Recipes: Globalization, Institutions, and Economic Growth (Princeton, NJ: Princeton University Press, 2007).  23  These views of prominent economists reflect the diversity in Development Economics. Various approaches present analysis of elements often overlooked in the discussion on standard economics and law, and alternative strategies are available to facilitate the development of poor countries. A brief overview of the leading economic scholars’ views on development reveals that there are numerous aspects of the development predicament for poor countries. There is consensus among the leading scholars, policy makers, and regulators that there is no magic wand for developing countries which would help them transition from underdeveloped to developed or middle-class countries. All the elements mentioned above— aid, the role of the state, institutions (international and national), industrial and technological development, manufacturing sector, protectionism, free trade, and free markets—are important, but how do we make them work for the poor countries? This still remains a myth for many of us. It is pertinent to note that poor and developing countries are scattered around the globe and have diverse cultures, social, political, and economic structures, geography, institutions, and outlooks on the ways and means to achieve prosperity, progress, and development. There can be no precise or simple answers to such complex problems. However, it is not difficult to identify that keeping in view their legal, institutional, and governance structure, it is the country’s government/state itself which should be the fountain of all efforts to address the problem of underdevelopment. The situations in Haiti, Somalia, Sudan, Afghanistan, Pakistan, and Iraq amply illustrate the need for a strong state structure. Irrespective of the kind of economic system a country has—i.e. whether planned or market economic—it needs strong institutions, good laws, good governance, rule of law, equality before the law, due process of law, and protection of property rights, liberty, and individual freedom to develop properly. It is imperative to mention here that due to the weak state structure in poor and developing countries, the state is mostly dependent on the capital/monetary-technical support from the IFIs, regional development banks, the international development agencies (U.S. AID, CIDA, AusAid, etc.) and governments from industrialized countries. Most of these organizations are providing capital aid in the form of loans, grants, and technical and policy assistance to initiate reforms to alleviate poverty, build infrastructure (roads, highways, buildings, schools,  24  universities, hospitals, basic health units), strengthen institutions, promote good governance, enhance human capacity, promote trade, attract foreign investment, and increase exports. As a result, these non-state entities have an important role in the nation building process and are vital players in the execution of the development agenda in the borrowing and donor countries. We have long experimented with various development models, from state-led development models to today’s poverty labs to eradicate poverty, but without substantial gains against poverty. The failure of the efforts on poverty reduction and development can be attributed to multiple factors, but the most important are the lack of sincerity on behalf of the political leadership in poor and industrialized countries; IFI reliance on inappropriate policies based on assumptions, inadequate ideologies and theories that are detached from reality; legal and institutional structures in the poor and industrialized countries; and the lack of coordination between the poor countries, the industrialized countries and the IFIs. The failure stems from the transplantation of ideologically structured economic models, which are most of the time divorced from the prevailing conditions of the poor countries. The policy reforms prescribed by the IFIs and the WTO have perpetuated the control of industrialized countries over poor countries and the control of the local elite over poor people in the developing countries. The policy recommendations of the IFIs, instead of resolving the problem, further aggravate it and become part of the problem. 2.4  Chapter Overview  This chapter will discuss the following issues: i.  Who should be the agents of development: markets or government, and why?  ii.  Why can’t the market be the generating force of economic development in developing countries?  iii.  How can law and institutions prove instrumental in providing a strong framework for the development of poor countries? The importance of law and institutions for poor countries will be analyzed in the theoretical framework of Professor Douglas C. North’s views on Institutions, Institutional Change, and Economic Development.  iv.  Can law facilitate market development? If so, how?  25  v.  What are the flaws with the theory of Comparative Advantage in the context of Development Economics, how are the WTO rules based on comparative advantage insulated from the development needs of the poor countries, and how do those rules perpetuate poverty?  vi.  In the context of Pakistan, what can be the appropriate strategy?  The IFIs and the WTO have been advocating policies known as the Washington Consensus, mainly postulating liberalization, privatization, deregulation, free trade, and investment as a new mantra for development in poor countries. However, the recent experience with these policies has dented their claim to address the development needs of poor countries, and rather perpetuates the poverty of these countries. The most famous of the policies is the reduction of state intervention in the country’s economy, resulting in free trade based on comparative advantage. It is, therefore, important to analyze the role of the state in the Washington Consensus policies and to identify the inherent flaws of free trade based on comparative advantage. The law and development movement has been under constant shift since its origination after the World War II. It is imperative to shed some light on the origination and traits of the classic law and development movement, which is significant in order to understand the impact of economic policies in shaping the structure of law and its role in development. The classic law and development movement originated in the 1960s after World War II; it was based on Development Economics theories emphasizing the active role of the state in driving the economy of a country. The state was responsible for the formulation and implementation of all economic, industrial, and development policies. Major industrial enterprises were owned by the state and the private sector was considered inadequate for promoting economic development. The policy of import substitution industrialization (ISI) was pursued by most of the developing countries around the globe with the aim of protecting their infant industrial and manufacturing base by insulating their economies from world markets.15 The law and  15  David Trubek, “The Rule of Law in Development Assistance: Past, Present and Future” in David Trubek & Alvaro Santos eds., The New Law and Economic Development: A Critical Appraisal (New York: Cambridge University Press, 2006) at 74.  26  development movement of the 1960s-70s was the logical offshoot of the modernization theory.16 The modernization theory attributed the underdevelopment of the developing countries to their adherence to local culture, traditions, and social and institutional structure.17 One of the proponents of Modern Theory, Walt Rostow, contended that development would be achieved in developing countries if they emulated the practices, experience, and development strategies of the developed countries. Consequently, the developing countries of Africa, Asia, and Latin America adopted the state-led ISI development model that gave state an active role in engineering and managing the economy of a country.18 The enhanced role of the state required laws, regulations, and legal institutions empowering the state to steer and transform economic behaviour. Legislation in the state-centred model served as a tool for national economic planning, and law created the essential framework for the management of the industrial and manufacturing sector. Hence, scholars, academics, policy makers, and development agencies adopted the functionalist/instrumentalist conception of law, using law as a tool to facilitate state-led development efforts.19  16  The key works advocating this movement include Walt Rostow, The Stages of Economic Growth: A NonCommunist Manifesto (Cambridge: Cambridge University Press, 1960); Theodore W. Schultz, Transforming Traditional Agriculture (New Haven, CT: Yale University Press 1964); and Neil Smelser, “Towards a theory of Modernization” in Neil Smelser, Essays in Sociological Explanation (Englewood Cliffs, NJ: Prentice Hall, 1968) 125. To track the latest debate on the issue see Waltraud Schelkle et al., Paradigms of Social Change: Modernization, Development, Transformation, Evolution (Frankfurt & New York: Campus Verlag & St. Martin’s Press, 2000). For earlier views see Emile Durkheim, The Division of Labour in Society [1893] trans. by W.D. Halls (London: MacMillan, 1984) and Max Weber, The Protestant Ethic and the Spirit of Capitalism, trans. by Talcott Parsons (London & Boston: Allen and Unwin, 1930). 17  John Isbister, Promises Not Kept: Poverty and The Betrayal of Third World Development (Bloomfield, CT: Kumarian Press, 2003) at 32-41. 18  Kevin Davis & Michael Trebilcock, “The Relationship between Law and Development: Optimists versus Skeptics (2008) 56:4 Am. J. Comp. L. at 899. 19  The functionalist approach refers to law as an instrument for the achievement of economic goals. See Roscoe Pound, “Law in Books and Law in Action” (1910) 44:12 Am. L. Rev. 12, accessed 16/08/2011 online: <http://heinonline.org/HOL/LuceneSearch?searchtype=advanced&submit=Go&search_within=&prev_q=&pre v_origterms=&cited_by=&maxresults=25&terms=creator:%22%20Pound,%20Roscoe%20%22&origterms=cre ator:%22%20Pound,%20Roscoe%20%22&termtype=word&termtypea=&termtypeb=&termtypec=&sortby=rel evance&collection=journals&specialcollection=&operator=&operatorb=&termsa=&termsb=&termsc=&typea= &other_cols=&typeb=&typec=&yearlo=&yearhi=&all=&solr=true&dontsave=1&current_historical=&latest= &journal=ALL&subject=ANY&authority_type=&country_code=&collections=&jump=true&firstdoc=100&ini tcounter=124&base=>; Peer Zumbansen, “Law After the Welfare State: Formalism, Functionalism and the Ironic Turn of Reflexive Law” (2008) 56:3 Am. J. Comp. L. at 769-808, accessed 16/08/2011 online: 27  The instrumental use of law prompted legal transplantation in developing countries. The early law and development movement was focused on state-led development and according to leading practitioners and scholars of that time most of the developing countries had virtually non-existent laws and legal institutions. The developing countries, therefore, transplanted the modern legal institutions of the developed world, focusing on economic laws to stimulate economic development, resulting in the creation of a liberal democratic setup. However, the state-centric model lost its spark in the early 1970s due to ideological shifts in the global political economy. Due to the international economic order given by the Bretton Woods institutions, many developed and developing countries adopted the state-centric model based on Keynesian economics. International development regimes based on Keynesian economics encouraged protectionism, however the global trend towards development underwent a paradigm shift in 1980s towards market-led development through promotion of policies of privatization, deregulation, liberalization, and competition.20 The vigorous adoption of these policies by the developed countries and implementation of them by IFIs in the developing and poor countries substantially undermined the utility of the previous state-centric model.21 Under the neoliberal economic order, the market-centric development model was adopted, which marked the beginning of new orthodoxy: market-centred rule of law in the law and development movement.22 Under the neoliberal order of law and development, the main function of law was the dismantling of state-run institutions to minimize state interference in economic policy/decision making and hand it over to the market. The new restructuring demanded new legal perimeters to facilitate the efficient working of the markets: new corporate/commercial laws, finance, banking, insurance, privatization, trade, competition, <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1128144>; and <http://heinonline.org/HOL/Page?handle=hein.journals/amcomp56&id=775&collection=journals&index=journ als/amcomp>. 