Global liberalism, local elites, and Pakistan’s development dilemma-I

Many economists view competition among European empires for global territories as one of the underlying causes of World War I. Just over a decade later, World War II emerged, with the global financial crisis of 1929 playing a major role in creating the economic and political conditions that led to the conflict.

The crisis was largely triggered by excessive credit given to individuals and corporations for speculation in financial markets, a trend that had begun in the 1920s with rampant stock market speculation and margin buying.

After World War II, European colonial control weakened significantly, particularly that of the UK. France and Portugal attempted to maintain their colonies but ultimately failed to retain control.

In 1944, the Bretton Woods system was established to stabilize currencies through fixed exchange rates anchored to the US dollar, promote open markets, and rebuild war-torn economies. Institutions such as the IMF and the IBRD were created to support long-term development. This period marked a shift in global power dynamics as international relations increasingly moved toward globalization. While states remained central to the global economy, international institutions and NGOs added complexity to the global system.

Liberal economic policies disproportionately benefited developed countries by facilitating capital liberalization and granting access to inexpensive raw materials and low-cost labor. At the same time, economic liberalism generated substantial inequalities in purchasing power, health, education, and wealth, even as it accelerated growth in industrialized economies that possessed greater leverage in global markets. Four decades ago, most global manufacturing was still concentrated in developed countries, despite the fact that they accounted for only about 12 percent of the world’s population.

Since the 1970s, particularly following the election of Ronald Reagan in the US, corporations, financial institutions, and wealthy elites resembling the robber barons of the Gilded Age have accumulated significantly greater power.

The increasing emphasis on shareholder maximization has directly contributed to the crisis of democratic capitalism by prioritizing profits over workers’ rights and labor protections. This shift away from democratic capitalism toward tax evasion, regressive tax systems, oligarchic structures, and corporate scandals has weakened political voice, as a clear separation between wealth and political power is essential for the functioning of a healthy democratic system.

Karl Marx stated that “Political power, properly so called, is merely the organized power of one class for oppressing another.”

In the postwar period, the global economy largely operated within a bipolar system, with realism and liberalism serving as the dominant frameworks in international relations.

After the Cold War, the world transitioned to a unipolar system characterized by relative stability, expanding trade, and the widespread adoption of market-based economies. Many analysts, including Francis Fukuyama, argued that liberal democracy and free-market capitalism would spread globally, fostering long-term peace and prosperity.

The IMF and World Bank, originally established to promote trade, reduce poverty, and support development, later became central actors in advancing the Washington Consensus. During the 1990s, these institutions applied similar policy frameworks across the Global South.

As a result, many countries experienced currency crises following financial liberalization, while poverty and inequalities particularly in health, education, and wealth persisted.

Pakistan, established after World War II, emerged in a region that the UK had treated as a frontier zone, where political leadership was often appointed rather than elected. For much of its first two decades, the country did not experience consistent democratic governance, and the first elections in the 1970s were highly controversial.

Emerging and developing economies were unsure which model to follow for their economies due to the Cold War. Pakistan faced the same issue and became a key battleground in the Cold War, particularly because of the Russian-Afghan conflict.

Pakistan’s participation in SEATO, CENTO, the Soviet–Afghan War, and the War on Terror brought short-term stability largely through external inflows, rather than through sustainable domestic reforms.

Successive governments prioritized short-term political interests over long-term productivity, leading to political instability, excessive bureaucracy, and weak meritocratic governance.

Deep-rooted institutional weaknesses, including poor accountability, state intervention in markets, and inefficient public administration, further constrained economic growth.

Resource allocation remained politically driven, with programmes such as the Public Sector Development Programme (PSDP) often serving short-term objectives rather than genuine development, thereby generating multilateral income inequality across districts and provinces.

Economic planning was undermined by inadequate data, selective protectionist policies, high barriers to entry, and reliance on import duties for revenue. Additional challenges included elite tax exemptions, ineffective tax administration by Tax collection authorities, distortions arising from the withholding tax regime that created hurdles and made the value-addition process expensive, limited decentralization, persistent underperformance in agriculture, and insufficient investment in education and health.

Collectively, these factors entrenched inequality and curtailed long-term development.

As a result, productivity declined and domestic production failed to meet internal demand. Pakistan’s net factor productivity remains around 1 percent of relative to economy, while population growth averages 2.5 percent, implying an underlying growth rate of roughly 3.5 percent.

Growth beyond this level has largely depended on short-term fiscal or monetary stimulus and has therefore been unsustainable.

Economic growth has become consumption-driven and increasingly dependent on imports, worsening balance-of-payments pressures. Exports remain low in value addition and narrowly concentrated, with earnings often lower than remittances. Growth above 4 percent rapidly depletes foreign exchange reserves.

In this context, the work of Joel Mokyr, Philippe Aghion, and Peter Howitt is particularly relevant. Their research highlights that sustained economic growth depends on technological progress, innovation, and creative destruction supported by strong institutions, rather than on capital accumulation alone.

(To be continued)

Copyright Business Recorder, 2026