pointed to the same conclusion. Foreign debt was declining and the current
account was showing sharp improvement. The real interest rate was low or
even negative, showing that borrowers were not chasing scarce savers.
Investment remained below savings, indicating that banks had a surplus of
funds they could have lent for productive use. Investment, at around 17 per cent
of GDP, was significantly less than in other developing countries. A reason for
low investment could be the low return to economic activity. Pakistan did by
the mid-2000s have most of the symptoms of low economic returns, low inter-
est rates implied that lenders were chasing borrowers and increased remit-
tances from overseas Pakistanis were being invested in real estate rather than
industry. There was certainly evidence that Pakistan suffered from low appro-
priability of returns. In the Global Competitiveness Reports from the mid-
2000s Pakistan rated poorly in terms of judicial independence and the
existence of well-defined property rights, while launching a small business
was a long, expensive and cumbersome procedure. A poorly functioning legal
system made banks more reluctant to lend,banks typically faced a significant
default risk from borrowers who could continue for years until being declared
bankrupt by a corrupt and inefficient court system and be pushed to repay the
debt; even then typically once assets were scheduled for auction to repay
debtors they would typically disappear. Lending for property in Pakistan was
hindered by inefficient, unclear and frequently disputed rights to land and land
titling. The proximate constraint on growth was low investment and its deeper
causes lay in the lack of protection afforded to potential investors.
Be careful with lessons and history
Too often policy advisers, donors and scholars confine themselves to compar-
ing policies and institutions of poorly performing developing countries with
either the successful developing countries (often those East Asian countries
like South Korea and Singapore) or now-developed countries. The comparison
is typically and not surprisingly unfavourable. Reformers then tend to urge that
poorly performing developing countries copy such ‘good policies’ and ‘good
institutions’. This type of approach ignores what we can learn from history in
two ways: the history of how institutions have changed; and the relation
between economic growth and institutional change. First, the possibility of the
rapid institutional change urged by many commentators is contradicted by the
historical experience of today’s developed countries. Now-developed coun-
tries experienced, according to Chang (2003), a ‘long and winding road’ of
institutional development which took ‘decades’. From the first stirrings of
democracy to universal suffrage took France and Switzerland a hundred years
after the nineteenth century. The need for a modern professional bureaucracy
in Britain was first discussed in the eighteenth century and became a reality
only in the early nineteenth century. Such slow change was often because of
the widespread realization that many changes were expensive (labour laws and
Conclusion: Eight Principles for Policy-Makers 293