20  David Trubek, supra note 15 at 80-82.  21  Ibid. at 82-83; F. Charles Sherman, “Law and Development Today” (2009) 10:9 German Law Journal at 1263. 22  John Ohnesorge, “Developing Development Theory: Law and Development Orthodoxy and the Northeast Asian Experience” (Spring 2007) 28:1 U. Pa. J. Int’l Econ. L. 219, accessed 17/08/2011 online: <http://heinonline.org/HOL/Page?handle=hein.journals/upjiel28&id=223&collection=journals&index=journals/ upjiel>.  28  foreign investment, consumer protection laws, and regulations that substituted private law for the public law as a tool to regulate the economy.23 There was again another phase of transplantation in the developing and poor countries based on an unflinching belief that the implantations of Western style, market-based laws, and institutions would be sufficient for economic development of developing countries. The contemporary trend in law and development tries to synthesize the earlier law and development models of the 1950s and 1960s24 and the neoliberal approach based on the Washington Consensus to create a more balanced, innovative and collaborative approach towards the relationship between state and market, called “New Developmentalism” or “New Development State”.25 Economist Justin Yifu Lin of the World Bank has made this recent attempt. In his recent work on structural economics, Lin argued for state support in those sectors of the economy where the country has a comparative advantage instead of investing money in underdeveloped sectors of the economy.26 Lin has attempted to combine the elements of neoliberal regime and traditional structural economics. He supports market determination of the comparative advantage of the country and argues for a supportive state role to promote the comparative advantage. Lin’s New Structural Economics (NSE) approach highlights the imperfections of the market and the government and by extending on those imperfections constructs a hybrid model: state-market partnership.  23  David Kennedy, “The ‘Rule of Law’, Political Choices, and Development Common Sense” in David Trubek & Alvaro Santos eds., The New Law and Economic Development: A Critical Appraisal (Cambridge: Cambridge University Press) 95, accessed 17/08/2011 online: <http://www.law.yale.edu/documents/pdf/Intellectual_Life/LTW-Kennedy.pdf>. 24  David Trubek & Marc Galanter, “Scholars in Self-Estrangement: Some Reflections on the Crisis in Law and Development Studies in the United States” (1974) 4 Wis. L. Rev. 1062, accessed 13/08/2011 online: <http://heinonline.org/HOL/Page?handle=hein.journals/wlr1974&id=1074&collection=journals&index=journal s/wlr>. 25  David Trubek, “The Owl and the Pussy-cat: Is there a future for ‘Law and Development’?” (2007) 25:2 Wis. Int’l L.J. at 235-242, accessed 20/08/2011 online: <http://heinonline.org/HOL/Page?handle=hein.journals/wisint25&id=215&collection=journals&index=journals /wisint>; F. Charles Sherman, supra note 21; Kevin Davis & Michael Trebilcock, supra note 18 at 895-946. 26  Justin Yifu Lin, “New Structural Economics: A Framework for Rethinking Development” (August, 2011) 26:2 World Bank Research Observer 194, accessed 28/08/2011 online: <http://wbro.oxfordjournals.org/content/26/2/193.full.pdf+html>.  29  Generally speaking, NSE considers the factors of endowment; industrial structure; the distinctions in the industrial structures at multivariate levels of development; the forms of government interventions formulated by the policy makers; and the inability of the Washington Consensus to understand the structural differences in the developing countries.27 Based on these historical lessons, Lin proposes an analytical framework that specifically considers these factors and infrastructure endowments. The framework considers the various stages of development, the relevant social, political, and economic structures of developing countries, the role of the state and the market at different stages of development, and the intricacies of the shift from one level to another. It identifies the economic distortions, their causes, and the government mechanisms to deal with such distortions.28 Based on the aforementioned considerations, Lin proposes a facilitative state role in developing markets and promoting the comparative advantage of the country. The proposal has reignited the old debate about defining the state’s role and setting the limits for its intervention in the market. Lin argues in favour of the state resuming its leadership role in transforming and upgrading “hard (tangible)” and “soft (intangible)”29 infrastructure that will reduce transaction costs for businesses and investors. He then gives some fiscal, monetary, financial development, foreign capital, and trade policy insights for structuring development efforts in the developing and poor countries.30 Lin contends that if a developing country supports industries according to its comparative advantage it will have strong and stable financial base to confront internal and global crises. Industrial development based on comparative advantage will make the economy more competitive and more efficient due to the likelihood of good trade performance. Lin’s policy recommendations urge substantive government involvement through upgrading of industrial, infrastructure, technological innovation, investment in education, and human development.31 27  Ibid.  28  Ibid.  29  Ibid. at 201. Examples of hard infrastructure given by Lin are highways, port facilities, airports, telecommunication systems, and electricity grids. Examples of soft infrastructure are institutions, regulations, social capital, value system, and the social and economic system. 30  Ibid. at 207-212.  31  Ibid. at 207-213. 30  Lin concludes his policy recommendations with the contention that his work is not an attempt to replace an ideology, but rather an approach focusing on the endowment structure of a country and the structural differences between the developed and developing countries in the context of relevant institutional structure, policies, and limitations and opportunities for the private sector. His approach encourages intensive, innovative country-based research that is in consonance with the development realities of the country.32 Lin’s work has come under criticism from some leading scholars for a lack of novelty and for self-conflicting arguments. It is said that there is nothing new in his work and he is reproducing what has already been done. Critics suggest that the argument of industrial upgrading is in consonance with import substitution policies, and the argument that the state should facilitate industries promoting comparative advantages negates both the theory of comparative advantage and the import substitutions. Furthermore, the promotion of the industrial sector at the cost of other sectors is not feasible. Finally, the state interference would result in the resumption of rent-seeking behaviour of the state.33 There are various dynamics to the arguments Lin advances, but I will focus on the two key components: the new role the state can assume and the theory of comparative advantage. First, I will demonstrate the importance of the state in creating a market-friendly environment in the developing countries and how the appropriate institutional edifice—an open, transparent, accountable mechanism supplemented by development oriented appropriate laws, regulations and policy initiatives—can promote development without nurturing the rent-seeking behaviour of the state. However, the state should not just focus on promoting industries supporting comparative advantage but also should help develop industries defying the comparative advantage of the country.  32  Ibid. at 214.  33  Anne Krueger, “Comments on ‘New Structural Economics’ by Justin Yifu Lin” August, 2011) 26:2 World Bank Research Observer 222, accessed 26/08/2011 online: <http://wbro.oxfordjournals.org/content/26/2/193.full.pdf>; Dani Rodrik, “Comments on ‘New Structural Economics’ by Justin Lin (August, 2011) 26:2 World Bank Research Observer 227, accessed 26/08/2011 online: <http://wbro.oxfordjournals.org/content/26/2/193.full.pdf>.  31  2.5  What is the Role of the State?  The importance of the state in creating a market-friendly environment and facilitating its development cannot be overemphasized. An example is the efforts of the international community, led by the United States, in Iraq, Afghanistan, and Haiti, putting in place strong and stable governments that could take those countries’ security and governance into their own hands. Afghanistan has been the battlefield for a proxy war between the Soviet Union and the U.S. and now between Al-Qaeda, the Taliban, and the U.S.34 The suicide bombs on a daily basis, attacks on United Nations offices, and daily attacks on foreign military bases are enough to paint a picture of law and order problems. In such a scenario, a free trade and market model is not appropriate for development. The basic requirements for a free trade and market are non-existent as the basic requirements of statehood, such as government, administration, legislature, and executive, are absent. In such circumstances, it is unrealistic to suggest a minimal state role and assume that the adoption of liberalization, deregulation, and free trade will ipso facto lead to Afghanistan’s long-term development. The free trade and market posture might encourage the multinational corporations to invest in Afghanistan’s natural resource exploration but might not help her to explore the natural resource herself. The fundamental reason for the failure of free trade and market policies for people in Afghanistan is the absence of a basic governance structure in the country. The people of Afghanistan do not have the basic rules of engagement and institutions to regulate their interaction. The appropriate strategy would be to give a dominant role to the state in structuring a strong legal, regulatory framework to run the affairs of the country, including the economy and the markets, by involving all the stakeholders. The existence of a strong government is a prerequisite for development. The creation of strong legal and regulatory framework will 34  The efforts to establish an effective and sustainable government and democracy have borne minimum success. The efforts are focused on establishing a strong government structure in the country to establish rule of law, government institutions, governance mechanism, police to enforce law, courts to administer justice, and military to defend the country against the Taliban, ensuring the existence of the government to deliver basic public services like schools, colleges, universities education, clean drinking water, hospitals, and housing. The country does not have any industrial, manufacturing base to integrate itself into an international economy.  32  facilitate the establishment of stable and sustainable government. The existence of stable government would provide the basic minimum framework to erect infrastructure, identify the areas where it has comparative advantage, further develop advantage, and promote export.35 In countries like Afghanistan, the reason that free trade is not taking place to benefit the people is not interference by the state but rather the non-existence of the state. If a country like Afghanistan follows protectionism, she would be justified in doing so to create an environment for developing the country’s natural resource, agriculture, industrial and manufacturing base. In addition, international financial institutions like the IMF, WB, WTO and regional development banks, recognizing the development needs of the country, should exempt Afghanistan from strict requirements of their conditionalities and provide technical assistance for the development of trade. The industrialized countries would have to go beyond expectations and share the benefits of free trade with poor countries like Afghanistan by giving open access to products from Afghanistan. The same strategy might work for Pakistan but with different conditions tailored to its circumstances. 