Pakistan’s political economy: the price of privilege

For most of its history Pakistan grew at a little over 5 percent a year. That record now looks like a memory. Over the last four years growth has averaged barely 2.3 percent. With the population still growing at around 2.5 percent a year, average incomes have barely moved.

Investment is stuck at around 14 percent of GDP, and exports have shrunk to under 9 percent of GDP, the lowest in a decade and roughly half their share in the 1990s.

The real danger is not slow growth alone. It is that this below 4 percent growth is the new equilibrium hardly the pace required to generate productive employment for a rapidly expanding workforce or substantially improve living standards. Why is this happening when the economy has fundamentals that should be propelling it forward?

Pakistan is not a country lacking economic potential. More than 170 million Pakistanis are under 30. This young population should provide a vast market for consumer goods and a large workforce that could be productively employed: the much-cited ‘demographic dividend’.

The country also has one of the world’s largest contiguous irrigation systems, an expanded road network and rapidly spreading mobile and internet connectivity, all capable of raising the mobility and productivity of this workforce and lifting the economy onto a higher, sustainable growth path.

Why has a country endowed with such resources consistently failed to translate its potential into prosperity? The answer lies less in the absence of economic opportunities than in the political and institutional arrangements governing their allocation. Pakistan’s fundamental problem is a system that rewards the capture of economic rents rather than the creation of economic value.

Political influence, administrative discretion and privileged access to the state frequently matter more than efficiency, innovation or enterprise. Large landowners, influential industrial groups, property developers, bureaucrats, and other organised interests have acquired disproportionate influence over public policy. They shape taxation, regulation, subsidies, public spending and access to economic opportunities to protect and enhance their advantages.

Consequently, the pursuit of government patronage often offers higher and more predictable returns than investment in productive activity. Industries protected by high tariffs and regulatory barriers can earn profits without becoming internationally competitive. Subsidised financing, preferential tax treatment and selective enforcement of regulations reward those with access to decision-makers.

The costs are transferred to consumers through higher prices, to taxpayers through subsidies and exemptions, and to the wider economy through suppressed competition and productivity. The economy rewards incumbency rather than innovation, discouraging the creative destruction essential for sustained growth.

Real estate illustrates this distortion. Preferential tax treatment, weak valuation and enforcement, discretionary changes in land use and public investment that raises private land values have made property speculation particularly attractive. Wealth can be accumulated through appreciation in land prices rather than through the creation of productive assets, technological capabilities or employment.

The problem is not investment in housing or construction, which can generate considerable economic activity. It is a framework that rewards speculative landholding and the capture of publicly created land values while productive enterprises confront regulatory uncertainty and intense taxation.

This system of privilege has progressively undermined the institutions responsible for governing the economy. The machinery that would be expected to implement reform has itself been hollowed out.

Appointments, promotions and transfers in the public sector are frequently influenced by political considerations rather than competence or performance. Administrative discretion has expanded while accountability for outcomes has weakened. Rules are selectively enforced, and regulatory institutions are often more effective at controlling economic activity than facilitating it.

Corruption is embedded in a wider political economy in which public authority becomes an instrument for distributing favours, extracting rents and protecting vested interests. In our case, what it makes more corrosive to investment is that it is fragmented and ubiquitous with many separate gatekeepers each extracting a toll. No single payment buys certainty, which makes such corruption far harder to manage or eliminate.

The resulting state is simultaneously intrusive and ineffective: powerful enough to obstruct businesses and burden citizens with regulations, yet too weak to enforce contracts consistently, protect property rights impartially or deliver dependable public services.

This contradiction is most visible in Pakistan’s public finances. The state repeatedly seeks additional revenue from those already within the tax net while politically influential and administratively difficult-to-tax activities remain inadequately taxed. Formal businesses, salaried employees and compliant taxpayers bear disproportionate pressure, while substantial income and wealth escape effective taxation.

The scale of preferential treatment is revealing. The Federal Board of Revenue’s 2026 Tax Expenditure Report estimated federal tax concessions and preferential treatments at Rs 2.35 trillion for FY2025, equivalent to approximately 2.1 per cent of GDP and one-fifth of FBR collections. Not all these concessions are unjustified, but their magnitude demonstrates why each must be subjected to a rigorous public scrutiny.

The fiscal problem, however, extends well beyond inadequate revenue mobilisation. Successive governments have constructed an administrative and institutional apparatus whose cost bears little relationship to the quality of services delivered.

Ministries, departments, attached bodies, regulatory authorities, and public enterprises frequently operate with overlapping mandates, weak performance incentives and insufficient accountability.

The system sustains an elaborate structure of salaries, allowances, official accommodation, vehicles, pensions and other privileges, often with little scrutiny of whether the public receives commensurate value.

Meanwhile, debt servicing absorbs enormous fiscal resources, and financially distressed state-owned enterprises create additional demands on the exchequer.

The combination leaves limited room for human development, essential infrastructure and the maintenance of existing public assets. Pakistan has built a state that struggles to finance the services its citizens need but continues to protect much of the institutional machinery and privileges that its economy can no longer afford.

The country’s recurring dependence on external assistance reflects this underlying failure. IMF programmes, bilateral support and debt rollovers have repeatedly provided temporary relief from external financing pressures. But stabilisation has too often substituted for structural reform.

