An interesting week for journalism as newspapers collectively revealed an important shift in the way the economy is being discussed. As I have noted in previous reviews, economic reporting has largely revolved around the daily cycle of announcements: another IMF review, another export target, another meeting of the ECC, another increase in petroleum prices, another promise of investment, another privatization plan. Journalism has remained an extension of official press releases. This week, however, several reporters and commentators moved beyond announcements and began asking questions about institutions, incentives and implementation. The movement is tentative, uneven and incomplete, but it needs to be encouraged.

What continues to remain missing is the detailed questioning of the system that even the government says, “has collapsed!”

Economic Journalism

Perhaps the best example was Profit‘s continuing coverage of the wheat market. Rather than simply reporting farmers’ protests or government responses, it used economic logic to discuss the sequencing required to liberalize a market. Merely eliminating procurement did not automatically create competitive markets because farmers still lacked storage facilities, warehouse receipt systems, commodity finance, transparent price discovery and effective competition among buyers. The result was a strengthening of intermediaries rather than markets, leaving farmers exposed to precisely the uncertainties that the supply chain was supposed to minimize. Thus the newspaper demonstrated something that Pakistani journalism rarely manages: policy reform is not merely a knee-jerk policy change without understanding the institutions that must exist if the market and supply chain are to work.

Profit continues to distinguish itself because its reporting reflects an understanding of economics rather than merely business news. Its coverage of the power sector is a good example. The immediate news was that distribution companies were seeking another tariff adjustment, but the newspaper looked beyond the regulatory hearing to explain the underlying problem. As more households and businesses switch to solar, the fixed costs of the old electricity system are spread over a shrinking number of grid consumers. Capacity payments remain locked into long-term contracts, pushing tariffs even higher and encouraging still more consumers to leave the grid. What they missed was what research has repeatedly shown: that the power sector is controlled by the bureaucracy, which does not allow a deregulated market-based system to emerge after 20 years of commitments.

Several newspapers correctly highlighted the impressive inflow of worker remittances of over three and a half billion dollars during July, recognizing its importance for Pakistan’s external position. Yet remittances are only half of a much larger story. During the same week, reports also noted the continuing outflow of skilled and semi-skilled Pakistani workers seeking employment abroad. Rising remittances undoubtedly ease balance-of-payments pressures, but they may simultaneously indicate an economy increasingly dependent upon exporting labor because it struggles to create sufficiently productive employment at home. Research on the brain drain has regularly shown that this skilled migration coincides with our continued reliance on foreign consultants as well as the erosion of domestic capacity. This link was missed.

The announcement that the Special Investment Facilitation Council intends to accelerate the regulatory guillotine has the potential to become one of the year’s most important economic stories. None of them knew that while domestic research was available, there is a foreign consultant leading the effort. Domestic research has also pointed out simpler methods for doing such deregulation, while the consultants’ efforts are to keep the process going for a long time. Unless newspapers maintain such institutional memory, even deregulation risks becoming another slogan whose success is measured by announcements rather than outcomes.

Overall, the quality of reporting this week was stronger than usual because several journalists displayed an awareness that economies are systems rather than collections of isolated events. Nevertheless, the dominant weakness remains fragmentation. The reports on taxation, electricity, migration, agriculture, regulation and investment were all informative individually, but very few attempted to connect them into a single explanation of Pakistan’s long-standing avoidance of reform.

Economic Commentary and Opinion

Opinion pages also improved but remained “siloed” and unrelated to local research. However, these articles were willing to question assumptions that have become deeply embedded in Pakistan’s policy debate. The article arguing that Pakistan’s power-sector privatization (BR) has the sequence backwards made precisely this point. Ownership changes alone cannot solve problems created by flawed market design. Nor is it wise to hand over monopolies to the usual houses that have grown up on government subsidies or protection. Moreover, privatizing a distribution company while leaving unchanged the tariff structure, contractual obligations, regulatory framework and political interventions that shape its behavior merely transfers an inefficient system from one owner to another. The insight extends well beyond electricity. Pakistan has often treated institutional reform as a question of ownership when the more fundamental issue concerns the incentives created by the rules within which organizations operate.

The taxation debate similarly showed signs of maturing. The article challenging Pakistan’s obsession with the tax-to-GDP ratio (BR) argued, correctly in my view, that taxation cannot be evaluated independently of the economy from which taxes are collected. The relevant questions are not only how much revenue is raised but also what forms of economic activity are taxed, what compliance costs are imposed, how investment incentives are affected and how effectively public expenditure converts taxation into public value. Pakistan has gradually allowed the tax ratio itself to become the objective of policy rather than a consequence of economic development.