2.5.1 Pakistan Compared to Afghanistan, Pakistan has a strong infrastructure, government, and legal and institutional structure. It is much stronger economically, with a sound agricultural, industrial, and manufacturing base. Geographically it is connected to the sea and has borders with India, Iran, Afghanistan, and China. However, compared to other countries in the region like India, Bangladesh, and China, its pace of development is slow. Pakistan so far has good relations with the international financial and trade organizations. The Government of Pakistan has complied with most of the conditionalities of the IMF, WB, and WTO. The conditionalities have mostly been aimed at promoting neoliberal free market policies in the country. Most of the public-owned enterprises have been privatized and  35  Supra note 26 at 193-221, accessed 26/08/2011 online: <http://wbro.oxfordjournals.org/content/26/2/193.full.pdf>. For critique see Joseph E. Stiglitz, “Rethinking Development Economics” (August, 2011) 26:2 World Bank Research Observer 230, accessed 26/08/2011 online: <http://wbro.oxfordjournals.org/content/26/2/193.full.pdf>.  33  independent regulatory authorities have been established.36 The role of the government has been minimized to a great extent, but still the development strategy based on a free market model has not worked well for the poor people of Pakistan. The failure of free trade neoliberal policies can primarily be attributed to the double standards of the developed countries. The developed countries, even after reaching their development standards, are still observing protectionist policies and still have protectionist laws in force. Failure can also be attributed to the laws and institutions at the national and international level, which do not address the development complexities of the poor people and the country as a whole. The control of the governance, policymaking and development structure by industrialized countries and the IFIs and the WTO has complicated and inhibited development in Pakistan. In addition, there are some internal national factors37 specific to Pakistan. Any critical analysis of Pakistan’s trade policy and development strategy should incorporate these externalities. For the purpose of this research I will elaborate how these externalities (with a focus on legal and institutional structure) interact with imperfections in the international trade regime to inhibit the development of Pakistan. Given the aforementioned constraints, Pakistan has limited room to make independent decisions in opting for either protectionism or free trade. However, while remaining within its limitations the country has to balance out the role of the state and the market. The circumstances of the country demand a strong, sustainable, and trust-based partnership between the government and the market, with a dominant and flexible state. Such a development model demands a strong and stable institutional structure equipped with the legal authority and will to implement the law in letter and spirit, which would go a long way towards creating a market-friendly environment.  36  Pakistan Electronic Media Regulatory Authority; Oil and Gas Regulatory Authority; Pakistan Telecommunication Authority; Pakistan Nuclear Regulatory Authority; Privatization Commission of Pakistan; State Bank of Pakistan; National Power Regulatory Authority; Public Procurement Regulatory Authority; Security and Exchange Commission of Pakistan; Small and Medium Enterprises Development Authority (SMEDA). 37  Obsolete legal and institutional edifice, absence of rule of law, bad governance, lack of accountability, lack of transparency, absence of checks and balances within organization and different branches of the government (i.e. legislature, judiciary, and executive), the political, economic, social and cultural framework of the country, and the incompetency of the political and military leadership.  34  Unfortunately, in Pakistan the public institutional structure is weak and the laws are either obsolete or ineffective, which means that deregulation or privatization will leave the public at the mercy of the unregulated markets. Pakistan does not have the capacity to bear the risks attached with unregulated markets under the existing conditions. Unregulated markets can lead to financial crisis under the best conditions; the current global financial crisis in developed countries reinforces this point. In the absence of strong, open, transparent, and accountable regulatory institutions, the unregulated markets in Pakistan would cater to the greedy, corrupt, and wealthy politicians, industrialists, and bureaucrats at the cost of public good. Therefore, the state has an important role to play to create stable and strong markets able to deliver public goods. I believe that internally Pakistan needs rules based, institutionalized public-private partnership structure with dominant state role. Any such structure should primarily focus on development, delivering public good and services, and encourage stakeholder participation based on a checks and balance system. The IMF and WB should attach such conditionalities with their loans to promote transparent and accountable public-private partnership. In the next section, I am going to explain the role of law and institutions for creating trade and an investment-friendly atmosphere. 2.6  Role of Law and Institutions  Just a glimpse of the trade policies pursued by the developed countries in the past proves that the policy objectives were achieved through legal tools, Acts and statutes passed by the parliament and legislature. Historical analysis of the policies adopted by the U.K. and the U.S., the two leading countries, reinforces the fact that today’s developed countries have achieved their current status not only by involving themselves in economic activities producing increasing returns and technological innovation, but also through vigorous pursuit of the path of protectionism rather than free trade. For instance, the Corn Laws, the Navigation Act, and the Wool Act increased protectionism in the U.K. England enacted protectionist laws to protect its manufacturing sector, especially  35  the textile sector. The Corn Laws38 protected grain farmers and the Navigation Acts39 protected England’s shipping industry. The repeal of the Corn Laws is often held up as an example set by England, but what is often overlooked is that at the time the repeal was announced England still had high duties put in place against products from France.40 The  38  For details of statutes enacted with the purpose of increasing government revenues and ultimately creating protective impact read Ralph Davis, “The Rise of Protection in England 1689-1786” (1966) 19:2 Economic History Review New Series at 306-317. The extent and duration of British protectionism can be gauged from the fact that Edward III’s statute of 1337, which prohibited the import of woollen clothes in England, remained in force until the seventeenth century, as quoted by the customs manuals of the eighteenth century. These protectionist measures remained in force for well over three centuries. Then, in order to protect the English textile industry from the cheap textiles coming from China and India, a 20 percent special duty was imposed and in 1701 an Act called An Act for the more effective employing the poor by encouraging the Manufactures of this Kingdom was enacted which completely prohibited textile imports from India and China. For details also read William J. Bernstein A Splendid Exchange: How Trade Shaped the World (New York: Atlantic Monthly Press, 2008) at 280-300; Ralph Davis, “English Foreign Trade 1660-1700” (1954) 7:2 Economic History Review, New Series at 150-166. For detailed analysis of political conditions of the time and debates going on in the country read John Maloney, “Gladstone, Peel and the Corn Laws” in Andrew Marrison, Geriant Parry & Hillel Steiner, eds., Free Trade and its Reception 1815-1960: Freedom and Trade, vol. 1 (London & New York: Routledge, 1998) at 28-45; Betty Kemp, “Reflections on the Repeal of the Corn Laws” (March, 1962) 5:3 Victorian Studies at 189-204; G. Kitson Clark, “The Repeal of the Corn Laws and Politics of the Forties” (1951) 4:1 Economic History Review, New Series at 1-13; T. J. McKeown, “The Politics of Corn Law Repeal and Theories of Commercial Policy” (July, 1989) 19:3 British Journal of Political Science at 353-380; Alon Kadish, “Free Trade and High Wages: The economics of the Anti-Corn Law League” in Andrew Marrison, Geriant Parry & Hillel Steiner, eds., Free Trade and its Reception 1815-1960: Freedom and Trade, vol. 1 (London & New York: Routledge, 1998) at 14-27; Douglas A. Irwin, “Political Economy and Peel’s Repeal of the Corn Laws” (Spring 1989) 1:1 Economics and Politics at 41-56; John Gallagher & Ronald Robinson, “The Imperialism of Free Trade” (1953) 6:1 Economic History Review, New Series at 1-15; C.P. Kindleberger, “The Rise of Free Trade in Western Europe 1820-1875” (1975) 35:1 Journal of Economic History at 30-31; and Mehdi Shafaeddin, “How did Developed Countries Industrialize? The History of Trade and Industrial Policy: The Cases of Great Britain and the USA” UNCTAD/OSG/Discussion Paper 139 (December 1998) at 2-10. 39  David J. Loschky, “Studies of the Navigation Acts: New Economic Non-History?” (1973) 26:4 Economic History Review New Series at 689-691; J.E. Farnell, “The Navigation Act of 1651, the First Dutch War, and the London Merchant Community” (1964) 16:3 Economic History Review New Series at 440; J.H. Clapham, “The Last Years of the Navigation Acts” (1910) 25:99 English Historical Review at 480-501; Larry Sawers, “The Navigation Acts Revisited” (May 1992) 45:2 Economic History Review New Series at 262-284; Bruce Bartlett, “The Truth About Trade in History”, accessed online 10/06/2010: <http://www.cato.org/pub_display.php?pub_ id=10983>; J.H. Clapham, “The Last Years of Navigation Acts” (July 1910) 25:99 English Historical Review at 480-501; Ha-Joon Chang, Kicking Away the Ladder: Development Strategy in Historical Perspective (London: Anthem Press, 2002). The colonial merchants had the firm belief that the abolition of the Navigation Laws would abolish their dominance and they would be taken over by American merchants. The Scottish and English control over the Atlantic tobacco trade created resentment amongst the planters and made them believe that British merchants intend to make them bankrupt and take control of their possessions. This view had gained such widespread acceptance in the colonies that Thomas Jefferson also bought this argument. The planters complained of low prices and falling profits in the tobacco business, which forced most of them (for example George Washington) to become wheat farmers. These actions created resentment amongst the public and were among the causes of the American Revolution. 40  John Vincent Nye, “The Myth of Free-Trade Britain and Fortress France: Tariffs and Trade in the Nineteenth Century” (March, 1991) 51:1 Journal of Economic History at 23-46; For counter-arguments read Douglas A. Irwin, “Free Trade and Protection in Nineteenth Century Britain and France Revisited: A Comment on Nye” 36  hypocrisy of the industrial class proposing repeal of the Corn Laws can be illustrated by the fact that their movement argued for repeal but favoured government measures protecting the industrial and manufacturing sector of the country.41 In the U.S., the Morrill Act 1861, the McKinley Act 1891, the Dingley Act 1897, the FordneyMcCumber Act 1922, and the Smooth Hawley Act 1930 increased American tariffs and promoted protectionism.42 A comparative analysis of protectionism in England and the U.S. reveals that the U.S. was more protective during its free trade period (1913-1929) than England (1860-1932).43 The U.S. shifted towards free trade after the Second World War, only after it had achieved industrial, technological and manufacturing supremacy. The U.S. technological edge (which is dwindling) in industries such as computers, aerospace, and the Internet would have been impossible to achieve without significant government contributions in defense-related research and development work.44 It is not that this trend has changed in the 21st century; rather the protectionist measures have assumed different forms and shades. For instance, recently U.S. President Barak Obama signed into law the American Recovery and Reinvestment Act, 2009, which is worth $787 billion in government spending. The Act has clauses that intend to help the steel, iron, and manufacturing industries by  (March, 1993) 53:1 Journal of Economic History at 146-152. For arguments against Irwin see John Vincent Nye, “Reply to Irwin on Free Trade” (March, 1993) 53:1 Journal of Economic History at 153-158. 