Each crisis produces another round of taxation and administrative measures, while the political arrangements that generate fiscal imbalances remain largely intact. The immediate emergency is managed; its underlying causes survive.

This pattern has also imposed a substantial burden on private investment. Government borrowing competes for financial resources, uncertainty discourages long-term commitments, and enterprises face an environment in which policy privileges can matter more than commercial competitiveness.

The electricity sector is a particularly damaging example. Inefficient distribution companies, theft, weak bill recovery, contractual capacity obligations and governance failures have contributed to high electricity costs and persistent financial imbalances.

Successive tariff increases have sought to recover the costs of these inefficiencies from paying consumers. But continually raising tariffs on compliant households and businesses cannot substitute for reducing system costs, improving collections, enforcing accountability and restructuring poorly performing institutions.

While public education, health, safe drinking water and sanitation have deteriorated, the better-off have simply opted out, buying private schools, private hospitals, generators and bottled water.

In doing so, they have also lost any personal stake in improving public services, silencing the most influential voices that might demand better. This has weakened the political constituency for improving public provision. Influential groups can insulate themselves from the consequences of institutional failure, while poorer households bear its full cost.

Education offers perhaps the starkest evidence of the country’s misplaced priorities, since enrolment in schools alone is no guarantee of learning. Many children who attend school fail to acquire basic literacy and numeracy. Poor teaching standards, inadequate supervision, absenteeism and weak accountability compound the effects of poverty and inadequate facilities.

Technical and vocational training suffers from similar weaknesses. Most institutes run outdated, shoddy programmes that teach skills the market does not demand, producing graduates without employable skills and leaving businesses short of capable workers even as large numbers of young people struggle to find productive employment.

These failures are not distributed equally across the country. Differences in economic opportunity, infrastructure, public services and access to decision-making have reinforced regional disparities and perceptions of exclusion.

In parts of the country, the state is experienced more through its coercive and regulatory powers than through its developmental responsibilities.

Such perceptions cannot be dismissed simply as the product of political agitation. They reflect deeper questions about the distribution of power, resources and opportunities within the federation.

A federation cannot be sustained indefinitely by constitutional provisions and fiscal transfers alone. Its durability also depends on whether citizens across its constituent regions believe that they enjoy fair treatment, meaningful political representation and a credible opportunity to improve their lives.

Where these conditions are absent, economic grievances can acquire political and ethnic dimensions, weakening trust in the state and threatening national cohesion.

The erosion of confidence is particularly dangerous among the young. In principle, an emerging middle class, now sizeable in absolute numbers, could organise through civil society to rectify these distortions.

In practice, divisions of class, region, ethnicity (heterogeneous population of different nationalities) and political allegiance, combined with dependence on state patronage for employment and opportunity, have weakened the emergence of a broad coalition for reform. Those benefiting from the existing arrangements are organised, influential and determined to preserve them, while those bearing the costs are dispersed, politically fragmented, and often unable to translate their dissatisfaction into sustained pressure for institutional change.

Emigration, a safety valve for frustration, also drains away many of the most able and most vocal.

Can a new political dispensation or a new set of political actors enter such a system and execute a formidable reform agenda? On present evidence the barriers are formidable.

Elections have become prohibitively expensive, requiring huge volumes of funding that invariably attract illicit, including criminal, sources — which then have to be ‘paid off’ through contracts, postings and protection. The entry ticket into politics is itself a commitment to the rentier order.

This explains why reforms repeatedly falter despite widespread agreement on what needs to be done.

Pakistan does not suffer from a shortage of reform proposals. It suffers from a political economy in which the beneficiaries of the existing order possess both the incentives and the influence to obstruct their implementation and who still have not come to the conclusion that the cost of preserving the status quo exceeds the cost of reform if the country is to escape from its growth trap.

Meaningful change therefore requires more than another programme of fiscal adjustment or administrative restructuring. Tax reform must address the preferential treatment of income, assets and activities rather than merely increasing demands on existing taxpayers.

Competition must replace protection as the principal discipline governing business performance. The state’s administrative footprint must be rationalised, with public institutions judged by outcomes rather than their size, budgets or political influence.

Above all, rebuilding the federation requires institutions that distribute opportunities fairly, respect regional diversity and give citizens a meaningful stake in the country’s economic and political future.

None of these changes will be easy. They require confronting interests that have shaped public policy for decades. But the alternative is the continued erosion of economic opportunity, institutional legitimacy and social cohesion.

Pakistan’s central challenge is not a lack of resources, entrepreneurial ability or economic potential. It is a system in which private privileges are protected while their costs are socialised.

The most serious danger is that millions of unemployed young Pakistanis are losing faith in the possibility of building a better future in their own country. When the young increasingly see opportunity as dependent on connections rather than competence, and advancement as possible only through emigration or patronage, the consequences extend far beyond economic stagnation.

Those who can are leaving, including thousands of doctors, engineers and accountants. Their remittances keep the balance of payments afloat, but the country is exporting the very people it needs to build its future. A young population denied a stake in the country’s growth does not remain a dividend for long; it becomes a demographic nightmare that threatens social cohesion and national unity.

Copyright Business Recorder, 2026