Dawn also produced reporting that challenged conventional economic narratives rather than simply reproducing official statistics. Its report on Bank of Punjab President Zafar Masud’s proposal for a “Welfare GDP” questioned whether aggregate GDP adequately measures improvements in living standards when rapid population growth, unequal income distribution and differing inflation experiences across income groups are taken into account. Whether one agrees with the precise methodology is almost beside the point. The report encouraged readers to think beyond headline GDP figures and towards the relationship between economic growth and actual welfare, a distinction that has become increasingly important in countries where macroeconomic stabilization has not translated into broad improvements in household well-being.

Several commentaries also converged around the question of governance. The continuing debate over creating new provinces prompted thoughtful discussions about whether administrative fragmentation can compensate for institutional weakness (BR and Dawn). These pieces deserve credit for refusing to assume that smaller provinces automatically produce better government. Yet the discussion remained incomplete because it focused primarily upon constitutional arrangements rather than the economics of public administration and fiscal federalism. The debate on provinces has been ignited to defer the longstanding demand for city autonomy through a local government law. Much research around the world has shown that cities are the engines of growth and that city competition for investment and human capital drives investment. Most recent research on China called the growth acceleration in China a product of the “mayoral economy.” The debate here missed this point.

Another welcome theme was the treatment of artificial intelligence as part of a broader development ecosystem rather than as an isolated technology. In Dawn, Mahwish Khan’s “Before AI Hits the Grid” argued that Pakistan’s AI ambitions will be constrained by unreliable and expensive electricity. Business Recorder’s “The Real Test of Pakistan’s AI Sovereignty” similarly argued that competitiveness depends not only on adopting AI but also on developing domestic technological capability and sound governance. Together, these articles remind us that technology is central to modern life, and technology policy cannot be separated from education, infrastructure and institutions.

Despite these strengths, the opinion pages also revealed a long-standing weakness in Pakistan’s economic commentary. Too many articles still end with broad prescriptions rather than specific reforms. We are repeatedly told that Pakistan should improve governance, strengthen institutions, broaden the tax base, increase exports or invest in human capital. Many of this week’s pieces, including “Pakistan Needs a Pause” (Profit), “Beyond Tax-to-GDP Ratio” and “Fiscal Federalism in Pakistan” (Business Recorder), correctly identify the country’s structural weaknesses, but they often stop at that level. The more difficult questions are left unanswered. Which regulations should be abolished? Which agencies should lose authority? Which subsidies should end? Which markets need new institutions? Which decisions should move from ministries to cities, schools or firms? Institutional reform happens at this level of detail, not at the level of aspiration. Until economic commentary moves from diagnosis to institutional design, calls for better governance will remain persuasive but incomplete.

Another notable omission across much of the week’s commentary was the limited engagement with Pakistan’s own research community. International institutions continue to dominate public debate. World Bank reports, IMF assessments and multilateral publications receive detailed discussion while Pakistani economists, universities, think tanks and researchers who have spent decades examining precisely these questions are never cited. Economic journalism would become considerably richer if it routinely placed domestic scholarship alongside international work, allowing ideas to compete rather than assuming that intellectual authority must always arrive from abroad.

A Common Narrative Emerging but Granularity Missing

Taken together, the week’s reporting and commentary point to a narrative that few articles state explicitly. Pakistan has made measurable progress in restoring macroeconomic stability, yet the institutions that generate sustained growth remain largely unreformed. Weak cities, over-centralized administration, thin markets, regulatory accumulation, financial systems geared toward government borrowing rather than enterprise, an unreformed power sector, dysfunctional agricultural markets and continuing reliance on migration and IMF support are not separate problems but different manifestations of the same political economy. The encouraging development is that Pakistan’s economic press is beginning to move beyond reporting announcements toward examining the systems that produce these outcomes. The next step is to connect those systems into a coherent explanation of why the same economic crises continue to recur using available research and not just IFI and donor prescriptions.

Every few years, Pakistan’s decentralisation debate wakes up, stretches, and asks the same tired question: should we create more provinces? Divide Punjab. Split Sindh. Somewhere in this arithmetic, development is supposed to follow.

Nigeria gets dragged into the argument almost on cue. Look, the proponents say — 240 million people, thirty-six states. We have four provinces for a fraction of that population, and much less state capacity to show for it. The comparison sounds persuasive until you look past the headline number.

