Naeem Afzal
During a glamorous summit in Islamabad, the Prime Minister declared, “Pakistan is out of the woods now.” According to analysts, the PM views the woods differently. Because on the ground, Pakistan is getting worse off by all the regional standards.
In a resource-rich study by S. Akbar Zaidi, it has been proved that ordinary Pakistanis have experienced low quality of life. In the 1990s, the per-capita income in Pakistan was 100% higher than that of Bangladesh and 56% higher than that of India. In 2024, Bangladesh has a 53% higher and India a 71% higher per capita income than Pakistan. In real terms, the wages in Pakistan have fallen behind.
Pakistan’s state of economic dysfunction is not incidental. It’s rooted in a poor structure of incentives, originating from the extractive nature of the political economy of taxation, and sustained due to the geopolitical handouts. The long-term remedy lies in the implementation of structural reforms.
The Integrated Household Survey 2025-2026 reveals that since 2018, Pakistanis have been consuming less food because a large share of their income is spent in paying utility bills. The unemployment figure is at an all-time high. According to the latest labor survey, 7.6 million people are neither enrolled in any institution nor employed. The International Monetary Fund calls this situation of the economy the “stagnation,” or stabilization without job creation.
The economic thinking in Pakistan is still stuck in the era of the sixties. Our policymakers see “development” in big and shiny projects and infrastructure-related spending. They focus on the hardware and neglect the software of the economy. Modern economics is nothing but transactions: the exchange of goods, ideas, and so on. The successful countries facilitate transactions, while unsuccessful countries block transactions through regulatory sludge and controls.
The poor economic development also has roots in the poor governance structure of the country. The World Bank, in its policy notes, Pakistan@100, argues that Pakistan ranks poor among regional peers on the rule of law, strong institutions, and other good governance indicators. In the words of Woodrow Wilson, the economic forces respond to the incentive structure of good governance. “Running a constitution is harder than framing a constitution.”
The pervasive corruption and rent-seeking practices sit at the heart of economic underdevelopment in Pakistan. The IMF, in its Governance and Corruption Diagnostic Report, calls corruption the cause for perpetuating rent-seeking patterns in the economy.
The political economy of taxation has blocked the expansion of the revenue base in real terms. The tax-to-GDP ratio is stuck at 10%, among the lowest in the region. The revenue base is constrained and getting coercive for the compliant sectors. The agriculture sector contributes 23% to the GDP, employing 45% of the labor force. From its Rs. 900 billion size, it contributes merely Rs. 2-3 billion to the revenue pool, because Pakistan’s parliaments are packed with agriculturalists who have blocked serious legislation in this regard. In the words of Ijaz Nabi, it’s the political economy that has been the cause of the shrinking resource base, not the technical capacity of the FBR.
Pakistan’s economic structure is also deeply mired in the crisis of productivity. According to the World Bank, a Pakistani product or service is ten times less productive than the product made in regional countries. In the words of Ijaz Nabi, “Pakistan consumes 95% of what it produces.” Consumption isn’t a serious problem, because we spend more than we earn. Pakistan’s exports have remained low-value-added products, earning only $30 billion in foreign exchange. As one analyst puts it, “Pakistan earns more from its geopolitical position than exports.” In the words of Nadeem-ul-Haque of PIDE, fancy terms such as geopolitics or geoeconomics work as patronage distribution mechanisms. The long-term growth will result in the case of holistic reforms because, as Paul Romer says, “Economic growth springs from better recipes, not just from cooking.”
Milton Friedman once warned, “One of the greatest mistakes is to judge policies and programs by their intention rather than their results.” Pakistan must reform its civil service, because undertaking serious reforms requires a smart and efficient bureaucracy. Currently, bureaucratic inertia obstructs innovation and the emergence of new ideas in the economy. According to PIDE, there is a regulatory sludge that hinders the free flow of transactions by imposing NOC requirements, licenses, and unnecessary permissions. PIDE has calculated that there are 140+ regulatory agencies in the federal government alone, and this bureaucratic sludge costs the economy $6-7 billion in GDP loss.
Pakistan must also enhance the ease of doing business by streamlining economic transactions. Businesses don’t flourish in a vacuum; they operate in a holistic ecosystem influenced by institutional incentives. Nearly all investors, both domestic and foreign, complain about red tape and a coercive permission culture, and the effects are visible in the declining trend of Foreign Direct Investment inflows, which has shrunk to merely two billion dollars of the GDP.
The government’s footprint has also grown beyond limits. According to PIDE, government controls 67% of the economy, and this involvement is the potential cause behind distortions in the markets, erosion of competitiveness, and distribution of rents. In order to enhance productivity, Pakistan must introduce markets and let all organizations compete in the free but regulated markets.
Friedrich Hayek reminds us, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” To conclude, Pakistan is not out of the woods yet. Stabilization has morphed into stagnation. Pakistan does not need another reform package, another IMF program, or another donor’s advice. What Pakistan needs is a holistic structural change, led by the people through the act of parliament. As Paul Romer has rightly said, “A crisis is a terrible thing to waste.”
