Pakistan needs a new economic engine

Pakistan’s economic debate is often repeatedly reduced to arguments over how a limited national budget should be divided: defence or development, subsidies or taxation, the federation or the provinces, public-sector salaries or infrastructure. These are legitimate questions. But they obscure a more fundamental failure. Pakistan has not created enough wealth to meet the aspirations of a rapidly growing population.

The country is attempting to finance the ambitions of more than 250 million people from an economy that remains insufficiently productive, inadequately invested, lightly taxed and only marginally integrated with global trade. No rearrangement of expenditure can permanently resolve that structural mismatch. Pakistan’s first economic imperative must therefore be to enlarge the economic pie.

This point is often overlooked in Pakistan’s public discourse. If the country’s economy were USD 800 billion instead of roughly USD 400 billion, while maintaining broadly the same fiscal priorities, both defence and development would automatically command far greater resources without increasing their share of national income. A defence budget equivalent to around 2 percent of GDP would rise from approximately USD 8 billion to USD 16 billion, while development spending of around 2.4 percent of GDP would increase from roughly USD 9.6 billion to USD 19.2 billion. The percentages would remain unchanged, but the resources available for national security, infrastructure, education, healthcare and technology would effectively double. Sustainable prosperity is therefore not fundamentally a debate about choosing between defence and development. For Pakistan, it is about creating enough national wealth so that both can grow together.

This does not mean pursuing growth as an abstract statistic. It means increasing national savings, productive investment, exports, technology adoption, workforce participation and productivity. It means creating competitive companies, scalable industries and highervalue employment. Above all, it means building an economic system in which prosperity comes primarily from producing and selling more to the world, not periodically from external assistance, geopolitical rents, remittances, debt or consumption financed by unsustainable imports.

Pakistan’s historical growth record needs to be described accurately. The economy has not always grown at only 3 or 4 percent. Growth averaged approximately 6.1 percent during the 1980s, before declining to 4.4 percent in the 1990s and recovering only modestly to about 4.8 percent in the 2000s. The more consequential statistic is that real output per person has risen by only about 2.2 percent annually over the past two decades. Periods of faster expansion have frequently proved short-lived because they depended on external inflows, debt accumulation or domestic demand booms that eventually produced trade deficits, reserve losses and another IMF stabilization programme.

This explains Pakistan’s recurring cycle. Foreign financing becomes available, imports rise, consumption increases and economic activity temporarily accelerates. Because domestic production and exports do not expand sufficiently, the current account deficit widens. Foreign exchange reserves fall, the rupee comes under pressure, inflation rises and the government returns to the International Monetary Fund.

Stabilization then suppresses demand and restores temporary balance, but it does not transform the economy’s productive structure. Once financing conditions ease, the old cycle often begins again.

The latest numbers show how little the underlying economic engine has changed. In FY2025–26, Pakistan’s investment-to-GDP ratio was only 14.4

percent, while national savings were 14.1 percent of GDP. The Economic Survey itself acknowledges that investment has remained around 14 percent over recent years and remains low compared with regional peers. Economies that have transformed themselves, particularly in East Asia,generally invested much larger shares of national income over sustained periods.

At 14 percent, Pakistan is not investing enough to modernize its cities, industry, logistics, agriculture, energy systems, schools or technological capabilities while also absorbing millions of young people into productive employment. Nor is it saving enough domestically to finance even this limited investment without recurring reliance on foreign capital.

Exports reveal the same structural weakness. The IMF has described Pakistan’s export sector as only about 10 percent of GDP. Textiles and apparel still account for roughly 60 percent of merchandise exports, leaving the country vulnerable to a narrow range of products, markets and external demand conditions. During July–March FY2025–26, total exports declined by 8 percent, while textile and apparel exports were broadly stagnant.

Pakistan undoubtedly possesses successful textile companies, a growing information technology services industry, capable entrepreneurs and considerable agricultural potential. But islands of excellence do not constitute an export economy. The country needs to move from cotton yarn and basic garments towards technical textiles, branded apparel, engineering goods, pharmaceuticals, processed food, digital products, professional services, minerals with domestic value addition and participation in regional and global supply chains.

Remittances remain an invaluable source of foreign exchange and support millions of households. Yet their scale also illustrates the weakness of domestic wealth creation. Personal remittances were equivalent to approximately 9.4 percent of the GDP in 2024, almost as large as the country’s export sector when measured against GDP. Pakistanis working abroad are effectively supplying foreign exchange that the productive economy has failed to generate in sufficient quantities at home.

The objective should not be to diminish remittances, but to build an economy whose exports, investment income and highvalue services eventually become much larger than them. A successful country should be able to employ more of its talented citizens productively at home while attracting capital, technology and expertise from abroad and not exporting its talent abroad.

