In author’s doctoral studies — published later on in an expanded way by Springer in 2016 as ‘The economic impact of International Monetary Fund programmes: institutional quality, macroeconomic stabilization and economic growth’, he utilized a ‘macroeconomic instability index’ (MII) that was produced by Mustafa Ismihan in his 2003 PhD thesis titled ‘The role of politics and instability and public spending dynamics and macroeconomic performance: theory and evidence from Turkey’ where the MII – which included four aspects of macroeconomic instability as (i) inflation rate (IR), (ii) budget deficit (BD), (iii) general government gross debt (GGGD), and (iv) exchange rate variability – was further augmented by the author by including real effective exchange rate (REER) to include the aspect of competitiveness.
The research was contextualized for 129 International Monetary Fund (IMF) programme countries, which included Pakistan as countries that have at least once utilized an IMF programme, out of a total of 188 IMF member countries for the time period 1980-2009. The study, among other findings, found out the importance of institutional determinants in enhancing macroeconomic stability, and economic growth.
The same doctoral study of the author used the concept of ‘Economic Freedom Index’ (EFI) as a proxy for ‘Economic Institutional Quality’ (EIQ), which, in turn, should be made a part of MII, since as indicated it impacts macroeconomic stability (or simply ‘stability’), and given stability is a pre-requisite of economic growth (or simply ‘growth’), and because research has amply also found a positive consequence of EIQ on growth directly, importance of improvement of institutional quality holds immense importance for sustained stability, and growth.
Sadly, economic institutional quality enhancing determinants are neither rightly contextualized in the light of decades of experience of misgivings of Neoliberalism – the main philosophical underpinning of suggested structural reforms to the country whether in or outside of an IMF programme –nor is the importance of institutions seen as an ‘endogenous’ determinant of production function, or in other words, institutions are only seen to have a very limited impact on national output (or production function, or gross domestic product (GDP)), and since under neoclassical, or neoliberal philosophy, institutions are seen in a very limited way.
As a corollary to not giving much importance to the role of institutions in determining stability and growth – since transaction costs or search and information-related costs, which, in turn, also covers the aspect of asymmetric information-related costs are not considered endogenous to economic policy, (wrongly) internalizing in turn – policies both in or outside of the IMF programme under the influence of neoliberal/neoclassical philosophy have only seen very limited success on not only on the stability, and growth aspect, but also resilience aspect. This is mainly because resilience – or the capacity to appropriately absorb, adapt, and recover from shocks, for example, existential threats like climate change and ‘Pandemicene’ phenomenon and conflicts – depends on stability and growth, which, in turn, require better quality political and economic institutions.
The same doctoral study of the author also included the aspect of political institutional quality (PIQ), in turn, proxied on ‘Polity II’, which is a dataset produced under ‘Polity IV Project’, and included aspects like civil liberties, extent of strength of government in parliament, voice, accountability, rule of law, control of corruption, among others. The study also found the impact of ‘past’ on current institutional quality, pointing, in turn, towards strong presence of path dependency in the case of economic, and political institutional quality.
Hence, it can be seen that both political and economic institutional qualities are important determinants of stability, growth and resilience; which, in turn, means that the philosophical underpinning of neoliberal-minded policy – both under IMF programmes and otherwise – needs to be replaced with philosophies like democratic socialism or social democracy, which do not see a very limited role of public sector – in terms of both elected representative, and appointed public servants – in reducing transaction costs, and overall play a very meaningful role in creating a symbiotic relationship with the private sector, markets, and organizations to overall put stability, growth, and resilience on an optimal level, and a sustainable path.
This then points to the need by both government, and IMF to revisit the whole structural reform affair, centre-staging in turn the role of political-, and economic institutions, and to see both these sets of institutions in the much-needed enhanced, and appropriately-required non-neoliberal perspective.
The current list of structural reforms is very limited in terms of scope, and impact, and the approach of structural reforms is sub-optimal to start with, since by unjustifiably reducing the role of government to mainly as a ‘market fixer’ and ‘facilitator to the private sector’, they have undercut democracy — an important determinant of political, and economic institutional quality. This, in turn, is reflected by lack of pre- and re-distribution policies, including unjustifiably reducing the role of government to appropriately provide non-neoliberal ‘rules of game’ to central, or State Bank of Pakistan (SBP).
Copyright Business Recorder, 2025
The writer holds a PhD in Economics degree from the University of Barcelona, and has previously worked at the International Monetary Fund. His contact on ‘X’ (formerly ‘Twitter’) is @omerjaved7