Nadeem-ul-Haque
The objective is not an absence of regulation but intelligent regulation. Regulation must be evidence-based rather than authority-based, and every rule must be required to show its purpose.
For more than three decades Pakistan has searched for growth in all the wrong places. Every crisis has produced another package of tax incentives, another subsidized credit scheme, another industrial policy, another export package, another special economic zone, and another donor-funded reform program. Yet investment remains weak, productivity stagnant, and exports disappointingly narrow. We continue to debate taxes, interest rates, and exchange rates while ignoring the institutional reality that determines whether entrepreneurs invest at all.
The greatest tax on Pakistan’s economy is one that never appears in the budget. It is the cost of regulation. Not regulation in the classical sense of protecting consumers, enforcing contracts, or correcting market failures, but regulation as an instrument of administrative control. It is collected not by the Federal Board of Revenue but through licenses, permits, NOCs, inspections, certificates, approvals, notifications, circulars and committees that stand between citizens and ordinary economic activity. It is paid not in money alone but in time, uncertainty, delay, and the countless opportunities for discretion for rent collection that accompany every administrative hurdle.
This is what I have previously described as Pakistan’s sludge economy. Richard Thaler and Cass Sunstein introduced the concept of “sludge” to describe administrative frictions that make it unnecessarily difficult for citizens to access services or exercise their rights. Pakistan has transformed sludge from an unfortunate administrative by-product into a governing philosophy. We have institutionalized friction. We have created an economy in which the entrepreneur’s greatest challenge is often not competition, technology, or finance but the state itself.
The origins of this system lie in the colonial extractive state, which viewed indigenous enterprise with suspicion and organized administration around control rather than economic dynamism. Its objective was to maintain order, collect revenue, and preserve imperial interests, not to create competitive markets or encourage entrepreneurship. Unfortunately, Pakistan inherited not merely this administrative machinery but its underlying philosophy.
Instead of replacing a control-oriented state with an enabling one, successive governments deepened the regulatory apparatus. Planning, industrial licensing, nationalisation, environmental controls, security concerns and donor-driven governance reforms all added new layers of regulation, while virtually none of the old ones disappeared. Every crisis became an excuse for another rule, every scandal for another approval and every market imperfection for another intervention, until the state evolved into an elaborate system of permissions in which administrative discretion increasingly replaced market freedom.Like cholesterol in the human body, individual regulations may appear harmless, even beneficial. The problem lies in accumulation. A single permit rarely destroys investment. A hundred permits certainly can. Just as cholesterol slowly narrows arteries until blood can no longer circulate efficiently, regulatory sludge slowly clogs an economy until enterprise itself struggles to move.
This is regulatory cholesterol. Unlike fiscal expenditure, whose costs appear transparently in annual budgets, regulatory costs remain almost entirely invisible. Governments know how much they spend on roads, hospitals, or defense. They have almost no idea how much compliance costs they impose on firms and households through regulation. No ministry estimates the hours businesses devote to obtaining approvals. No annual report calculates how much investment is delayed while files circulate between departments. No budget documents the opportunity cost of administrative discretion.
What cannot be measured is rarely managed. Economic theory has understood this problem for decades. Ronald Coase demonstrated that transaction costs shape the organization of markets and firms. Douglass North argued that institutions determine long-run economic performance because they influence the cost of exchange. Hernando de Soto showed that excessive regulation traps entrepreneurs in informality by making legality prohibitively expensive. Public choice economists such as James Buchanan reminded us that bureaucracies, like all organizations, respond to incentives and naturally seek to expand their authority.
Pakistan illustrates all of these insights simultaneously. Our administrative system has become a factory for transaction costs. Starting a business, constructing a building, registering property, expanding production, importing machinery or introducing a new service frequently requires navigating overlapping jurisdictions, conflicting regulations and discretionary approvals administered by agencies that rarely coordinate with one another. The result is not merely inconvenience. It is a systematic increase in the cost of doing business that reduces investment, discourages innovation, and protects incumbents against competition.
