“…in a regime of positive transaction costs, the character of the law becomes one of the main factors determining the performance of the economy…As a consequence the rights which individuals possess will commonly be those established by the law, which in these circumstances can be said to control the economy.”—Ronald Coase (Simon lecture; April 1993)
If the latest WB report about the fiscal impact of (loss-making and preferentially treated) SOEs is anything to go by, then the muted growth of our bleeding economy may well be a foregone conclusion. To make matters worse, the WJP has placed us in the lowest echelons of the rule of law. This does make a convincing case for the overlapping law and economics nexus or the economic analysis of law in Pakistan. Despite its relevance, and factoring in our nation’s legal-economic woes, there is a dearth of discourse focused on this interdisciplinary field.
The law is the foundation of the social edifice, so when it is subjected to scientific or empirical analysis, its efficiency is strengthened. The law and economics movement, spanning over the past half a century bears testament that the economic analysis of constitutions, laws, rights, legal processes and institutions can play an instrumental role in ameliorating economic, political, legal, policy and social outcomes.
The need for a new social Contract in Pakistan: through an economic lens
There has been much debate going on in political, legal and civil society circles regarding the need for a new social contract in Pakistan. The now incarcerated ex-PM in an interview with Time Magazine called for a “completely new social contract”. Historically, the proponents of the social contract theory (Hobbes, Locke, Rousseau) philosophized it primarily to propel the import of state sovereignty.
Economists do characterize a Constitution as a social contract. According to Buchanan and Tullock: “We shall mean by this term (constitution) a set of rules that is agreed upon in advance and within which subsequent action will be conducted.”
Buchanan utilizes the economic game theory of the prisoner’s dilemma where all the citizens under a social contract (constitution), in order to maintain an “equilibrium of anarchy” create a secure state. This probably accounts for how rational actors under the social contract foresee important benefits from cooperation or the perils emanating from noncooperation. This also explains the behavior of state institutions in maintaining law and order.
A social contract heavily relies on the credibility and rationality of actors. Therefore, a new social contract in Pakistan will demand a laborious effort by all institutional actors, policy makers and the citizenry in general. From an economic standpoint, game theory requires complete coordination to attain an equilibrium where the result becomes self-executing.
The efficiency-distribution binary must also form an integral part of a new social contract. Digital rights ought to be introduced keeping in mind a mushrooming, tech-savvy and connected Gen-Z population. A just allocation of resources on the touchstone of proportionality amongst federating units is also the need of the hour. A step further could be fragmenting the federation into additional constitutive units for efficient governance and a more equitable distribution of resources.
Moreover, for want of maximized efficiency, an actual devolution of powers to all tiers of government which includes the local government, is required. “Fiscal federalism” stipulates that an ideal constitutional structure follows a decentralized model, which in essence is an amalgam of both cooperative and competitive powers between all layers of government.
An Economic appraisal of fundamental rights in Pakistan
According to Cooter, fundamental rights are one thing but their value is something else. Simply put, economic analysis of rights involves the mathematical evaluation of the opportunity cost of one right in terms of another. For example, the scope of a fundamental right can be measured by plotting a demand curve of an individual who is willing to trade a price for individual liberty. Thus, the slope of the curve depicts the “value” of that right. Similarly, plotting a supply curve determines the costs or the resources employed in safeguarding that right.
The cost-benefit analysis is a strong tool in determining the value of all the fundamental rights guaranteed in our Constitution. However, Rawlsian justice puts forth the point that even in the face of scarcity, a state must always choose more liberty against a trade-off for any amount of wealth.
The HRCP identified 2023 as “a year of economic suffering”. Some of the key issues highlighted in its report included:
- alarming figures indicating that against a sanctioned capacity 67,294 the country’s jails held 97,449 prisoners, implying a very high rate of overcrowding at 145 percent.
- at least 2,299 cases of enforced disappearances remained unresolved as of end-2023.
- at least 618 people were reportedly killed in police encounters, while 33 were killed in custody and 24 out of custody. At least 13 people were also reportedly victims of custodial torture.
- In the World Press Freedom Index Pakistan was ranked at 150 out of 180 countries.
- At least 15 internet shutdowns occurred in 2023, violating people’s right to information.
- At least 29 attacks occurred against religious minorities’ worship places as well as 11 cases of faith-based killing, according to media reports monitored by HRCP.
- At least 226 women were reportedly victims of ‘honour’ crimes during 2023, 700 were abducted, 631 were raped and 277 gang-raped; at least 66 women reported having been subjected to domestic violence.
- An estimated 26 million children were out of school in 2023, according to the Annual Status of Education Report, while Pakistan’s public expenditure on education as a percentage of GDP in the fiscal year 2022/23 was estimated at a paltry 1.7 percent as against 1.4 percent in the previous year.
According to Voigt, the affinity between nominal guaranteed rights (on paper) and their actual enforcement is pivotal to predict their economic outcome. A state’s regard for, and implementation of fundamental rights such as life, liberty and dignity of its own citizens can be a good standard to gauge its respect for economic and property rights of foreigners. Farber asserts that when a state carries an odious repute of human rights violations then there are economic consequences for:
- the country’s creditworthiness, as well as
- the amount of foreign direct investment (FDI) it will attract, leading to
- a generally lower propensity to invest in an abusive country than in one where the government diligently enforces basic human rights.
