Pakistan’s cobra economy: when the cure becomes the disease

During British colonial rule in India, the authorities in Delhi became concerned about the growing population of venomous cobras. Their solution appeared straightforward: offer a financial reward for every dead cobra brought in. The incentive worked initially. People began hunting snakes, and the authorities believed they had found an inexpensive way of dealing with the problem.

But human ingenuity, particularly when money is involved, had other ideas. Some enterprising individuals reportedly began breeding cobras to collect the government bounty. When the authorities discovered the practice, they cancelled the programme. The breeders, left with no reason to keep their snakes, released them into the streets. The result, according to some accounts, was an even greater cobra problem than before.

The historical details of the Delhi episode are not conclusively documented, and the story is often repeated as an illustration rather than a fully verified historical event. The term Cobra Effect was popularised by German economist Horst Siebert in his 2001 book of the same name.

The lesson, however, is enduring. It describes a phenomenon in which a policy intended to solve a problem creates incentives that produce precisely the opposite outcome. The intervention does not just fail; it can make the original problem worse.

There is perhaps no more interesting application of this concept than Pakistan’s political economy and its recurring economic predicament.

Pakistan’s economic problems are usually discussed through the diagnoses of fiscal deficits, mounting public debt, a narrow tax base, low exports, weak investment, energy shortages, declining productivity and recurring balance of payments crises. These are real problems. But perhaps one needs to ask a more fundamental question. Have the policies adopted to address these problems actually created incentives that perpetuate them?

The answer, across several areas of the economy, appears to be yes.

Consider the tax system. Pakistan’s government needs more revenue to finance expenditure, service debt and reduce fiscal deficits. The typical response has been to increase tax rates, impose additional levies and extract more from the already documented economy. Yet the politically difficult task of bringing historically undertaxed sectors, property, agriculture and segments of the informal economy into the tax net has remained incomplete. The result is a vicious circle where formal businesses face higher costs, incentives to remain informal increase, investment is discouraged and the tax base remains narrow. The IMF reported that Pakistan’s total tax revenue, including provincial taxes and petroleum levies, reached 12.3% of GDP in FY2025, its highest level since at least 2000, but remained below the 25th percentile of peer countries. It also estimated that raising GST efficiency towards 35% could generate an additional Rs2.1 trillion on the FY2024-25 base. The issue, therefore, is not simply how much more to tax, but whom to tax and how to expand the productive tax base. At the same time, government needs to be fully transparent in terms of its own expenditure and spending and curtail it to gain public trust.

The energy sector offers an even more striking illustration. Governments have repeatedly attempted to make electricity and gas affordable through suppressed tariffs, subsidies and delayed price adjustments. But when tariffs do not cover the actual cost of generation, transmission and distribution, the resulting shortfalls accumulate as circular debt. Suppliers remain unpaid, investment is discouraged, government liabilities grow and the accumulated costs eventually return to consumers through higher tariffs and taxes. By early 2026, circular debt stood at approximately Rs1.8 trillion in the power sector and Rs3.4 trillion in the gas sector. The policy intended to make energy affordable has helped create an energy system that is increasingly expensive and financially unsustainable. Of course, subsidies are not the only culprit; capacity payments, distribution losses, poor governance and weak recovery are also central to the problem.

Our approach to industrialisation has produced similar contradictions. For decades, Pakistan has sought to develop domestic industries through import tariffs, regulatory duties, subsidies, preferential credit and protection from foreign competition. The intention was to nurture local manufacturing, conserve foreign exchange and create employment. Yet protection, when prolonged and disconnected from productivity and export performance, can become a comfortable shelter from competition. Businesses have little incentive to innovate, improve quality or achieve international scale when the domestic market offers protected margins. The automobile industry illustrates this contradiction. Domestic production and profitability do not automatically translate into internationally competitive manufacturing or exports. The IMF has identified Pakistan’s protectionist trade structure and anti-export bias as significant obstacles to efficiency, resource allocation and export growth. Its analysis found that the country’s weighted average tariffs had remained among the highest of its peers, with additional duties further increasing protection.

The exchange rate offers another example. Governments have frequently resisted market driven adjustments to the rupee in an effort to contain inflation and preserve confidence. But defending an overvalued currency through reserve depletion and administrative import controls can undermine exporters, make imports artificially attractive and discourage investment in domestic production. Eventually, foreign exchange shortages force restrictions and a sharp devaluation. What was intended to preserve stability ends up producing greater instability. Pakistan’s recurring boom and bust cycles cannot be understood without examining this interaction between exchange rate management, domestic demand, fiscal policy and external competitiveness.