41  In 1699 England prohibited the export of woollen products from the Colonies under the Wool Act. The Act stopped the export of woollen clothes from England’s colonies to other countries, which badly damaged the Irish and American Wool Industry. In 1700 a ban was imposed on the imports of superior Indian Cotton Products. In 1732 England introduced another law to stop the progress of the beaver-skin industry in America by prohibiting the export of such hats to other colonies and countries. England also stopped the authorities from using tariffs to muster their revenue sources even though there was a genuine need. In 1859 the British Colonial Government in India imposed import duty ranging from three to ten percent to meet fiscal needs; to achieve the financial objectives they taxed local producers to the same extent to establish a level playing field. Even then the British Cotton manufacturers were not satisfied and kept the government under constant pressure to repeal the duties, which they ultimately managed to achieve in 1882. In the 1890s the colonial government of the time imposed tariffs on cotton products (in order to protect the Indian Cotton Industry) but the British Cotton Textile group managed to stop the government. For details read supra note 5 at 22, 23, 52 and 53; Paul Bairoch, Economics and World History: Myths and Paradoxes (Brighton, U.K.: Wheatsheaf, 1993) at 89. For more details on the protectionism granted to the manufacturing sector while the agriculture sector was protected through the Corn Laws, read Mehdi Shafaeddin “How did Developed Countries Industrialize? The History of Trade and Industrial Policy: The Cases of Great Britain and the USA” UNCTAD/OSG Discussion Paper 139 (December 1998) at 2-10, online: <http://unctad.org/en/Docs/dp_139.en.pdf>.  37  motivating consumers to help the nation by buying U.S.-made goods.45 The Act has been put in place in clear violation of the country’s commitments under the agreements of the WTO. The United States, notwithstanding its support for free trade, has opted for a protectionist path to facilitate their recovery from the current financial crisis.46 British Prime Minister Gordon Brown stated in his speech to the U.K. Department for International Development DFID Annual Conference in 2009:  42  Michael Bailey, Judith Godstein & Barry R. Weingast, “The Institutional Roots of American Trade Policy: Politics, Coalitions and International Trade” (April 1997) World Politics 49:3 at 311. 43  Supra note 6 at 30.  44  H. Shapiro & L. Taylor, “The State and Industrial Strategy” (1990) 18:6 World Development at 866. Shapiro and Taylor sum it up in most appropriate manner: “Boeing would not be Boeing, nor would IBM be IBM, in either military or commercial endeavours without Pentagon contracts and civilian research support” 866. 45  American Recovery and Reinvestment Act 2009, §. 1605 Use of American Iron, Steel, and Manufactured Goods. (a) None of the funds appropriated or otherwise made available by this Act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron, steel, and manufactured goods used in the project are produced in the United States. (b) Subsection (a) shall not apply in any case or category of cases in which the head of the Federal department or agency involved finds that-(1) applying subsection (a) would be inconsistent with the public interest; (2) iron, steel, and the relevant manufactured goods are not produced in the United States in sufficient and reasonably available quantities and of a satisfactory quality; or (3) inclusion of iron, steel, and manufactured goods produced in the United States will increase the cost of the overall project by more than 25 percent. (c) If the head of a Federal department or agency determines that it is necessary to waive the application of subsection (a) based on a finding under subsection (b), the head of the department or agency shall publish in the Federal Register a detailed written justification as to why the provision is being waived. (d) This section shall be applied in a manner consistent with United States obligations under international agreements. Online: <http://www.canadainternational.gc.ca/sell2usgov-vendreaugouvusa/procurement-marches/ARRA. aspx?lang=eng#1605>. See also “The Peril of ‘Buy American’”, Editorial (3 June 2009) New York Times A 26, online: N.Y.Times.com <http://www.nytimes.com/2009/06/03/opinion/03weds1.html?_r=1 &pagewanted =print>; Daniel R. DiMicco, Chief Executive Officer and Chairman of the Board of Nucor Corporation and Independent Director, Duke Energy Corporation (who lobbied hard for the insertion of a Buy American Clause in a recent government economic stimulus package) in an interview with Lesley Stahl on CBS News 60 Minutes commented on free trade: “Yes, Buy America Clause benefits steel industry in United States absolutely! But what we are saying also is that my that concept also benefits [the] US economic engine [to] get started again”. In reply to a question about whether it might result in a retaliatory action against the United States DiMicco replied: “it’s all garbage. People can say whatever they want. I am the person who says there is no such thing as ‘Free Trade’; Free Trade is an academic luxury that real world does not enjoy; if you want to study it at Harvard, study it at Harvard. It doesn’t work in a real world, it has no application”, accessed 7/04/2011, online video: <http://www.cbsnews.com/video/watch/?id=5037292n&tag=related;photovideo>.  38  Now there are those who say that to talk of common interests and how we can work together weakens the moral case. But I don’t share that view. I am passionate about development because I cannot countenance a world in which a child dies because they are too poor to live, because they don’t have enough access to clean water or because they don’t have a mosquito net. But I am passionate about development also because I believe in its transformative effects—its potential to help us create the global society that will benefit us all. So in the run-up to this London Summit we will work with the World Bank and our G20 partners to build support for a new fund specifically to help the world’s poorest through the downturn. Too often our responses to past crises have been inadequate or misdirected, promoting economic orthodoxies that we ourselves have not followed and that have condemned the world’s poorest to a deepening crisis of poverty.47  Former President George W. Bush commented in his book about his decision to handle the financial crisis by involving the government: The Strategy was a breath taking intervention in the free market. It flew against all my instincts. But it was necessary to pull the country out of the panic. I decided that the only way to preserve the free market in the long run was to intervene in the short run.48  Similarly, President Obama, while addressing the graduation ceremony of the Columbus Police Division 114th class, stated: Four point four million jobs. I don’t need to tell the people of this state what statistics like this mean, because so many of you have been watching jobs disappear long before this recession hit. And I don’t need to tell this graduating class what it’s like to know that your job might be next, because up until a few weeks ago, that is precisely 46  Rob Gregory et al., “Trade and the Crisis: Protect or Recover” IMF Staff Position Note SPN/10/07 (16 April 16 2010), accessed 08/02/2011 online: International Monetary Fund <http://www.imf.org/external/pubs/ft/spn/2010/spn1007.pdf>. 47  Gordon Brown, “Seizing the Opportunity to help the Poor” (Address given at the United Kingdom Department of International Development Annual Conference, 9 March 2009). National Archives, Government of the United Kingdom, accessed 11/02/2011 online: <http://webarchive.nationalarchives.gov.uk/+/ http://www.dfid.gov.uk/news/files/Speeches/pm-conf-speech.asp>. 48  George W. Bush, Decision Points (New York: Crown, 2010) at 458. In his interview with anchor Matt Lauer on Dateline NBC on the question of the American financial meltdown, President George W. Bush stated: “So the decision point here is that you either adhere to your policy and say let him all fail its free market; or you take taxpayers’ money and inject it into the system and hope that you prevent a depression and I chose the latter. I abandoned the free market to save the free market system. And I also say that my friends in Midland are going to say what happened to Bush? But when you are the President and somebody say hey if you don’t do something strong there may be a depression it gets your attention at least it got mine. The idea of taxpayer money to Wall Street and the banks to save them lot of people think that created a crisis in the first place. So I can understand the ant but in my case I am not going to worry about my personal ant or contradictions as worried about the economy going down and I believe that TARP saved the economy. Wall Street got drunk and we got hung over”, accessed 05/04/2011 online: <http://www.youtube.com/watch?v=bx2rxF67L_E& feature=related>.  39  the future that this class faced—a future that millions of Americans still face right now. Well, that is not a future I accept for the United States of America. (Applause.) That is why I signed the American Recovery and Reinvestment Act into law. (Applause.) Now there were those—there were those who argued that our recovery plan was unwise and unnecessary. They opposed the very notion that government has a role in ending the cycle of job loss at the heart of this recession. There are those who believe that all we can do is repeat the very same policies that led us here in the first place. But I also know that this country has never responded to a crisis by sitting on the sidelines and hoping for the best. I know that throughout our history, we have met every great challenge with bold action and big ideas. That’s what’s fueled a shared and lasting prosperity. And I know that at this defining moment for America we have a responsibility to ourselves and to our children to do it once again. We have a responsibility to act, and that’s what I intend to do as President of the United States of America. (Applause.)49  Similarly, France has adopted the same posture in light of the recent financial crisis. France, a key Canadian ally in persuading the European Union to launch negotiations in 2008 aimed at reaching a Canada-EU deal, initiated a controversial measure to promote French industry. French Industrial Minister Christian Estrosi, in order to secure the interest of many French companies, reduced the high unemployment in the country and established a monitoring agency that will ensure that a percentage of locally manufactured products are made up of components made in France.50 He stated: What is important is the number of components, to ensure that the large majority comes from French suppliers. All this will lead me to think a law on inter-industrial to better protect our suppliers.51  EU officials contend that Canada’s various provincial Acts such as the Ontario Green Energy Act, 2009, give preferential treatment to local suppliers.52 Similarly, the U.S. 49  President Barak Hussain Obama, Remarks at Graduation of Columbus Police Division’s 114th class Alaadin Shrine Center (Columbus Ohio, 6 March 6 2009), accessed 11/02/2011 online: <http://www.whitehouse.gov/ the-press-office/remarks-president-graduation-columbus-police-divisions-114th-class>. For a contrary view of internal USA policies on deregulation and unbridled liberalization please watch Michael Kirk, Frontline: The Warning (20 October 2009) (Documentary) online: pbs.org <http://www.pbs.org/wgbh/pages/frontline/warning/ view/?autoplay&utm_campaign=searchpage&utm_medium=videosearch&utm_source=videosearch>. 