Can coalitions push through reforms?

There is a generally held belief in Pakistan, especially among many within and around the corridors of power, that the country needs a strong and centralized government in Islamabad. This, they argue, is a necessity to push through the types of economic reforms the country needs to get out of a decades-long decline. From privatization of leaky state-owned enterprises to the broadening of the tax net, the argument is that tough decisions require a strong leader with a broad mandate where the government cannot be held hostage. Research, however, suggests that coalition governments and a system where power is distributed may be better at delivering sustainable growth and reforms.

Dr. Irfan Nooruddin’s book Coalition Politics and Economic Development makes a compelling argument for coalition governments and their ability to deliver growth and reforms. He argues that “governments’ inability to commit credibly to present and future policies strongly contributes to growth-rate volatility.” This claim resonates with those who follow Pakistan’s economy, where constant political and policy volatility undermines confidence in the economy and a boom-bust cycle is the norm, not the exception.

This volatility, Dr. Nooruddin argues, breeds macroeconomic instability, discouraging investment in the economy, particularly investment with a longer time horizon. The higher risk associated with investing in such an economy requires higher returns, “which means that higher volatility probably deters investments in projects that might have occurred at lower levels of volatility, something developing countries cannot afford.”

Incentivizing investment by reducing actual and perceived risks should therefore be of utmost priority for governments. But how can this be achieved? Dr. Nooruddin argues that an effective way to do so is by credibly committing to stable policies that reduce uncertainty and signal to investors, domestic and foreign, that the country is committed to maintaining macroeconomic stability. A key driver of economic stability is policy stability, and the data analyzed by Dr. Nooruddin shows that “states in which credible constraints against policy change exist experience lower levels of growth-rate volatility.”

So far, the findings seem intuitive. But it is when the author analyzes growth rate volatility across types of governments around the world that things get fascinating. According to the research conducted by Dr. Nooruddin, “minority and coalition governments in parliamentary democracies emerge as the most consistent dampener of volatility.” He also finds that “the most robust determinant of economic growth is the presence of coalition or minority parliamentary governments.” In short, the author’s analysis shows that coalition governments in democracies have a better track record of stabilizing the economy, delivering reforms, incentivizing investment, and generating sustainable economic growth.

This does not make intuitive sense. After all, coalition or minority governments are inherently unstable, where reaching consensus on policies is a painful and arduous process. But according to Dr. Nooruddin, this is exactly why coalition governments deliver stable and sustainable growth with reduced policy volatility. His argument is that while achieving consensus in a coalition government may be a slow and painstaking process, reforms pushed through such a process are less likely to be reversed by successors who were left out of the process at the outset.

An example of the longevity of such reforms is visible across the border in India, where weak coalition governments set about reforming the Indian economy decades ago. These reforms were successful for two key reasons: a “widespread recognition” among India’s political elites that economic liberalization was the only path forward and “the status-quo-preserving nature of coalition politics.” This has been evident in recent years as well, where the Modi-led NDA government in India has continued the slow process of liberalizing India’s economy, even when such liberalization causes disruption that affects the core voter base of the ruling party – the country’s slow embrace of organized retail and the successful rollout of the GST reforms under the NDA, despite significant pushback from trader groups who are a key voter base of the BJP, is a case in point.

But while these findings push back against the view that a strong, centralized government can change the trajectory of Pakistan’s ailing economy, they do not answer the question of how consensus can be reached, especially in today’s polarized environment. The ruling PML-N’s leaders have long argued for a “charter of the economy,” and many PTI supporters who closely follow the economy agree that reforms are the only path forward. But the current political temperature is running high, meaning that political leaders are simply incapable of reaching the type of consensus India reached years ago. 

Add to this the fact that Pakistan’s political system is inherently exclusionary, meaning that broad swathes of underprivileged groups remain shut out of the political system. Which means that the very beneficiaries of the status quo economy, one that is delivering for the few at the expense of the many, must be the ones who agree on and push reforms that reduce their own ability to extract rents. Why should they pursue this path when Pakistan’s decades-long secular decline has enriched them? This is a question worth pondering over and one that requires more research and debate. But based on Dr. Nooruddin’s research, weak coalition governments may not be so bad for Pakistan’s economy after all.

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Uzair Younus
Uzair Younus is Director of the Pakistan Initiative at the Atlantic Council, a Washington D.C.-based think tank, and host of the podcast Pakistonomy. He tweets @uzairyounus.

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