Arshad Mahmood Awan

In economic discourse, an elite is typically defined as a group or entity that seeks external rents, which are profits gained through non-productive means, without a corresponding contribution to the country’s Gross Domestic Product (GDP). In Pakistan, the issue of elite capture is not just a theoretical concern but a fundamental challenge that has shaped the country’s economic landscape for decades. Elites in Pakistan, including powerful business associations, feudal lords, and influential institutions, have historically maintained their grip on the nation’s resources while bypassing the tax system and contributing little to the economic growth of the country. This elite-led system has fostered a culture of rent-seeking and political patronage, perpetuating inequality and undermining economic stability.

Pakistan’s political and economic structure has consistently been shaped by elite groups that prioritize their own interests over national development. These elites can be broadly categorized into several groups: representatives of powerful business sectors, feudal landowners, wholesalers and retailers, and influential institutions such as the military and bureaucracy. For instance, the business elite, especially those from the manufacturing sector, have formed powerful associations that influence policies in their favor, operating as oligarchs who control market dynamics without contributing equitably to the economy. Similarly, the feudal class, which controls vast tracts of agricultural land, has successfully resisted attempts to impose income tax on the agricultural sector, where the majority of the nation’s wealth is generated. Meanwhile, wholesalers and retailers—critical parts of Pakistan’s trade system—have continuously resisted efforts to bring them into the formal tax net.

The concept of elite capture is not new, but it has gained renewed attention recently due to its profound implications for economic policy and governance. According to a report by the Stimson Centre, a reputable think tank, elite groups in Pakistan, despite their seeming differences, cooperate with one another to maintain control over state functions. The report notes that even though these groups might appear confrontational and exclusionary, they often form alliances through bargaining and negotiations to ensure that their extractive roles within the state are preserved. This cooperation, which spans across various sectors, has led to the perpetuation of a system that benefits a select few while hindering the nation’s broader economic development.

This cooperation between elites is most evident in Pakistan’s budgetary processes, where the same groups continue to benefit year after year. The pattern of budgetary allocations remains largely unchanged, with the majority of the national budget directed towards military and civilian salaries, which represent a small fraction of the population. In contrast, vital social welfare programs, such as the Benazir Income Support Programme (BISP), which is intended to provide assistance to the growing number of poor and vulnerable citizens, receive only a fraction of the budget. The 2024 budget, formulated at a time of acknowledged economic fragility, saw an inexplicable 21 percent increase in current expenditures, largely allocated towards salary increases for government officials and military personnel, while the allocation for social welfare programs like BISP remained at a meager 3 percent.

Moreover, Pakistan’s tax system is heavily skewed. The government has made little progress in implementing a tax system that is both equitable and progressive. Direct taxes, which are supposed to be based on the ability to pay principle, are largely overshadowed by indirect taxes, which disproportionately affect the poor. While direct tax revenue is reported to account for 42 percent of total Federal Board of Revenue (FBR) collections, a significant portion of this amount comes from withholding taxes levied on sales taxes, which are considered indirect taxes. These taxes, such as the sales tax, place a heavier burden on lower-income groups than on the wealthy, exacerbating inequality. Despite recommendations from the Auditor General of Pakistan to clarify and accurately represent the composition of these taxes, the government has continued to misrepresent this collection, further compounding the issue of tax transparency.

At the same time, indirect taxes, which form the bulk of the country’s tax revenue, have continued to burden the already strained public. The rationale behind these taxes is often presented as necessary for fiscal stability, but in reality, they exacerbate the wealth gap, creating a system in which the elite continue to benefit at the expense of the poor. The wealthy business elite, for example, remain largely outside the formal tax net, with their vast wealth generated through rent-seeking activities and monopolistic practices.

The growing dissatisfaction with elite capture is not only evident within Pakistan’s own population but has also attracted attention from international lenders and financial institutions. The International Monetary Fund (IMF) and multilateral institutions have increasingly called for structural reforms to address the issue of elite capture. These calls are particularly urgent as Pakistan’s external debts continue to rise, and the country’s economic stability remains in jeopardy. The IMF, in particular, has emphasized the need for tax policy reforms that focus on simplifying revenue collection and broadening the tax base while ensuring the progressivity of the tax system. This would require reducing exemptions and preferential treatments that benefit the elite and addressing long-standing distortions in the agricultural sector, which have hindered its productivity.

The agricultural sector, which employs a large portion of Pakistan’s population, has long been dominated by powerful feudal lords who benefit from government price-setting policies and subsidies. These interventions, while initially aimed at supporting farmers, have created inefficiencies and distortions in the sector, preventing it from responding to changing market demands. This has led to price volatility, hoarding, and a lack of innovation, all of which have contributed to the sector’s stagnation. Furthermore, the continued reliance on state support has created a vicious cycle in which the demand for more subsidies from vested interests increases, while productivity remains stagnant. As noted by the IMF, these distortions in the agricultural sector have undermined Pakistan’s medium-term economic potential and placed a significant burden on fiscal sustainability.

One of the key recommendations from the IMF is to contain primary expenditure, which accounts for a significant portion of Pakistan’s budget. In 2024, primary expenditure is expected to reach 16,176 billion rupees, or 13.3 percent of GDP. The IMF has urged the Pakistani government to contain this expenditure while ensuring that social and development spending priorities are protected. However, the reality is that much of the government’s spending continues to be directed towards maintaining the privileges of the elite, rather than fostering productive sectors of the economy.

In conclusion, the issue of elite capture remains a significant obstacle to Pakistan’s economic development. The country’s tax system, budget allocations, and economic policies have consistently favored a small group of elites at the expense of the wider population. While there are growing calls from both domestic and international actors for reform, the entrenched interests of the elite continue to resist change. To achieve sustainable economic growth and address the structural challenges facing the country, Pakistan must move away from the rent-seeking model and prioritize internal reforms that focus on broadening the tax base, reducing distortions in key sectors such as agriculture, and ensuring that state resources are allocated in a way that benefits the majority of the population. Only through such reforms can Pakistan break free from the cycle of elite capture and build a more equitable and prosperous future.