50  Peter O’Neil, “France backtracks on Trade EU Deal: Canada’s ally in negotiating trade with Europe pushes protectionist measure” The Province (18 August 2010) at A26. 51  Ibid.  52  Ibid.  40  Government has taken over various banks and other financial institutions and pumped in huge amounts of money to prevent the banking and financial system from total collapse,53 which illustrates the fact that the best policy is the one which addresses the needs of the country in light of the prevailing local circumstances. It also reinforces three important facts. Firstly, the shift in developed countries towards free trade was not due to it being the perfect development strategy; it was adopted to sustain the development they have achieved under protectionism. Secondly, benefits flowing from free trade in its original form are achievable only in an ideal world, as in the real world even the most ardent proponents of free trade prefer protectionism over free trade. Lastly, the developing countries would have no reluctance to adopt the free trade posture if the developed countries reciprocated. After the Uruguay round it is abundantly clear that international trade rules are more favourable to developed countries than developing countries, and the current deadlock in the development round has its genesis in these types of double standards. Hence, protectionism has been the most effective tool in the catch-up strategy of most of the modern industrialized countries and law has been an important tool for such protectionism. The strategic policy of protecting infant industry has been employed not only by the U.K. and the U.S., but also by many other industrialized countries, such as Germany, France, Sweden, Belgium, the Netherlands, Switzerland, Ireland, and Japan, and more recently by East Asian countries.54 Proponents of free trade usually dismiss the protectionist regime of developed countries as history, but most overlook the protectionist laws recently enacted by governments of nearly all industrialized countries in order to handle the global financial crisis. The proponents of free trade quote India and China as the countries prospering through their free trade policies, but they forget that these countries emulated the policies of developed countries i.e. they initially followed protectionism before their gradual shift towards free trade. The prosperity of Korea is the result of protectionism and development of both the 53  “The size and power of the state is growing and discontent is on rise” The Economist 394: 8666 (23 January 2010) at 11; “Leviathan stirs again” The Economist 394: 8666 (23 January 2010) at 23-26; “Are we there yet? America’s recovery will be much slower than that from most recessions; but the government can help a bit” The Economist 396: 8700 (18 September 2010) at 13. 54  Supra note 6 at 32-51; supra note 7 at 70-100; 165-201. 41  agricultural and the industrial sectors. If Korea had followed the free trade policy based on comparative advantage it would have been an efficient producer of rice but would not have been able to get out of poverty.55 These developed and newly developed countries were initially following the protectionist path (defying free trade/comparative advantage), and only subsequently followed the path of gradual openness.56 Their underlying strategy was to use protectionism to protect their infant industries, and only after significantly developing industrial and manufacturing sector capacity would they argue for free trade. Legal instruments clothed the protectionist policies into legal obligations and effectively implemented them. Hence both national and international law (international trade law under the WTO) can be agents to promote comprehensive national development in a country if it is structured to achieve development. However, the laws should be supplemented by strong institutional structure and a policy mechanism for enforcement. The above analysis of protectionist policies and laws demonstrates their role in promoting protectionism in developed and newly developed countries. In the next section, I will illustrate how the absence of qualitative laws, policies, and institutions can negatively impact development. In this context, I will critically analyze the institutions and laws of Khyber Pakhtunkhwa, one of the provinces of Pakistan, specifically focusing on economic and industrial development. The critical view will identify the structural defects of the institutions, the inadequacy of the laws, and the incoherency of the law, policy, and development goals.  55  Joseph Stiglitz, “Rethinking Development Economics” (August 2011) 26:2 World Bank Research Observer, accessed 10/09/2011 online: <http://wbro.oxfordjournals.org/content/26/2/230.full.pdf+html>. 56  Supra note 21 10:9 German Law Journal, accessed 07/09/2011 online: <http://www.germanlawjournal.com/ pdfs/Vol10No09/PDF_Vol_10_No_09_1257-1273_Articles_Sherman.pdf>; Ross P. Buckley, “The Economic Policies of China and India and of the Washington Consensus: An Enlightening Comparison” (1 January 2010) 27:4 Wisconsin Internat’l L.J. at 707-724; Jayati Ghosh, “China and India: The Big Differences” (2005), accessed 07/09/2011 online: IDEAs <http://www.networkideas.org/news/aug2005/news25_China_India.htm>; Hei Li, “The Chinese Path of Economic Reform and its Implications” (Winter, 2005) 31:4 Asian Affairs at 195211, accessed 07/09/2011 online: <http://www.jstor.org/stable/pdfplus/30172860.pdf>; Susan L. Shirt, How China Opened Its Doors: The Political Success of PRC’s Foreign Trade and Investment Reforms (Washington, DC: Brookings Institution, 1994); Nancy Birdsall, Dani Rodrik, & Arvind Subramanian, “How to Help Poor 42  2.6.1 Department of Planning and Development, Khyber Pakhtunkhwa The province of Khyber Pakhtunkhwa has some thirty departments in total. The department specifically focusing on development is the Department of Planning and Development.57 It supervises the overall development activities and projects in the province. The development strategy focuses on the infrastructure; the social sector (i.e. education, health, social protection and poverty alleviation); achieving economic growth through agriculture, livestock, minerals and technical education; urban development through traffic and road engineering, housing, waste disposal, water, and sanitation; and improving good governance by maintaining law and order and initiating institutional reforms. 2.6.2 Department of Industries, Khyber Pakhtunkhwa The Department of Industries is mainly responsible for the promotion of the industrial sector and trade in the province, focusing on promotion of industrial research; industrial training, including the enforcement of Merchandise Marks Act; and the administration of railway freight, import and export, trade control, capital issue, the Insurance Act, the Registration of Accountants, Auditors’ Certificate Rules, the Partnership Act, 1932 trade condition reports, and trade enquiries and agreements. The department deals with all cases relating to the Boilers Act, the Patent and Designs Act, 1911, the Explosive Act, 1884, the Companies Act, 1984, and the Registration of Joint Stock Companies, Firms, and Societies 1860.58 The Government of Khyber Pakhtunkhwa has made no significant changes in these laws to bring them in consonance with the policy objectives of industrial and economic development of the country and the province. Recently in 2005, the governments of Pakistan and Khyber Pakhtunkhwa launched a new Industrial Policy in order to encourage private sector/market participation in the revival of  Countries” (July/August 2005) 84:4 Foreign Affairs 136, accessed 07/09/2011 online: <http://www.cgdev.org/ doc/commentary/FAhelp.pdf>. 57  Government of Pakhtunkhwa, Pakistan, Objectives and Functions of the Department of Planning and Development, accessed 3/3/11 online: <http://www.khyberpakhtunkhwa.gov.pk/Departments/PnD/ Development-Strategy.php>. 58  Government of Khyber Pakhtunkhwa, Pakistan, Functions of the Department of Industry, accessed 3/3/11 online: <http://www.khyberpakhtunkhwa.gov.pk/Departments/Industries/Functions.php>; <http://www. khyberpakhtunkhwa.gov.pk/Gov/Details.php?id=4>.  43  the industrial sector in the Province.59 The federal government gave various attractive sales tax, tariff, and duty incentives to local and foreign investors.60 Similarly, the Government of Khyber Pakhtunkhwa (NWFP) initiated some policy changes in 2005 and gave incentives like a 25% rebate on electricity consumption; exemption from property taxes in the Industrial Estates; education cess; introduction of tiered system for the collection of employee social insurance; establishment of an investment facilitation committee and council under the chairmanship of industrialists from the private sector; and establishment of industrial estate management committees under the chairmanship of leading industrialists to identify the problems of public sector. Special industrial units were constituted and the Directorate of Labour also exempted these units from inspection for three years.61 The new policy changes initiated by the government present an attractive outlook but are at odds with the existing laws and institutional and organization framework of the Department. Apparently the policy is intended to attract private sector investment, but a comparison of these incentives with the West Pakistan Industries (Control on Establishment and Enlargement) Ordinance IV of 196362 reveals the incoherency of the policy enumerated by the federal government, the existing provincial legislation, and the industrialization and investment policy of the Government of Khyber Pakhtunkhwa. The policy document 59  Five years exemption from property tax in the Industrial Estates and for new industries; exemption from labour inspections after compliance with labour laws; exemption from Education Cess for Industrial Units; a new tiered-policy for ESSI contributions; formation of Industrial Facilitation Council and Committee; 25% rebate in electricity consumption for a period of three years to new selected industries; provision of 10MW cheap electricity from Malakand Hydel Power Project-III to be provided to selected industrial units to be set up in the Malakand Industrial Estate; Government of NWFP, Investment Facilitation Centre, Investment Policies and Opportunities in NWFP-Pakistan: Another Milestone towards prosperity (2005) at 2, accessed 8/03/2011 online: <http://www.khyberpakhtunkhwa.gov.pk/cms/downloads/nwfp.gov.pk-downlaods-%20fb46932ea9 48c3dda0596b9705bd3e70.pdf>. 60  Government of Pakistan, Ministry of Finance and Economic Affairs, Statistics and Revenue (Revenue Division) Islamabad, (18 June 2001) SRO # 439(1)/2001, accessed 11/11/2011 online: <http://www.findpk. com/engineeringindustry/html/sro_439.html>; Government of Pakistan, Ministry of Finance and Economic Affairs, Statistics and Revenue (Revenue Division) Islamabad, (12 June 2004) SRO # 455(1)/2004, accessed 11/11/2011 online: <http://www.paksearch.com/Government/ LAWS/BUDGET/ Budget%20200405/sros/Customs/2004sro455cu.htm>. 61  Government of NWFP, Investment Facilitation Centre, Industrial Policy NWFP (2005) Investment Policies and Opportunities in NWFP-Pakistan (Another Milestone Towards Prosperity) at 5-6, accessed 8/03/2011 online: <http://www.khyberpakhtunkhwa.gov.pk/cms/downloads/nwfp.gov.pk-downlaods-%20fb46932ea 948c3dda0596b9705bd3e70.pdf>. 62  West Pakistan, Ordinance IV, The West Pakistan Industries (Control on Establishment and Enlargement) Ordinance (1963), 23/03/2011, online: <http://www.khyberpakhtunkhwa.gov.pk/Gov/Details.php?id=155>.  