Nigeria is not simply a country with many provinces. It has three constitutionally recognised tiers of government: the federation, thirty-six states, and 774 local government areas. The states are not local governments. They are intermediate governments — a middle layer between Abuja and the institutions that are supposed to actually touch citizens’ lives. Pakistan’s debate keeps borrowing Nigeria’s middle tier and forgetting its third one exists. That’s not a small omission. It’s the whole story.

So here’s the question nobody in Islamabad wants to sit with: if we carved out ten or twelve provinces tomorrow, would government actually get closer to citizens, or would we just end up with more governors, more assemblies, more secretariats, another layer of people stamping files? Because Nigeria already ran this experiment, and it should make anyone citing the country nervous rather than confident.

Creating thirty-six states didn’t decentralise power in Nigeria. It just moved the centre — from Abuja to thirty-six state capitals. For years, federal money meant for the 774 councils passed through something called the State Joint Local Government Account, and governors used it exactly the way you’d expect: controlling deductions, controlling timing, controlling who got paid and when. Elected councils were routinely swapped out for caretaker committees loyal to the governor. On paper, the third tier existed. In practice, it was a branch office with a nameplate.

Governors had a defence, and it wasn’t a stupid one. Many councils, they argued, couldn’t run payroll on their own. Pooling resources kept the weak ones solvent. Fair enough — except critics pointed out the obvious trap in that logic: councils can’t build administrative capacity while the state keeps a hand on their money, their staff, and their politics. Round and round it goes. Sound familiar? It should. Pakistani cities have been having a version of this fight with their provinces for decades, just without the vocabulary to name it.

In July 2024, Nigeria’s Supreme Court finally weighed in. States, it ruled, could no longer hold and spend the councils’ federal allocations. The money had to go directly to democratically elected local governments, and the caretaker-committee trick was thrown out too — a local government had to actually be elected, not appointed from a state capital and given a badge.

Two years later, the ruling is still mostly theoretical. Reporting through mid-2026 shows the bulk of quarterly allocations — more than a trillion naira in the first quarter of 2026 alone — still flowing through state-controlled channels, not directly to councils. President Tinubu has leaned on governors publicly and even floated an executive order to force the Central Bank’s hand. Governors have mostly just waited him out. Anambra State passed legislation in 2024 that critics say quietly rebuilt the old joint-account system under a different label. And with 2027 elections approaching, nobody in the federal government wants to pick this fight too hard, too fast.

Which points to the real lesson, and it isn’t about compliance timelines. A court can reassign legal authority overnight. A political system cannot reassign actual power nearly so fast. Even where the money now technically lands in a council’s account, the state still runs local elections, controls personnel, writes the relevant laws, and manages the administrative machinery underneath it all. Depositing a cheque doesn’t make a government autonomous if everything else about it still answers upward.

This is almost exactly the trap waiting for Pakistan. Split Punjab, Sindh, Balochistan and Khyber Pakhtunkhwa into ten or twenty provinces tomorrow, leave the existing provincial model untouched, and what have you actually built? Several smaller Lahores, each dominating its own hinterland the way Lahore dominates Punjab today. The map changes. The politics of centralization doesn’t. You’d have decentralized centralization — a phrase that should embarrass anyone who says it out loud, and yet.

There’s a reason this pattern reproduces itself so faithfully, and it isn’t really about geography. It’s about the bureaucracy that would staff each new provincial capital. Nigeria’s own federal civil service is, like Pakistan’s, a colonial inheritance built to run a large territory from the center — hierarchical, politically captured, more instrument of the ruling class than neutral administrator of it. And crucially, that pathology didn’t stay in Abuja when power moved to the states. Nigeria’s thirty-six state bureaucracies largely reproduced the same fusion of politician and civil servant at their own scale, just with smaller budgets and shorter supply lines to the governor’s office. Pakistan’s own CSS-dominated administrative culture — postings, transfers and patronage run out of the chief secretary’s office — would not stay behind in Lahore, Karachi or Peshawar if new provincial capitals were created. It would simply relocate, fully intact, to Multan, Sukkur or wherever the next secretariat gets built. New provinces don’t dilute an entrenched bureaucracy. They franchise it.

Pakistan, to be clear, hasn’t even reached this stage of the conversation. Every constitutional fight here is still about the NFC Award, provincial shares, or the demand for a new province. Local government shows up right before elections are constitutionally overdue, gets a headline or two, and then vanishes. Cities and districts remain what they’ve always been — administrative appendages of provincial departments, not governments in their own right.