These costs are not accidental. They sustain what might be called the Secretary’s State. Since colonial times, Pakistan’s governance structure has concentrated extraordinary authority in senior civil servants. Ministries draft regulations, interpret regulations, issue exemptions, supervise regulators, and often exercise quasi-judicial powers over disputes arising from the very rules they administer. The secretary becomes legislator, regulator, interpreter, and gatekeeper simultaneously. Markets operate only within the space permitted by administrative discretion.
This is the precise opposite of a liberal market economy, where government establishes broad rules while leaving economic decisions to citizens and firms. Such a philosophy inevitably produces rent-seeking because discretion has economic value. Every approval withheld creates bargaining power. Every license limiting entry protects existing firms. Every inspection increases opportunities for negotiation. Complexity therefore becomes an asset for those who administer it, which explains why regulatory systems continue expanding even when they plainly reduce national welfare.
Successive governments have attempted to solve this problem through digitization, one-window operations, and “ease of doing business” initiatives. While worthwhile, these measures confuse administrative efficiency with regulatory necessity. An online portal requiring twenty unnecessary approvals remains twenty unnecessary approvals. Electronic paperwork is still paperwork. Technology can accelerate bureaucracy but cannot justify its existence.
That reversal requires a regulatory decapitation.
Unlike conventional reform programs, a decapitation begins with a presumption that existing regulations possess no automatic right to survive. It should follow the following steps:
1. The cabinet should therefore announce that within six months every subordinate regulation, notification, circular, license, permit, inspection protocol, and administrative approval issued under delegated authority will expire unless explicitly renewed.
2. Every ministry should therefore be required to demonstrate, within six months, that each regulation satisfies four straightforward tests. Is there a clear statutory basis? Does the regulation address an identifiable market failure or public objective? Have its economic costs been rigorously measured through Regulatory Impact Analysis? Do its social benefits demonstrably exceed its compliance costs through transparent cost-benefit analysis? Failure to satisfy any of these tests should result in automatic expiry.
3. The review itself should not be entrusted to ministries evaluating their own powers. An independent Regulatory Review Commission appointed by the cabinet should for the duration of the “ Decapitation” and which should include eminent economists, legal scholars, engineers, business leaders, consumer representatives and academics with expertise in institutional analysis. Bureaucrats should provide evidence, but they should not sit in judgment over regulations from which their own authority derives.
4. Later the competition commission or some think tank should be set up to present regular regulation review and impact analysis to the parliament and the people. Perhaps there should be a parliamentary standing committee on regulation.
5. Transparency is equally important. Every month the commission should publish a Regulatory Impact Report listing regulations abolished, regulations renewed, compliance costs reduced, administrative time saved, and ministries failing to complete their reviews. Just as governments publish fiscal accounts measuring expenditure, they should publish regulatory accounts measuring the costs imposed upon society.
Such reports would fundamentally change the incentives of government itself. Ministries would begin competing not over how many new rules they could issue but over how many obsolete rules they had successfully removed.
The objective is not an absence of regulation but intelligent regulation. Environmental standards, financial supervision, consumer protection, and competition policy remain essential functions of a modern state. What must disappear is regulation that exists simply because no one has ever questioned its necessity.
Growth ultimately depends less upon what governments spend than upon how governments govern. Pakistan’s debate about economic reform has remained trapped within macroeconomics for too long. We obsess over taxation while ignoring transaction costs. We debate fiscal deficits while neglecting administrative burdens. We seek investment through incentives while preserving institutions that systematically discourage enterprise.
Until Pakistan replaces the Secretary’s State with an enabling state, until regulation becomes evidence-based rather than authority-based, and until every rule is required to justify its continued existence, the country will continue searching for prosperity while carrying the dead weight of accumulated administrative sludge.
The writer is the former deputy chairman of the planning commission.