44  specifies the exemption for foreign investors from seeking government permission to establish any industry anywhere, with a few exceptions in sectors such as arms and ammunition, high explosives, radioactive substances, security printing, currency and mint, and alcoholic beverages and liquor. This contradicts the West Pakistan Industries (Control on Establishment and Enlargement) Ordinance IV of 1963 of Khyber Pakhtunkhwa, which requires the issuance of permit by the Government of Pakhtunkhwa for the establishment of any industry in the province. In order to promote a well-planned industrial growth, the Ordinance empowers the Government of Khyber Pakhtunkhwa to issue a permit before the establishment of any industrial undertaking.63 The Ordinance also empowers the government to investigate and punish any person violating any provisions of the Ordinance. It also expressly bars the jurisdiction of the courts. The Ordinance gives excessive power to the Government, to the extent that their actions cannot be challenged in any Court of law (Section 9 of the said ordinance), and the appellate forum against the Department of Industry is the Government itself. So the government is the prosecutor and the judge; the concentration of powers in a single individual (the Secretary or the Director of the Department) without any judicial review is prone to being misused. The result of such incoherency is that it increases the transaction costs for a business, creates uncertainty among foreign investors, and discourages them from investing in profitable sole or joint ventures with the local industrialists/investors. Pakistan needs foreign investment for the efficient exploration of its natural resources, human capital, and potential joint ventures in the industrial, manufacturing and technological sectors, which is not possible in the presence of such incoherency between laws, policies, and institutional structures. In addition, both the federal and provincial governments were supposed to enact and introduce appropriate legal reforms in the Patents and Designs Act, 1911, the Partnership Act, 1932, and the Companies Ordinance, 1984, and there is no concept of legislation protecting Intellectual Property Rights in either the country or the province. There are no rules available to regulate joint public-private ventures. All these loopholes demonstrate the 63  Ibid. 45  importance of law and institutions in the development of a country. The World Bank under its legal reform and rule of law project should focus on such incoherencies and push initiatives to promote respect for due process, rules, and more transparency and accountability. There is an urgent need to reconcile the policies, laws, institutional structure, and organization of Pakistan to prevent industrial and technological decline. The decline is evident from the statement by Mir Hazar Khan Bijarani, Pakistan’s Federal Minister for Industries and Production, who said in response to a question in the National Assembly that in Khyber Pakhtunkhwa a total of 307 industrial units have been closed down. He attributed the closure of these units to financial, management, and marketing problems; the lack of entrepreneurial skill, trend adoption, and security (law & order); and the power crisis in the country.64 These causes of failure underline not only the gap between law and policy but also the incoherent and ill-coordinated approach towards industrialization and development in the province. Another cause for the decline of the industrial sector has been the absence of research-based policies and legal reforms encouraging cooperation and coordination among the provincial and federal governments, and consistency in the pursuit of policies. This approach needs to be supplemented by government support in the form of infrastructure, capital, institutions, laws, standardization, transparency, accountability, stake holder participation, training for the development of technical skills and knowledge, adaptation to the constantly changing trends, and specifically setting up development targets. In addition, the interference of IFIs through their conditionalities of fast track privatization, liberalization, and deregulation has further complicated the progress of the country. The critical analysis of the policy incentives given by the Government of Khyber Pakhtunkhwa highlights the need to align the legal and policy reforms with the development objectives. The Government of Pakhtunkhwa should have consulted the local stakeholders  64  Pakistan Lower Chamber of the Legislature National Assembly 28th session (31 January 2011) at 8 (Hon. Federal Minister for Industries and Production, Mir Hazar Khan Bijarani), accessed 5/03/2011 online: <http://www.na.gov.pk/questions/session28/monday310111.pdf>.  46  and the World Bank in identifying the development objectives, policy formulation, and legal and institutional reforms before giving policy incentives to local and foreign investors. Analyzing such incentives from a country perspective underlines the fact that incentives to the private sector or the foreign investor without target oriented development goals are more prone to misuse at the cost of taxpayers. Conditions such as transfer of knowledge and technology for the promotion of industrialization, manufacturing, and the production sector will lay the foundation for sustained development, as will obligations on investors to provide education, training, and employment for the local population, the development of infrastructure, and the requirement of feasibility studies. The whole scenario underlines the divergence of the policy and the law, and reinforces the need to reconcile policy, law and development goals, to establish of standardization, and to observance transparency in the grants of incentives. From a development perspective, it is obvious that a poor person from the public does not have the means to make any investment in huge industrial projects and benefit from the incentives given by the Government of Khyber Pakhtunkhwa, which keeps the resources in the hands of the few local industrialists and landed elite class. In Pakistan, the individuals working in both the government and the market are of the same origin, i.e. belonging to the same families and political affiliation. The same individuals dominate the state and the local market. The beneficiaries of these incentives are the politicians, their relatives, party members, and the members of the opposition in the parliament, who are granted political favours. This scenario again reinforces the need to break two vicious cycles: one in which the wealth circulates among a few classes of people and the rich get richer; and the other the vicious cycle of poverty in which poor people constantly struggle to get out of poverty but end up poorer. As mentioned above, in some cases the laws are obsolete and in conflict with the policies, but in some cases even the newly enacted laws/statutes creating new institutions perpetuate the monopoly of the elite-dominated government. The provisions of newly enacted Competition Act of Pakistan, 2010 exemplify this point.  47  2.6.3 The Competition Act, 2010 The recent Competition Act, 2010 65 replaced the Monopolies and Restrictive Trade Practices (Control and Prevention) Ordinance, 1970.66 The new Act established the Competition Commission of Pakistan, which replaced the old Monopoly Control Authority. It is an improvement but there are still some areas that have been overlooked. For instance, an undertaking accused of acting in a way to achieve dominance in the market is given the opportunity to comply with the law at every level, from the initiation of the complaint to appeal to the Supreme Court of Pakistan. The Act does not contain any provision making direct and positive benefit for the general public mandatory for the grant of exemption or as a condition reducing the amount of a penalty. The Competition Act 2010 authorizes the Commission to grant exemption under certain circumstances, under section 10 sub-section (a-d).67 If a condition such as benefit to the public or public betterment and development is also inserted the prospective undertaking seeking dominance in the market would be forced to address the condition before planning and structuring any merger, acquisition or undertaking. The Commission can monitor the public betterment and development under Section 28-31 of the Act.68 Similarly under Section 5469 the Government of Pakistan has the power to grant exemption to any undertaking from the provision of this Act on three grounds: i. Exemption in the interest of security of state or public interest. ii. Practice or agreement due to Pakistan’s commitment under international treaty, agreement, or convention.  65  Competition Act of Pakistan, 2010, Act No. XIX, Pakistan Gazette, No. M-302/L.-7646 [Competition Act, 2010], accessed 25/03/2011 online: <http://www.cc.gov.pk/images/Downloads/competitionn_act_2010.pdf>. 66  Monopolies and Restrictive Trade Practices (Control and Prevention) Ordinance, Ord. No. V 1970 (26 February 1970), accessed 25/03/2011 online: <http://www.globalcompetitionforum.org/ regions/asia/ pakistan/ATT01665.pdf>. 67  Competition Act, 2010, Sub-Section (a)-(d) at 653.  68  Ibid., Section 28-31.  69  Ibid., Section 54.  48  iii. Any undertaking which performs on behalf of the provincial government or federal government. Terms like “security of state”, “public interest”, “international commitment and sovereign function” are very broad and abstract. Keeping in mind the political and economic culture of Pakistan, such terms can be misinterpreted in a way to favour the leading elites of the country (most of them local politicians) which control both the government and the market structure of the country. Also, the Act does not say anything about any undertaking involving foreign companies and the government and its impact on the public good, betterment, and interest. The latest sugar crisis in Pakistan is an appropriate example of this problem. Pakistan ranks among the top ten producers of sugar cane and relies on it for most of its sugar production. Unfortunately, most of the sugar mill owners are leading politicians in the country therefore the Pakistan Sugar Mills Association (PSMA)70is the most powerful lobby. The PSMA structured the demand and supply for sugar in a way that helped the PSMA owners earn billions of dollars in a month by taking advantage of the new market system in the country, loopholes in the law, the institutional deficit, and increases in sugar prices in the international market. Smuggling to Afghanistan and the delay in production for the new season raised the demand but the supply was deficient. Resultantly, the price of sugar doubled and it became difficult for a common man to buy sugar for daily usage. The PSMA stopped the supply of sugar to the government-run utility shops (the government provides the sugar and other utilities to the public at a subsidized rate). The short supply of sugar forced the general public to buy sugar from the private market at prices determined by the All Pakistan Sugar Mills Association (APSMA—in other words the local politicians) and forced the government (through the Ministry of Industries and Production) to enter into an agreement with APSMA for fixing the price of the sugar per pound to APSMA’s liking and for APSMA to get a tax break from the Government as well. The Competition Commission of Pakistan (CCP) was  70  Pakistan Sugar Mills Association, online: <http://www.psmaonline.com/acquia-drupal/node/8>.  49  unable to take substantial steps in this regard, but in its policy opinion it condemned the agreement between the Government of Pakistan and APSMA. 71 The institutional reforms in the country should be selective to make institutions like the CCP, other regulatory authorities, and laws like the Competition Act, 2010 more effective in addressing the concerns of national development, and meeting global obligations.72 For instance, in the local context reforms could involve the granting of more powers such as arrest, maximum imprisonment, and fine; the participation of parties affected by the actions of the undertaking; and provisions making it obligatory that any undertaking have a definite positive impact on the public welfare. The goals of public welfare can be achieved only if provisions like tax or penalty exemptions under the CCP Act 2010 are granted not only with the aim to seek compliance with the Act (to declare the tactics of market dominance), but also on the grounds of their contribution towards the public benefit and development of the country. Public welfare goals can include delivering qualitative and cheap supply of foods to the poor people, education, and investment in shelters for the homeless. Likewise, the CCP has an office located in the federal capital Islamabad but does not have any branches in the provincial capitals. The establishment of branch offices in the provincial capitals would help curb the tendencies of the undertakings involved in unfair business practices at national and provincial levels. 