That’s a problem, because development doesn’t happen at the provincial level anymore, if it ever did. It happens in cities. Land markets, zoning, transport, commercial regulation, policing — these are local questions dressed up as provincial ones. Firms invest in Karachi, not Sindh. Entrepreneurs compare Lahore to Bengaluru or Dubai, not to Multan. And yet nearly every decision that shapes those cities gets made in a provincial secretariat, by people who don’t live there and won’t answer for the outcome.

Nigeria’s unfinished mess offers Pakistan both a warning and a working principle, not a template to copy. The warning: adding intermediate governments doesn’t decentralize anything by itself — it can just relocate where the center sits. The principle: decentralization that stops at the province isn’t decentralization at all. It’s a change of address. Real reform means deciding, constitutionally, what belongs to the local level and cannot be touched by the province above it — not just money, but elections, staffing, land, planning, regulation.

None of this is free, either. Every new province means a governor, a cabinet, a secretariat, a police command — resources that could have gone to roads or schools, and fresh patronage to hand out besides.

So the question Pakistan should be asking isn’t how many provinces we need. It’s where decisions actually ought to be made, and how much room our cities have to run themselves. Development doesn’t happen where governments spend money. It happens where people, firms and ideas are free to interact. Nigeria didn’t learn that by creating states. Two tiers down, it’s still trying to.

Pakistan has once again entered the familiar debate over provinces, and once again it is asking the wrong question.

The right one is harder: why does Pakistan still govern its economy through boundaries the British drew for reasons that had nothing to do with prosperity, rather than through the cities where its wealth is actually made? Split Punjab into four provinces tomorrow and ask what changes. Does Faisalabad wake up capable of governing itself, its land markets clearing faster, its entrepreneurs getting easier access to infrastructure and approval? Almost certainly not — the province was never the unit doing the strangling.

We keep treating governments as if their job were to hand out health, education and infrastructure and stop there. Those things matter, but they don’t explain why some societies get rich and others don’t. A government can build every school and clinic on the list and still leave its people poor if it never builds the environment in which people exchange ideas, take risks and invest. That environment has a name, and it isn’t the province. It’s the city.

The numbers already say as much. Urban Pakistan produces something like 55 percent of national output even though the official count — the one the state actually plans around — puts only 38 percent of the population as urban. Ten cities generate 95 percent of federal tax revenue; Karachi alone accounts for more than half of that and close to a quarter of GDP, with Lahore and Islamabad trailing behind. A country cannot run itself as an agrarian federation of districts when a handful of cities are quietly paying for the rest of it.

The mismeasurement gets more embarrassing up close. A recent World Bank paper applied the Degree of Urbanisation method — the density-based standard most countries now use instead of drawing arbitrary lines on a map — and found that roughly 88 percent of Pakistanis already live somewhere with genuinely urban characteristics, more than double the official figure. Pakistan is one of the last countries still classifying urban space by decree, which means the state is planning, quite literally, for a country that no longer exists.

None of this is new, even if Pakistan has ignored it for decades. Jane Jacobs argued that cities are humanity’s great engine of development because they keep generating “new work” through the friction of strangers bumping into each other’s ideas. Edward Glaeser calls the city mankind’s greatest invention for much the same reason. Geoffrey West did the math and showed that as cities grow, productivity rises faster than population — a doubling in size more than doubles output. Paul Romer’s growth theory puts ideas, not capital, at the centre of the story, and Hayek got there decades earlier, arguing that the knowledge a society needs is scattered across millions of minds and cannot be directed from a ministry. Put these thinkers together and one claim survives all of them: a city is a living system, and nobody can predict which street corner produces the next idea worth having.

That should change how we think about the state’s job. If cities behave like complex systems rather than machines, no government can order prosperity into being through a subsidy scheme or a five-year plan. What it can do is build the conditions that let millions of separate decisions add up to something: property rights, streets where people actually meet, transit that gets workers to jobs instead of trapping them in traffic, land markets not strangled by rules written for a different century, and permission systems simple enough that starting a business doesn’t require a favour from someone in an office. This is the part Pakistan keeps getting backwards.

Our cities are administered as if they were still colonial outposts — rural settlements dressed up with a few more buildings, existing mainly to house people and keep them fed. Density, the one thing that makes cities productive, is treated as a threat: sprawl gets subsidised while downtowns are preserved for the comfort of a small official class, a habit reinforced by paying loyal servants and supporters in government plots. The result is expensive, worsening sprawl, and the state’s answer has been flyovers, underpasses and signal-free corridors — moving cars faster through a city shaped to guarantee they’ll always be stuck. Every serious study of urban productivity says the opposite should be happening.

