The ‘big cycle’ of Pakistan’s economy – I

In the aftermath of World War II, a new world order emerged through the formation of institutions like the UN, IMF, World Bank, and WTO - established to promote stability and cooperation, allowing major powers to coexist within a rules-based global system.

But in 2025, that post-war order is visibly fraying. The WTO’s dispute resolution arm is barely functioning just as new tariff wars reshape the global order.

It is in this context that American billionaire investor Raymond Dalio offers insights through his thesis on the rise and fall of empires – The Big Cycle. He argues that new world orders often emerge from the ashes of disorder, and that it is strong leadership and strategic foresight that determine whether a nation rises or sinks during these transitions.

In every war, there are winners and losers - but Dalio notes that neutral nations in great-power conflicts often outperform even the victors. During WWII, nations like Switzerland, Turkey, and Sweden avoided destruction and leveraged neutrality to grow economically and politically. They maintained trade with both sides, served as financial hubs, and positioned themselves for post-war growth.

While the US and China escalate their rivalry today, nations in the middle may quietly grow stronger, richer, and more stable. India is a visible candidate - leveraging the tariff war to expand its influence, attract investment, and secure strategic deals, all without being a frontline player in the conflict.

But can Pakistan do the same?

To navigate the evolving world order as a beneficiary rather than a bystander, Pakistan must balance its foreign relations while undertaking institutional reforms at home. For this shift to occur, it first needs to avoid internal dysfunction (such as weak governance) and external collapse (like mounting debt and fiscal mismanagement).

The big cycle explained:

Dalio’s thesis can be summarized simply: economies rise, peak, and then decline. But first, they must rise.

As economies ascend, they are marked by strong institutions, capable leadership, technological progress, innovation, education, efficient resource allocation, and growing competitiveness. A wealth-generating class emerges, creating prosperity for both itself and the nation - enabling the country to capture a larger share of world trade as financial institutions such as banks and markets begin to thrive.

At their peak, however, economies face rising debt, internal discord, and dwindling reserves - signs of decline before emergence of a new order.

The rise and fall of nations:

Today, India represents a country in the ‘rising phase’ of Dalio’s Big Cycle: strong GDP growth (6.5%), robust foreign reserves ($676bn), booming merchandise exports ($437 bn) and expanding geopolitical relevance. Vietnam, too, is capitalizing on the China+1 strategy, with export growth, FDI inflows, and a competitive manufacturing base.

Eventually, nations reach a ‘tipping point’ where sustained prosperity leads to complacency, rising debt, and reduced competitiveness. A relevant example is the US, which, despite being the world’s leading power, shows signs of institutional dysfunction, political polarization, and declining competitiveness, with average annual GDP projected to fall to 1.9% in 2025 from 2.5% last year. Similarly, China, after decades of rapid expansion, now grapples with structural challenges - tariffs, market crisis, demographic decline, and excessive state control.

Finally, a country enters the ‘declining phase,’ where strengths like innovation, productivity, and leadership erode, and structural weaknesses - high debt, unrest, and capital flight - begin to dominate. Libya, once Africa’s wealthiest nation with over $100 billion in reserves, collapsed due to its authoritarian and archaic regime, civil unrest, and weakened institutions. Similarly, Sri Lanka faced a severe economic and political crisis after years of mounting debt, fiscal mismanagement, and fragile institutions.

Pakistan’s halfway to prosperity:

Unlike classical cases, Pakistan’s Big Cycle was truncated, with early gains stunted before reaching their full peak. Post-independence, Pakistan showed signs of growth with industrialization, strong GDP growth, infrastructure development, and export-led growth in textiles and rice. International institutions saw potential in its economy, but this rise was short-lived, largely confined to select regions, deepening political and regional inequalities.

The decline began prematurely amid political disorder, tensions with India, and the 1971 separation. Nationalization reversed gains, and reliance on aid replaced reforms. Successive regimes prioritized short-term stability over institution-building. The lack of adherence to any constitutional arrangement further accelerated the economic decay.

Since then, Pakistan’s early growth plateaued, constrained by poor governance, regional conflict, and external dependence - manifesting in persistent twin deficits, escalating public debt, loss-making SOEs, institutional decay and stagnant productivity.

What does this decline look like today? 2025 numbers provide a glimpse.

Pakistan on the wrong side of the economic curve:

The total debt and liabilities now stand at 83% of GDP, placing Pakistan 27th globally. Such levels are typically seen in either dynamic economies (US, UK) or collapsed ones (Sri Lanka, Sudan). To maintain its debt stability, Pakistan needs GDP growth exceeding the interest rate on its debt. However, projections suggest growth will barely reach 2% by FY25.