71  Competition Commission of Pakistan. “Price Fixing Agreement between All Pakistan Sugar Mills Association and Ministry of Industries and Production” (Policy Note, 2009), accessed 3/04/2011 online: <http://www.cc.gov.pk/images/ActionsPolicy_Notes_Policy_Note_on_Sugar-Price_Fixing.pdf>. One of the reasons why the free market system puts the general public in a developing country like Pakistan in a very disadvantaged position that both the markets and the government are controlled by the elite rich politicians, landlords and industrialists. The institutions are already there but they are weak due to the fact that they are run by this elite. In a government-run economy, the government can be held accountable due to the fact that they are elected by the general public. In the market economy, making profit is the underlying aim. After the introduction of the market system, the politicians, industrialists, and landlords all stand together under the umbrella of the free market without any relief for the general public. In the past, there used to be a district magistrate who would perform the same function as CCP and would regulate the prices of the local utilities to keep them more stable. 72  Ljiljana Biukovic, “Global Competition Governance: A Step Towards Constitutionalization of the WTO” in Pitman. B. Potter and Ljiljana Biukovic, eds., Globalization and Local Adaptation in International Trade Law (Vancouver: UBC Press, 2011) at 27-31, accessed 21/09/2011 online: <http://www.ubcpress.ca/books/pdf/ chapters/2011/GlobalizationAndLocalAdaptationInInternationalTradeLaw.pdf>.  50  2.7  The State, Comparative Advantage, and the WTO  In this sub-section, I will discuss (i) the flaws in the theoretical matrix of the theory of comparative advantage and (ii) how the golden principles of national treatment and nondiscrimination should not be binding on countries like Pakistan, which are still at an embryonic stage of their development after their independence. I stress the need for insertion of legal rules to introduce a mechanism in all WTO agreements to determine its impact on the development of the poor member countries and the modes to address them. 2.7.1 Deciphering the comparative advantage The criticism of free trade and comparative advantage is as old as the concepts themselves— the pros and cons of free trade and comparative advantage have been debated for the last two centuries—but lately free trade and comparative advantage have been trumpeted as important tools for development and poverty alleviation around the world, especially in poor countries. The incorporation of development has made the debate surrounding development goals more contentious. The proponents of globalization based on free trade and comparative advantage, including prominent economists Paul Krugman and Pascal Lamy of the WTO, contend that free trade, in spite of its pitfalls, is a better alternative than protectionism and has the potential to promote development.73 Krugman goes so far as to claim that intellectuals who criticize it simply do not understand Ricardo’s idea of comparative advantage, which is “utterly true, immensely sophisticated—and extremely relevant to the modern world.”74 Any argument against free trade and comparative advantage is considered as heresy. In order to determine the credibility of the above argument it is pertinent to analyze the theory from Development Economics, historical and legal perspectives. From a legal perspective, the WTO agreements and the IFIs’ conditionalities had a significant impact on the fundamental legal framework of  73  Pascal Lamy, “Comparative Advantage is Dead? Not at All” (Speech, Paris School of Economics Conference on Trade and Inclusive Globalization: Facts and Fiction in International Trade Economics, 12 April 2010), accessed 13/04/2010 online: <http://www.wto.org/english/news_e/sppl_e/sppl152_e.htm>. 74  Paul Krugman, “Ricardo’s Difficult Idea: Why Intellectuals Don’t Understand Comparative Advantage” in Gary Cook, ed., The Economics and Politics of International Trade (London: Routledge, 1998) at 22-36; supra note 14.  51  the developing countries, i.e. the authority of the state to regulate the trade, markets, and economic sector of the countries. From a Development Economics perspective, Krugman and Lamy’s contentions are rooted in the abstract theoretical logic and assumptions from Smith and Ricardo’s trade theories, which suggest that specialization of a nation in activity in which it is more efficient as compared to other nations will result in a total welfare gain for that nation. Such assumptions can hold true in an ideal/perfect world of free trade, but in an imperfect world such assumptions seem to be misplaced and detached from reality. They ignore the non-economic realities: the social and political elements, international politics, technological development, investment in research, and engagement of a country in an activity producing increasing returns. Ironically, the theory of comparative advantage has discarded the qualitative element of economic change/development and, as a result, when it is applied in a real world situation it forces poor countries to engage in activities which do not produce increasing returns for them, and in fact actually inhibit the development of their industrial, technological, production, and manufacturing sectors.75 2.7.1.1  Engagement in activities producing increasing returns  Under asymmetric globalization—where countries are categorized on the basis of the nature of activities, such as those with increasing or decreasing returns—countries specializing in decreasing-return activities can easily end up specializing in being poor.76 The nature and speed of globalization enforced in the last two decades has resulted in the de-industrialization of numerous countries; countries are being forced to engage in production that results in diminishing returns.77 Today most of the developing countries’ production activities are not only stripped of increasing returns but also inhibit any kind of technological innovation, knowledge, or research which could catalyze development and increasing-return activities in these countries. According to the World Development Report 1998, the disparity in 75  Erik S. Reinert, How Rich Countries Got Rich…And Why Poor Countries stay Poor (London: Constable & Robinson, 2007) at 102-118. 76  Ibid. at 110.  77  Ibid. at 109-10. For details on Mongolia and the policies of the IMF and WB see Erik. S. Reinert Globalization, Economic Development and Inequality: An Alternative Perspective (Massachusetts, USA: Edward Elgar Publishing, 2004) at 157-214.  52  knowledge between the developed and poor countries is not only due to the lack of capital, but also primarily to the scarcity of knowledge.78 The report defines knowledge broadly as knowledge about technology, software, food, industrial products, accountancy, manufacturing etc.79 2.7.1.2  The knowledge gap  Technology has been one of the defining elements of the current phase of globalization. In fact, it is the technological component (its presence or absence) that distinguishes an activity producing diminishing and/or increasing returns. Injection of technological innovations qualitatively improves the nature of activity in the production/industrial/manufacturing sector and dramatically changes the mode and manner of production, which enhances productivity in all industries including the agriculture sector. In agriculture, it is also possible to distinguish between mechanizable and non-mechanizable products, for instance the outsourcing of non-mechanizable products by the U.S. to Mexico and other neighbouring countries.80 The growth of the maquila industry near the U.S.-Mexico border has come at the expense of traditional industry.81 Another example would be the takeover of mechanizable production of wheat and maize by the United States while outsourcing non-mechanizable 78  World Bank, World Development Report: Knowledge for Development (September 1998) at 1, accessed 21/08/2011 online: <http://www-wds.worldbank.org/external/default/WDSContentServer/ WDSP/IB/1998/ 11/17/000178830_98111703550058/Rendered/PDF/multi0page.pdf>; Joseph Stiglitz, “Rethinking Development Economics” (August, 2011) 26:2 Oxford Journal at 2. 79  Ibid World Development Report  80  Ibid. at 112. See also Joseph E. Stiglitz, Making Globalization Work (New York: W.W. Norton, year) at 6466; William C. Gruben, “Was NAFTA Behind Mexico’s High Maquiladora Growth?” (2001) Economic and Financial Review (Third Quarter) 11; Sandra Polaski, Mexican Employment, Productivity, and Income a Decade after NAFTA (Carnegie Endowment for International Peace, brief submitted to the Canadian Standing Senate Committee on Foreign Affairs, 25 February 2004); World Bank Study conducted by Daniel Lederman, William F. Maloney, & Luis Servan, Lessons from NAFTA for Latin America and the Caribbean Countries: A Summary of Research Findings (Washington DC: World Bank, 2003). However, there are serious flaws with this study. For details see Mark Wiesbrot, David Rosnick, & Dean Baker, Getting Mexico to Grow with NAFTA: The World Bank Analysis (Center for Economic Policy Research, 20 September 2004) available online at <www.cepr.net/publications/nafta_2004_10.htm>; See Instituto Nacional Estadistica Geograffa e Informatica Personal ocupado en la industria maquiladora de exportacion segun tipo de ocupacion available at <www.inegi.gob.mx/est/contenidos/espanol/rutinas/ept.asp?t=emp75&c=1811>. 81  For details see M. Patricia Fernandez-Kelly, “Technology and Employment Along the US-Mexican Border” in Cathryn L. Thorup, ed., The United States and Mexico: Face to Face with New Technology, US Third World Policy Perspective Series No 8 (New Brunswick, NJ: Transaction Books, 1987); William C. Gruben, “Do Maquiladoras Take American Jobs? Some Tentative Econometric Results” (1990) 5:1 Journal of Borderland Studies Spring at 31-45; Lila J. Truett & Dale B. Truett, “Maquiladora Response to US and Asian Relative Wage Rate Changes” (January 1993) 11 Contemporary Policy Issues, at 18-28. 53  production, such as harvesting of strawberries, citrus fruit, cucumbers, and tomatoes, to Mexico. Such outsourcing traps a country into labour intensive activities and does not help the country engage in industrial or technologically innovative activities.82 2.8  Appropriate Strategies for Pakistan  It is not clear how the application of free trade based on comparative advantage would evoke development for countries like Afghanistan, Somalia, Haiti, and Sudan. These countries have been through wars (including ethnic wars), natural disasters, weak infrastructure, bad governance, and political instability. Free trade with such countries will not bear fruit unless they are internally strong enough to face foreign competition. The development disparities between developed and developing countries make it abundantly clear that the strict application or following of free trade based on comparative advantage will not help them develop substantially to follow their own independent strategies. From a historical perspective, developed countries did not follow the same policies now prescribed by them and the IFIs for poor and developing countries. Developed countries have not only forced on developing countries the concept of free trade based on comparative advantage, bereft of activities involving increasing returns, technological innovation, synergy and cluster effects,83 but have also ensured to prevent them from emulating the strategies adopted by the developed countries when they were at the same stage of development. To determine the appropriate strategy in the limited space, we assume two different scenarios for Pakistan: protectionist and free trade. 