The consequences follow predictably: decisions that should happen at the city level get made elsewhere, land sits idle while approval crawls through agencies that don’t talk to each other, transit fails to connect because the bodies running it answer to different masters, and public space rots because no single office is responsible for it.

None of this was an accident, which is why it’s proven hard to unwind. The colonial administration wasn’t built to maximise innovation; it was built to keep order, collect revenue and hold territory, and that logic survives almost intact today. An officer’s career still begins in a district — a rural unit — before working up to province and then centre, which means city management sits near the bottom of the hierarchy that runs Pakistan, junior even to the deputy commissioner. Town planners, transit managers, sanitation engineers: all junior posts, filled by people with limited authority. The system was never built to produce urban expertise, so it hasn’t.

Yet the country these officials govern has become something the org chart doesn’t recognise. Pakistan now has more than two hundred cities above a hundred thousand people, and clusters like Islamabad-Rawalpindi that function as single labour markets whether the map admits it or not. Cities that size need to compete for talent the way firms do, or accountability keeps drifting upward toward Islamabad rather than down to the people who live there.

India offers a useful comparison, mostly because its experiment didn’t fully work. The 74th Constitutional Amendment of 1992 gave urban local bodies constitutional standing and mandated regular elections — a real structural break that has held for thirty years. But fiscal autonomy never fully arrived, and several metropolitan planning committees the amendment called for were never set up. The lesson isn’t that recognition is worthless; it’s that recognition without money and function stalls halfway — and Pakistan hasn’t reached India’s starting line.

Even the electoral system compounds the problem. A metropolitan economy needs leaders answerable to the whole city, not a patchwork of wards each pulling toward its own interest. Plan transit, housing or economic strategy through a system that rewards every representative for maximising benefits to one neighbourhood, and you get exactly what Pakistan has: nothing coherent.

Which is why the provinces debate misses the point. It’s an argument about slicing up public spending, and it always lands back at the National Finance Commission, fighting over transfers. But wealth was never mainly created by government spending; it comes from what private people do when the conditions are right — invest, build, take a chance. Cities create growth because they create those conditions; provinces, by themselves, do not. What Pakistan needs is a government that treats cities as the living systems they are, not the districts they were drawn to be — one that sees its role not as directing the outcome from above, but as building the floor millions can stand on to build the rest themselves.

The remittance story nobody quite told

Record remittances hit $41.6 billion in FY26. That’s nearly double what came seven years earlier. Meanwhile, merchandise exports? They barely budged. Still stuck in the same narrow range, year after year. So, Pakistan got a current-account deficit of $139 million anyway. Let that sink in — a record inflow, and the external account still went negative.

Business Recorder’s editorial caught it. One op-ed in the same paper nailed the mechanism better: Pakistan has allowed remittances to do the work that exports should be doing. Remittances are the result of exporting productive labor while productive capacity and productivity is not improving. In reality, remittances have not created external resilience but helped postpone reform that for investment for more productive investment.

Here’s what didn’t happen: no story connected the remittance story to graduate unemployment, documented byHaque and Nayab. If firms at home can’t absorb educated workers, then remittances aren’t “external-sector strength.” They’re proof that Pakistani graduates and skilled labor are more employable in Riyadh or Dubai than in Pakistan. That’s not a resilience story. It’s an indictment. The journalism filed three separate stories when it was really one story all along.

FDI

Foreign capital kept moving through the week, though not toward anything productive. Pakistan actually paid out more to existing foreign investors than it pulled in fresh FDI during FY26, a fact Business Recorder reported clearly but nobody really interrogated. The distinction that matters, and that most outlets newspapers entirely, is between portfolio purchases of government securities and capital flowing into factories, technology, or exports. Treasury bills finance the state’s budget. They tell you nothing about confidence in the productive economy. Mixing them together is how government spin becomes economic news.

Bank Lending

Profit did better work here, reporting that banks borrowed Rs5.9 trillion from depositors in FY26, up from Rs5.4 trillion the year before, while private-sector credit is expected to shrink from Rs1.4 trillion. Banks chose government paper because it’s safer and better-paying; SMEs got squeezed. This isn’t new. PIDE’s regulatory work described exactly this crowding-out pattern years ago.