The SBP’s net reserves of $11.25 billion remain insufficient to cover even two months of imports, as imports are projected to reach $57.7 billion in FY25, or 15.5% of GDP. With unsustainable reserves, Pakistan has become the largest IMF beneficiary, having entered into 25 loan arrangements. Weak financial inflows strain the already fragile revenue system, further pressuring external accounts. The current account balance relies heavily on remittances - an unsustainable crutch. Though celebrated annually, remittances reflect the export of talent and intellect. There is ample evidence showing that an increase in remittances does not necessarily drive economic growth (more on this in an upcoming article). Meanwhile, exports, the basis for sustainable growth, now account for just 8.4% of GDP in 2024, down from 10.5% in 2000.

As a result, incentives for creating sustainable wealth are diminishing. Irrational tax policies, such as EFS, unjustified tax rates, and a narrow tax base, have eroded business confidence. Tax collection, revised downward by the IMF, continues to lag, eventually shifting the burden to already-taxed segments. Inflation has eased, primarily due to base effects and falling food prices, rather than an improvement in purchasing power. Household expenditures now consume 89% of the average monthly household income. Eroding purchasing power and difficult business conditions have slowed demand and business activity, contributing to economic stagnation, as reflected in negative industrial output in 8 of the last 10 quarters.

This is the decline Pakistan is facing. According to Dalio, debt doesn’t just grow - it compounds, triggering ripple effects across communities. Consumption falls, inflation rises, trust in institutions wanes, and confidence in the currency erodes. Investors pull back, and citizens lose faith in the system.

Acemoglu and Robinson sum it up in Why Nations Fail: “Nations fail because their extractive economic institutions do not create the incentives needed for people to save, invest, and innovate.” (A must-read for serious students of Pakistan’s economics.)

A Dalio-inspired path to growth:

In today’s shifting global order, increasingly shaped by the U.S., Pakistan has the opportunity to emerge as a strategic gainer - if it remains neutral and focuses on the strategic steps outlined by Dalio: strong governance, innovation, education, efficient resource allocation, competitiveness, and robust markets.

To begin with, Pakistan must focus on the basics: fiscal consolidation. Despite high tax rates on individuals and businesses, the country has one of the lowest tax-to-GDP ratios. The focus must shift from high rates to a broader base and from indirect to direct taxes. In 2024, the FBR collected 51.2% of revenue from indirect taxes (ST, FED, CD) compared to 48.4% from direct taxes. With the informal economy estimated at 30–35% of GDP, formalization and better compliance are essential to increase direct tax collection. A World Bank study reveals that untaxed sectors, like agriculture, contribute only 10% of their tax revenue potential. Bringing these sectors into the net is crucial for fiscal discipline.

Another fiscal pressure point is the financial burden of SOEs. As of FY24, their aggregate losses amounted to 6% of GDP (Rs.5.7 trillion), which is higher than the FBR’s direct tax revenue (Rs.4.5 trillion). Despite privatization being on the agenda since 1991, the government continues to provide budgetary support (Rs196 billion in FY25) to keep them running. Reforming or divesting loss-making SOEs is crucial to ease fiscal burden.

Dalio also stresses diversification of investment to hedge risk. For Pakistan, this means shifting from speculative real estate to export-oriented sectors - an outcome that hinges on restoring business confidence. High taxes, rising input costs, and low confidence push capital into unproductive sectors. Ahmed Jamal Pirzada recently noted that registered companies in Pakistan are increasingly investing in real estate. A stable business climate is the first step toward reversing this trend.

Dalio’s thesis further underscores that major economic powers rise through productivity and innovation. Pakistan must boost both. From 2000 to 2020, its labor productivity grew just 1.5%, far behind India (5.7%), Bangladesh (3.9%), and China (8.5%). With only 0.55% of budget allocated for education versus 7.42% on PSDP, rebalancing is vital. Investing in skills education can enhance productivity, improve job outcomes, and reduce brain drain.

Geopolitically, Pakistan must pursue a balanced approach. While it maintains strategic ties with both China and the US, retaliatory tariffs could damage relations with the U.S., while offering preferential tariffs to the U.S. might strain ties with China. Therefore, it is essential to uphold strategic neutrality, safeguard sovereignty, and pursue targeted reforms for post-war recovery.

Dalio’s roadmap - centered on debt control, fiscal discipline, and neutrality - offers Pakistan a path to resilience. However, to achieve this, the country must first reboot its economic mindset and policymaking framework. By adopting institutional reforms and positioning itself as a neutral gainer in the emerging global order, Pakistan has the potential to transform today’s crisis into a long-term advantage - much like the neutral nations of the post-WWII era.

(To be continued)

Copyright Business Recorder, 2025