Low investment, limited exports and weak productivity are not separate problems. They emerge from a political economy that frequently rewards access, protection and influence more generously than innovation, efficiency and competition. Businesses are often encouraged to seek tax concessions, protected markets, subsidized inputs, favourable regulation or government contracts rather than investing in research, technology, worker skills and global competitiveness.

The result is an economy with too many incentives for rent extraction and too few for productive risk taking. Capital flows disproportionately into protected sectors, government securities, speculative real estate and activities serving domestic consumption. Exporters, manufacturers and innovative firms must contend with inconsistent taxation, expensive energy, unreliable infrastructure, policy reversals, regulatory complexity and an exchangerate regime that has periodically penalized exports while subsidizing imports.

Yet diagnosing the broken engine is only half the task. Pakistan also lacks the institutional machinery required to repair it.

Economist Atif Mian has described Pakistan as needing a new “nervous system”, one built around real data, genuine learning and competent people entrusted with meaningful authority. The analogy is powerful. A country may possess ministries, plans, committees and capable individuals, yet still fail if information does not move accurately, decisions are not translated into implementation, performance is not measured and institutions do not learn from failure.

Pakistan does not suffer from a shortage of plans. It suffers from weak continuity, fragmented authority and poor execution. Successive governments announce export strategies, tax reforms, privatization programme, energy sector restructuring and investment initiatives. Many contain sensible proposals. But objectives are rarely translated into clearly assigned missions with measurable outcomes, named accountable officials, reliable data, implementation timetables and transparent review mechanisms.

Policies are frequently abandoned when governments change. Ministries work in silos. Federal and provincial priorities diverge. Data arrives late or is contested. Weak performance carries few consequences, while institutional knowledge disappears with the transfer of an official or the departure of a minister. The state repeatedly starts again rather than learning and improving.

This is why isolated reforms cannot transform Pakistan. Raising one tax, privatizing few enterprises, opening one investment facilitation window or subsidizing one export industry may produce a temporary improvement. But interventions undertaken without an integrated operating system are eventually overwhelmed by the surrounding institutional environment.

Pakistan therefore needs two transformations simultaneously. The first is an overhaul of its economic engine. The second is the construction of a national operating system capable of driving and sustaining that overhaul.

The economic engine must be built around a limited number of mutually reinforcing national priorities, raising savings and investment, achieving export-led growth, improving agricultural and industrial productivity, investing in human capital, expanding women’s participation in the workforce, reforming energy and stateowned enterprises, digitizing the economy and the state, creating competitive markets and mobilizing significantly more revenue without repeatedly burdening the already documented formal sector.

The operating system must establish how these priorities are agreed, implemented and measured. It should begin with a National Compact among political parties, federal and provincial governments, armed forces, business, labour and other major institutions on a small set of key economic and structural objectives that will survive changes of government. Consensus need not mean agreement on every tax rate or policy instrument. It means agreeing on the destination, the rules of the economic game and the reforms that cannot be reversed every few years.

Each priority should then become a national mission with quantifiable targets, an accountable leadership team, a delivery timetable and a public performance scorecard. A competent central delivery capability should identify implementation obstacles, connect data across government, escalate unresolved decisions and enable the leadership to distinguish real progress from ceremonial announcements.

Such a system must also learn. Policies should be tested, evaluated and modified when evidence shows they are not working. Countries and companies succeed not because they never make mistakes, but because they recognize failure early, adapt and retain institutional memory. Pakistan’s governance culture too often treats changing course as an admission of weakness. In reality, the capacity to learn is one of the highest forms of state competence.

Pakistan is already classified as a lower-middle-income economy. Its meaningful national ambition should be to graduate into the ranks of upper-middle-income countries within a generation. That cannot be achieved through consumption-led spurts of growth followed by balance-of-payments crises. It will require sustained annual growth of perhaps 6 to 8 per cent, accompanied by productivity gains, rising exports, much higher investment and improvements in real income per citizen.

No finance minister, prime minister, technocratic team or IMF programme can deliver this transformation alone. It requires political legitimacy, institutional continuity and a societywide agreement that wealth must first be created before it can be sustainably distributed.

Pakistan has spent decades patching an engine that repeatedly stalls. Another patch may keep it running until the next crisis, but it will not carry the country to prosperity. Now is the time to rebuild the entire engine and install the national operating system required to steer it, monitor it and continuously improve it. That is the reform before all other reforms.

Pakistan’s challenge is not that it lacks talent, ideas or even resources. Its challenge is that it has not yet built an economic engine capable of creating wealth at the scale its people deserve, nor an operating system capable of sustaining reform beyond one government or one generation. The task before policymakers is therefore larger than another reform package. It is to build a new engine for wealth creation and a new operating system for national execution. Only then will Pakistan possess an economy large enough to finance both its development ambitions and its security needs and finally realise the immense potential that has remained beyond its grasp for far too long.