As of March 2026, private-sector lending represented just 22 percent of banking assets. India’s ratio sits around 50 percent; Bangladesh manages 40 percent. Pakistani banks are running record leverage while channeling almost everything into government debt, and the advance-to-deposit ratio has hit one of the weakest readings in the region. When a newspaper reports “private credit growth” or “expanding bank risk appetite” without setting it against this structural reality, it’s letting officials’ language substitute for actual analysis.

Cotton: sectoral journalism, almost

Dawn got closest to real investigation with cotton. Output collapsed from 14 million bales to 6.85 million. The story connected it to import costs, lost export earnings, delayed decisions. That’s real sectoral reporting. But it leaned on OICCI’s frame. A stronger piece would have weighed competing explanations. Seed quality matters. Research-system failure matters. Water constraints. Support-price distortions. Pesticide availability. Provincial extension systems that don’t function. The political economy of sugar out-competing cotton for acreage and subsidy.

A crop loses more than half its output in a decade. That’s not weather. It’s institutional failure accumulated year on year. Deserves the same scrutiny as any governance collapse.

The MDR relaxation and another gift to banks

The minimum deposit rate floor got narrower, not removed. As of August 1, it applies only to accounts under Rs10 million. Everything above that? Trusts, companies, affluent individuals — they lost the guaranteed return. Banks are expected to pocket an estimated Rs20–45 billion annually from the repricing.

It was announced that this was done to compensate banks for the scrapped remittance-subsidy scheme which the government paid banks to bring in foreign remittances. Economists, including myself, had criticized it for years as unjustified. Banks were being paid to do what. Removing it made sense. So there was no need to give banks extra compensation--letting them cut returns on deposits above the Rs10 million threshold. No newspaper asked the obvious question: why did ending an unjustified subsidy require creating another one? Nor did anyone linked the public views of leading economists with this development..

Diplomacy as press release

UK trade coverage reproduced the press release. Both governments agreed to “strengthen engagement.” The high commissioner praised reforms. The story ended. No review of past trade commitments made and abandoned. No named barriers. No deadlines. No success metrics. The press release supplied the entire narrative, fact and interpretation both.

The op-eds: scepticism within silos

Opinion pages were better. More questioning than news pages. But fragmented.

Business Recorder warned that “external calm is more fragile than it appears.” Correct. That near-balanced current account rests on remittances and suppressed demand, not strength. The News ran “Migration by design,” linking migration to poverty and absent opportunity. That’s one step away from my brain-drain argument.

“Rethinking trade policy” in Dawn rejected export targets. But it stopped before connecting trade failure to energy pricing, customs, taxation, regulatory sludge — the permission economy that explains why commerce policy alone can’t fix exports. A Business Recorder piece on government mandates made the sharpest point of the week: which tier should do what? But it didn’t finish the thought. Reshuffling functions between provincial bureaucracies isn’t decentralization to citizens. Local government remains hollow, both fiscally and politically.

“Peacemaking with shopkeepers” challenged the latest traders’ tax scheme. Useful. But missed that “undocumented” commerce is increasingly mythical. Electricity, banking, property, supply chains — most retail activity is already visible. The problem isn’t invisibility. It’s political selectivity and distrust. But more importantly, it is the state of a disorganized market suffering from government predatory practices—volatile and grabbing--that operate like a tax on them which erodes trust and growth. Rather than taking the time to work with them to develop the market and stop predatory taxes the government wants to tax them further. This point has repeatedly been made in research, but columnists seem not to be aware.

Two columnists, one missing argument

Two Dawn columnists argued past each other without acknowledging it. Ishrat Husain was cautiously optimistic — external goodwill and Saudi deposits could convert into productive investment if the state managed capital flows carefully. Khurram Husain was openly sceptical, pointing out that Pakistan has repeatedly mistaken inflows, deposits, and geopolitical rents for genuine economic recovery. Both had something right. Neither identified what inflows have been used for decades: the postponement of reform.

That’s the real story. Dollars don’t fail to produce growth because there aren’t enough of them. They fail because they allow predatory governance to avoid changing itself. External money — Saudi deposits, IMF rollovers, remittances, geopolitical rents — lets the government keep doing what it’s already doing: paying civil-service perks, allocating plots and PSDP projects to the connected, offering protocol privileges to the well-placed, selling regulatory discretion to those with access. The state remains unthinking and uninformed. It sits on decades of domestic research — PIDE’s 5 year old work on the permission economy, the regulatory audit findings, the institutional analyses of why markets don’t function — and ignores it all because the incentive structure rewards extraction, not learning.