2.8.1 Options under protectionist regime In case of the protectionist scenario, the country’s protectionist policy will evoke the same policies from other trading partners, as a result hurting exports and economic benefits. Internally, the protectionist policy would encourage the rent-seeking behaviour of the government, discourage competition, and encourage monopoly, which will badly impact the  82  Erik S. Reinert, How Rich Countries Got Rich...And Why Poor Countries Stay Poor (New York: BBS Public Affairs, 2007 at 112. 83  The term used by Eric S. Reinert in his work How Rich Countries Got Rich…And Why Poor Countries stay Poor (London: Constable & Robinson, 2007).  54  efficiency of the country. Hence such policy would not only be economically detrimental but would also be a negation of free trade from a globalization perspective. 2.8.2 Options under free trade regime In a free trade scenario, Pakistan under its WTO obligations is supposed to open up its markets and follow the policy of non-discrimination, national treatment, and minimum government interference to create perfect competition in the country. These conditions will result in the efficient allocation of resources and will thus lead to efficient production. In this scenario there are three major issues. Firstly, how will free trade contribute towards the development of Pakistan when Pakistan does not have a strong diverse industrial and productive base? Secondly, even if it is assumed that Pakistan has a strong diverse industrial base, it still remains doubtful if products from Pakistan would get market access to industrialized countries. Finally, if for any reason Pakistani products don’t get access, does Pakistan have any legal and policy choices to address such a scenario? In a free trade scenario between countries like Pakistan and industrialized countries it is not only an issue of demanding reduction in tariff rates on products but also the pattern of the tariffs imposed on the products from Pakistan or any other poor country. The developed countries impose high tariff rates on processed/manufactured products from developing countries.84 These high tariff rates, which naturally discourage developing countries from specializing in manufacturing, clearly illustrate some of the trade barriers.85 For instance, Pakistan has comparative advantage in textiles, clothing, and food. The imposition of high tariffs by industrialized countries like the United States and European Union countries would discourage Pakistan from developing such a manufacturing sector. Naturally, such a scenario is ominous for Pakistan’s trade and development. Due to the political, military, and economic dominance of industrialized countries there is asymmetry of strength between the developed and developing countries. This asymmetry is more evident in terms of adjustment cost, the nature of activities, and the changing nature of 84  Paul Collier, Bottom Billion (Oxford: Oxford University Press, 2007) at 160; Joseph Stiglitz & Andrew Charlton, The Development Round of Trade Negotiations in the Aftermath of Cancun: A Report for the Commonwealth Secretariat (London, UK : Commonwealth Secretariat Marlborough House, 2004) at 21. 85  Joseph Stiglitz & Andrew Charlton, supra note 84 at 21. 55  global trade patterns in the context of market liberalization. The adjustment impact of market liberalization is more stressful on the developing and poor countries. For instance, if the developing countries such as Pakistan liberalize tariffs the impact on the local market would be devastating compared to any such measure taken by the United States or European Union.86 Unfortunately Pakistan, being a developing country, does not have the means and resources to rapidly adjust itself to high-speed market liberalization, which in addition to throwing the local businesses out of business will increase unemployment and inhibit development. Thus the adjustment cost is more to the poor countries than the developed countries. Similarly in addition to the market imperfection, factor endowment (the dependence of poor countries on natural resources and absence of innovative technologies) locks poor countries in activities that do not produce high returns. 87 Pakistan, like many other poor countries, has comparative advantage in the labour intensive activities/production and lacks physical, monetary and knowledge capital to improve and diversify production capacity to improve exports. The poor countries unfortunately are disproportionately poor and lack resources. Most of them specialize in exportation of products depending on natural resources. In such circumstances, it therefore becomes vital to be selective in determining how, when, and at what pace to liberalize industry and services. These differences also differentiate the trade priorities of developed and developing countries. The developed countries became developed by transitioning from agricultural to industrial/manufacturing economies and are now transitioning from manufacturing to service and knowledge industries, whereas the developing world has diverse specialization in the agriculture sector. Most of the African countries specialize in subsistence agriculture, Brazil and Argentina specialize in export agriculture, and some countries are trying to shift towards the manufacturing sector.88 Besides dealing with their own internal bottlenecks, the poor developing countries are undermined in comparative advantage of the agriculture sector by 86  Ibid.  87  Ibid. at 22.  88  Erik. S. Reinert, How Rich Countries Got Rich...And Why Poor Countries Stay Poor (New York, NY: Public Affairs, 2007 at 21.  56  the high subsidies given by the developed countries to rich farmers.89 In addition, the health and safety standards further aggravate the comparative disadvantage of poor countries.90 A report formulated by the International Food Policy Research Institute indicates that the Northern subsidies and import barriers result in losses of $24 billion to Southern countries per year in foregone agricultural and agro-industrial income.91 In addition to undermining the comparative advantage of the poor countries (in which half of the population is employed in the agriculture sector) these barriers aggravate poverty. There can be no right or wrong answers for such complex questions, however remaining within her constraints Pakistan has to prioritize her sectors for pursuing development goals and launch a multi-pronged strategy. In order to be more competitive every poor country needs to further develop those sectors in which it already has a comparative advantage but also needs to have a strong industrial and manufacturing base. Unfortunately Pakistan has a weak industrial and manufacturing base and relies mostly on exports from the agriculture sector: primary products like cotton, textiles, and clothing.92 The adoption of free trade at this stage will result in Pakistan specializing in the export of primary products. Resultantly, there is urgent need for the transfer of technology/knowledge, investment in short-term and longterm research work, and development in all the major sectors (agriculture, industry, and manufacturing).  89  Carmen G. Gonzalez, “Deconstructing the Mythology of Free Trade: Critical Reflections on Comparative Advantage” (2006)17:65 Berkeley LA RAZA Law Journal at 68,77; Carmen G. Gonzalez, “Trade Liberalization, Food Security and the Environment: The Neoliberal Threat to Sustainable Rural Development” (2004-2005) 14:2 Transnat’l L. & Contemp. Probs. at 419, 457-60, 463-64; Carmen G. Gonzalez, “Institutionalizing Inequality: The WTO Agreement on Agriculture, Food Security, and Developing Countries” (2002) 27:2 Colum. J. Envtl. L. at 433, 446-49,459-68; UNFAOOR, FAO Symposium on Agriculture, Trade & Food Security Paper No. 3 (1999), 19/03/2011 online: <http://www.fao.org/DOCREP/meeting/x3065E.htm>. 90  See Anita Regima et al., “Emerging Trade Issues for Developing Countries” (April 2000) Agriculture Outlook, Economic Research Service, Unites States Department of Agriculture (USDA) at 23, accessed 19/03/2011 online: <http://www.ers.usda.gov/publications/agoutlook/apr2000/ao270f.pdf>; Sophia Murphy et al., WTO Agreement on Agriculture: A Decade of Dumping, Institute for Agriculture and Trade Policy,1 (2005) at 2, accessed 19/03/2011 online: <http://www.tradeobservatory.org/library.cfm?RefID=48532>. 91  International Food Policy Research Institute, How Much Does it Hurt? The Impact of Agricultural Trade Policies on Developing Countries 2 (2003), accessed 19/03/2011 online: <http://www.agtradepolicy.org/output/ resource/IFPRI.pdf>. 92  World Trade Organization, Trade Policy Review: Pakistan, Trade Policies by Sector WT/TPR/S 193 (2008) at 1, accessed 22/2/2011 online: <http://www.wto.org/english/tratop_e/tpr_e/tp293_e.htm>.  57  If there is no transfer of knowledge or technology, Pakistan will be unable to promote its industrial manufacturing base and will lose the markets in the sector in which it has comparative advantage. Pakistan has three apparent alternatives. It can acquire essential capital, technology, and knowledge through the protection and help of the state. It can open its market for free trade and expect that companies investing in the country and market will provide the essential capital and technological knowledge to improve and develop its technological, industrial and manufacturing base. The WTO agreement on Trade Related Intellectual Property Rights (TRIPS) and the rigid intellectual property laws in the developed countries prevent such transfer of technology to the developing countries. A third option is for the Government of Pakistan to protect its industrial and manufacturing sector against foreign competition by providing all kinds of domestic support for the sector to enter into joint ventures with foreign-based companies and by seeking capital, knowledge, technology, and development for the people of Pakistan. However, before pursuing this path the Government of Pakistan should conduct a thorough research into all the intricacies involved in joint ventures around the world, especially in China, India, and poor countries. In the light of such research, the Government of Pakistan should create an institution that would attract foreign investment and transfer technology and knowledge with a focus on development, but should also give a dominant managing role to the Government of Pakistan, local stakeholders in the sector, and the public. The government role would be to facilitate research, infrastructure development, and the institutional and legal framework to prevent the misuse of incentives. There is a need for the enactment of a new national and provincial development law to standardize and regulate development research and goals, grants and incentives for the purposes of industrialization, stakeholder participation, transparency, and accountability. The new law should establish a national and provincial development authority and a development court.  58  2.9  Conclusion  If the theoretical framework of North’s theory of institutions and institutional change93 is accurate, then in the developing countries the internal structure favours local leading elites. In Pakistan, the power to reform or enact new laws, formulate new policies and introduce new institutions remains vested in the hands of the local elite. Hence, all the efforts by the IFIs or other development organizations to use or employ law as a development tool in the integrated economy primarily integrates the local wealthy elite with the global wealthy elite; the poor public remains irrelevant and does not benefit in any way.94 The local public does not have any role or participation, and consequently the expectation that mere initiation of legal, policy, and institutional reforms in developing countries like Pakistan will bring the much-desired institutional change can at best be utopian. There is an imminent need for policy, legal and institutional reforms to bring people, civil society, academics, and researchers to par with the local elite in the legislative process, policy formulation, and decision making. There is not a single and easy answer on “how” to address the development, institutional and legal quagmire of developing countries, but the better alternative in the case of Pak