Foreign Direct Investment (FDI) serves as an instrumental indicator for economic development. According to UNCTAD’s World Investment Report 2024 FDI inflows to Pakistan in 2023, at an estimated $1818 million, showed a marginal decrease from 2022. The recently created Special Investment Facilitation Council (SIFC) tasked with giving rise to an enabling and conducive environment to attract businesses and investors has fallen flat on its expectations as FDI remains elusive. The human rights violations and deteriorating security conditions are detrimental contributors to the erosion of investor trust.
The economics of vulnerable property rights in Pakistan
Blackstone makes much the eminence of property rights inasmuch as these strike the imaginations and affections of mankind; and them being “guardians of every other right”. In the economic understanding of property three prerequisites are axiomatic:
- property rights are impersonal and distinguishable from contractual rights which are personal;
- legal ownership allows any person to freely exercise property rights in respect of its development, use, transfer, sale, lease etc.
- property rights attach to them an exclusivity and protection in-rem (against everybody else).
Unfortunately, in Pakistan, property rights attest to vulnerabilities on all three prerequisites. The land-grabbing and “Qabza group” phenomenon are longstanding issues. The legal regime exists but its complexity, lack of implementation along-with an overwhelmingly property-litigious society has contributed to crumble the whole system. Developing a less complicated property-rights regime with minimal red-tape and providing institutionalized ADR methods may yield fruitful results.
One economic theory of property is the bargaining theory which is a type of game theory. Economists prove that the bargaining model shows how cooperation can create a surplus that benefits everyone. The total cost of operating an efficient property-rights system in civil society, is in actuality the cooperative surplus in the game. If we apply the bargaining model to Pakistan, then stringent enforcement of property rights will not only maximize the efficiency of our legal system but such bargaining will provide the methods for distributing the advantages of well-administered ownership through cooperation.
An extension of this bargaining model of property rights is the Coase theorem. It asserts that: “When transaction costs are zero, an efficient use of resources results from private bargaining, regardless of the legal assignment of property rights.” The theorem is counterintuitive and in fact it rationalizes why property rights are so important. This is because: “When transaction costs are high enough to prevent bargaining, the efficient use of resources will depend on how property rights are assigned”. It goes without saying that bargainers are more likely to cooperate when their property rights are certain and less likely to agree when their rights are ambiguous. In Pakistan, there is a pressing need to introduce a more robust land registry system, moving away from the antiquated colonial-era recording of titles.
The economics of coalition governments
An economic analysis of coalition governments finds much relevance as Pakistan not only has a history of such form of governance, but it is in currency these days. According to Cooter, when political bargaining succeeds, lawmakers cooperate rather than exploiting their “threat values”. Their ability to threaten, however, determines the distribution of the surplus from cooperation. Thus, bargaining mirrors their strength in the legislature. The divergence of interests in a game theory of conflict makes the players adversaries, not allies or rivals.
It is an open secret that the incumbent as well as the previous governments are/were unstable coalitions. In game theory of coalition government with symmetrical parties, there exists an empty core. An empty core causes instability. This is because, in the redistribution of political trade-offs, any proposal in the coalition game-theory is blocked by another proposal. This is precisely why different political parties in the present-day coalition have varying stances on multiple issues.
An economic analysis of the judiciary in Pakistan
Economic wisdom has it, that interest groups are led by the “invisible hand” to bring about socially desirable outcomes. However, the impartiality attached with judicial conduct fences a judge from such externalities. By constitutional design, the judiciary must be independent and not convergent to the legislature or the executive branch. The attacks on the independence of judiciary by the establishment in collusion with the legislature and executive branches have been surfacing time and again. The famous letter by IHC-six and increasing interference in the district judiciary for engineering judicial outcomes through court opinions paints a grim picture.
In economic analysis, an independent judiciary is of paramount importance in private and public bargains. Independent judges accomplish the goals of political bargaining by providing neutral interpretation of legislation. Empirical evidence suggests that perennial rule by autocratic regimes facilitates an onslaught on the independence of judiciary. This is comparable to the incessant hegemonic power that our country’s establishment wields, which is put to notorious use in undermining judicial independence.
Feld and Voigt, have conducted the largest studies of several jurisdictions in empirically introducing & measuring two indicators of judicial independence, one dealing with de-jure independence (i.e., the independence of the courts deduced from legal instruments) and the other with de-facto independence (i.e., the independence that the courts actually enjoy). The studies conclude that de-facto judicial independence positively influences real GDP per capita growth.
However, judicial independence must never be supplanted by judicial activism in usurping and accumulating power, which may breed disastrous economic consequences. The Steel Mills and Reko Diq cases are such examples that testify to the fact that even our judiciary is not without its flaws.
Litigation resembles markets in its many facets. Therefore, just as economists strive for searching efficiency-maximizing methods, judges must endeavor to establish efficient common-law. According to Cooter, a Pareto-efficient judiciary unclogs bargains for the legislature. In the Pakistani context, the recent reserved seats case is a good example which illustrates and supports this hypothesis.
Conclusion
The economic analysis of law is no more an intellectual niche, but is a growing specialization impacting legal systems around the world. It is about time that this branch of legal analysis gains traction in our country’s scholarly discourse. As the influential American Justice Oliver Wendell Holmes Jr. wrote more than a century ago::
“For the rational study of the law the black-letter man may be the man of the present, but the man of the future is the man of statistics and the master of economics…”—The Path of the Law