Investment doesn’t materialize in this environment because private investors need predictability, rule of law, and competitive markets. What they actually encounter is negotiation with officials whose incentive is personal benefit, not economic growth. A factory owner watches the government allocate a plot to a VIP’s nephew instead of to competitive bidding. A trader watches customs officials extract bribes because the tariff system is deliberately complex. An exporter watches tax authorities harass productive firms while letting connected smugglers operate. Why invest?

External money masks all of this. It allows the government to postpone the decision to reform its own structure. The cycle repeats: inflow arrives, celebration follows, consumption expands, imports surge, reserves pressure builds, exchange rate crashes, next crisis hits. Then the government goes cap in hand again. And the private sector, watching this pattern year after year, sees no reason to invest in manufacturing, exports, or long-term productive capacity.

Growth only happens if capital enters competitive markets, transparent allocation mechanisms, and cities capable of absorbing productive labor. Otherwise, the money is just a postponement — a way for predatory governance to survive another budget cycle without reforming itself.

The pattern

Five stories. Remittances. Portfolio flows. Private credit. Cotton. Skills. Each one reflects the same underlying condition. An economy where the state borrows first. Where everything else gets crowded out. Where labor exits because firms can’t absorb it. Where domestic research documenting underlying causes, sits on shelves, goes uncited.

-Pakistan’s policy debate remains trapped in a twentieth-century conception of development. We continue to believe that prosperity is built through government projects, subsidies, industrial policy, annual budgets, patronage and ever-expanding public expenditure. Success is measured by kilometers of roads, megawatts installed, tax targets achieved, welfare transfers distributed, and money spent. Yet the world’s most dynamic economies are investing less in projects than in ecosystems where ideas, entrepreneurs and innovation can flourish.

Three recent books—Geoffrey West’s Scale, Sebastian Mallaby’s The Power Law, and The Infinity Machine—offer a remarkably coherent alternative vision. One explains the mathematics of cities and complex organisations, another traces the evolution of venture capital, and the third tells the story of DeepMind and the race for artificial intelligence. Together they point to a single conclusion: prosperity is not engineered through projects but emerges from institutions that continually generate innovation.

The first lesson comes from Geoffrey West. Cities are not merely concentrations of people; they are networks of interaction. As they grow larger and denser, productivity, innovation and incomes increase faster than population because ideas circulate more rapidly, firms specialize, knowledge spills across sectors and new combinations continuously emerge. Growth is therefore fundamentally a network phenomenon.

Pakistan has systematically undermined these network effects. Our major cities remain fragmented by overlapping authorities, rigid land regulations, poor public transport and planning systems that separate homes from workplaces while pushing commerce into isolated industrial estates. Local governments possess neither authority nor financial autonomy, and the colonial administrative structure—designed for extraction and centralised control rather than urban development—continues to dominate governance. Development policy should therefore begin not with industrial sectors but with empowered cities capable of creating ecosystems where enterprise can thrive.

The second lesson comes from The Power Law. Innovation is financed very differently from the way Pakistan finances economic activity. Here, banks have been allowed to become virtually the entire financial system. They lend primarily against collateral, largely to government or established businesses, while young firms possessing ideas but few assets struggle to obtain capital. Our stock market, at barely ten percent of GDP, remains too small to play a meaningful developmental role, while regulators have concentrated fund management, debt markets, foreign exchange markets and much of financial intermediation within the banking sector, actively discouraging competing non-bank institutions.

This represents a profound misunderstanding of finance. The purpose of financial markets is not merely to preserve capital but to allocate and price risk. Venture capital, private equity, active equity markets and other non-bank institutions succeed precisely because they accept that many investments will fail while a handful of exceptional firms generate extraordinary returns. Their objective is not to eliminate failure but to maximise exposure to transformative success. Pakistan’s financial architecture, by contrast, has been designed to eliminate risk and has therefore eliminated much of the innovation that accompanies it.

This is not an argument for reckless speculation. It is an argument for recognising that banks and capital markets perform different but complementary functions. Banks preserve wealth and finance mature businesses; capital markets, venture funds and private equity finance discovery, experimentation and technological change. A country seeking sustained growth requires both.

The third lesson emerges from The Infinity Machine. DeepMind’s success did not arise because the British government declared artificial intelligence a priority sector and instructed civil servants or universities to produce it. Nor was it simply the result of generous subsidies. It emerged because world-class universities, ambitious researchers, patient investors, advanced computing infrastructure and entrepreneurial freedom combined within an ecosystem that rewarded curiosity, experimentation and risk-taking.