Agricultural policy is not immune. Support prices, procurement arrangements and subsidised inputs have been used to protect farmers and ensure food security. Yet when incentives disproportionately favour selected crops, they can distort land and water allocation, discourage diversification and create substantial fiscal and storage costs. Protecting agricultural incomes is a legitimate objective; perpetuating inefficient production and procurement arrangements is not necessarily the way to achieve it.

Then there is public debt. Borrowing can be an instrument of development when it finances productive infrastructure, education, technology and capacity. But when it finances recurring expenditure, subsidies and structural inefficiencies, it creates a compounding burden. Pakistan’s public debt reached approximately Rs76 trillion by March 2025. Interest payments alone amounted to Rs6.4 trillion in the first nine months of FY2025. Every additional rupee devoted to servicing past borrowing reduces the fiscal space available for future investment. The government borrows to meet existing obligations, thereby creating further obligations. The cure becomes another source of the disease.

These examples are not necessarily evidence that every intervention has failed or that all subsidies, taxes, tariffs and borrowing are undesirable. Economic policy inevitably involves trade-offs. The Cobra Effect arises when policymakers design interventions without adequately considering how people and institutions will respond to the incentives created. Good intentions are not a substitute for good incentive design.

But Pakistan’s problem goes beyond individual policy mistakes. It lies in the political economy that produces them.

We need to examine who benefits from the existing arrangements, who bears their costs and why reforms repeatedly encounter resistance. Businesses seek protection rather than competition. Governments seek revenue without confronting influential exemptions and privileges. Political parties favour immediate relief and visible projects over difficult structural adjustments. Institutions seek to preserve their resource allocations and discretionary authority. Those with access to power can secure concessions, contracts, licences and preferential treatment, while the broader economy bears the cost.

This is where the Cobra Effect becomes systemic. It is no longer simply a badly designed incentive in an otherwise functioning economy. It becomes an equilibrium in which the participants have reasons to preserve arrangements that are collectively damaging.

There is a connection here to two fundamental premises that appear to underpin much of Pakistan’s political and economic behaviour. Retaining power, no matter what, and making a quick buck, no matter what.

The first encourages short termism. Governments and political actors priorities survival, patronage and immediate political returns over reforms whose benefits may materialise years later. The second encourages rent extraction rather than wealth creation. When access, influence and protection produce better returns than innovation, productivity and competition, economic behaviour naturally adjusts accordingly. The distinction between creating wealth and capturing existing wealth becomes blurred.

The consequences are visible in the country’s persistent underperformance: a narrow productive base, inadequate investment, weak exports, low productivity, recurring fiscal and external crises and a continuing dependence on external financing. Pakistan has repeatedly stabilised its economy through adjustment programmes, emergency financing and temporary administrative controls, only to find itself returning to familiar difficulties. Stabilisation is necessary, but it is not the same as transformation.

There is also a lesson here from the economist Charles Goodhart, whose observation that when a measure becomes a target, it ceases to be a good measure, captures another dimension of the problem. When governments pursue tax collection targets without broadening the tax base, industrial output without competitiveness, currency stability without external sustainability, or energy affordability without financial viability, they can end up improving the reported indicator while damaging the underlying economy.

So how does Pakistan escape its cobra economy?

The answer is not another collection of disconnected policies or another round of austerity. It requires changing the incentives themselves. Taxation must reward formalisation and broaden the base rather than continually burden documented taxpayers. Industrial policy must reward productivity, innovation and exports rather than perpetuate protection. Energy subsidies should be targeted at vulnerable households, not used to conceal structural costs. Exchange rate policy must support competitiveness, while public borrowing must increasingly finance productive capacity rather than recurring inefficiency. Above all, institutions must become predictable, accountable and governed by rules rather than discretion and privilege.

None of this is easy. Those who benefit from existing arrangements will resist changes that threaten their advantages. That is precisely why economic reform cannot be separated from institutional reform and the political economy of power.

The tragedy of Pakistan is not simply that it repeatedly fails to solve its economic problems. It is that many of the solutions it adopts end up reinforcing the conditions that created those problems in the first place. We tax the same people more heavily, protect the same industries more generously, borrow more to finance the same inefficiencies and subsidise systems that become progressively more expensive to sustain.

Perhaps the most uncomfortable conclusion is that the system is not entirely dysfunctional. It may be functioning rather well for those who benefit from it, even as it fails the economy and the overwhelming majority of its citizens.

Pakistan needs an economic and political system in which the incentives to create national wealth are greater than the incentives to capture it. Until that changes, we may continue breeding cobras while congratulating ourselves on how many we have killed.