DeepMind’s founders were pursuing a fundamental scientific question—how intelligence itself works—not implementing a government development strategy. Commercial success followed intellectual inquiry rather than bureaucratic planning. Pakistan, unfortunately, has moved in precisely the opposite direction. Universities, intended to be communities of scholars, have increasingly become bureaucracies preoccupied with compliance, accreditation exercises, rankings, procedural requirements and administrative control. Faculty devote growing amounts of time to satisfying regulatory processes rather than pursuing original research, while vice chancellors increasingly resemble civil servants rather than academic leaders. We nevertheless expect these institutions to produce frontier innovation after organizing them to minimize risk instead of encouraging discovery. Breakthroughs emerge where universities are trusted as centers of inquiry, closely connected to entrepreneurs and investors, and free to pursue bold ideas—not where they function as extensions of the bureaucracy.

The contrast with Pakistan’s policymaking is striking. Ministers and civil servants routinely begin by deciding which industries deserve incentives, which products should be exported and how commercial risks can be transferred to taxpayers. Rarely do we ask how to create an environment in which thousands of entrepreneurs pursue their own ideas, compete freely, fail without stigma and begin again. Yet innovation cannot be planned because genuine breakthroughs are, by definition, unpredictable. This is the central message shared by all three books.

Governments perform indispensable functions. They build hard and soft infrastructure, protect property rights, fund basic research, maintain macroeconomic stability and provide public goods. They perform far less successfully when attempting to identify tomorrow’s winning technologies, firms or industries. Markets discover opportunities through countless decentralized experiments; governments create the institutional conditions that make those experiments possible.

The policy debate must therefore change fundamentally. Instead of debating which sectors deserve subsidies, we should ask whether entrepreneurs can establish businesses within days rather than months. Instead of producing increasingly detailed plans and targets, we should ask whether universities generate research that investors wish to commercialize. Instead of celebrating industrial estates and PSDP allocations, we should measure success by innovative firms created, a growing stock market, venture investment mobilized, patents commercialized, exports generated, and ideas translated into globally competitive products.

Artificial intelligence makes these lessons even more urgent. AI will not reward countries simply because they purchase software or announce ambitious strategies. It will reward those with world-class universities, competitive firms, sophisticated financial markets, open research environments and well-governed cities that maximize interaction among talented people. The competitive advantage will belong to ecosystems rather than projects.

Pakistan therefore requires a fundamentally different philosophy of development: regulatory reform that removes barriers to experimentation instead of creating new permissions; empowered local governments that manage cities as engines of growth rather than administrative districts; financial reforms that allow venture capital, private equity and deep capital markets to complement commercial banking; universities governed by scholars rather than bureaucracies; and, above all, a state that understands its greatest contribution to innovation lies not in directing discovery but in enabling it.

For too long, Pakistan has pursued development through planning, patronage and projects. The emerging global economy is increasingly organized around networks, knowledge, experimentation and entrepreneurial discovery. Countries that understand this transition will create the technologies of the future. Those that continue measuring progress by expenditure, projects and administrative control will remain occupied with financing yesterday’s economy while tomorrow’s is invented elsewhere.

For more than three decades Pakistan has searched for growth in all the wrong places. Every crisis has produced another package of tax incentives, another subsidized credit scheme, another industrial policy, another export package, another special economic zone and another donor-funded reform program. Yet investment remains weak, productivity stagnant and exports disappointingly narrow. We continue to debate taxes, interest rates and exchange rates while ignoring the institutional reality that determines whether entrepreneurs invest at all.

The greatest tax on Pakistan’s economy is one that never appears in the budget. It is the cost of regulation. Not regulation in the classical sense of protecting consumers, enforcing contracts or correcting market failures, but regulation as an instrument of administrative control. It is collected not by the Federal Board of Revenue but through licenses, permits, NOCs, inspections, certificates, approvals, notifications, circulars and committees that stand between citizens and ordinary economic activity. It is paid not in money alone but in time, uncertainty, delay and the countless opportunities for discretion for rent collection that accompany every administrative hurdle.

This is what I have previously described as Pakistan’s sludge economy. Richard Thaler and Cass Sunstein introduced the concept of “sludge” to describe administrative frictions that make it unnecessarily difficult for citizens to access services or exercise their rights. Pakistan has transformed sludge from an unfortunate administrative by-product into a governing philosophy. We have institutionalized friction. We have created an economy in which the entrepreneur’s greatest challenge is often not competition, technology or finance but the state itself.

The origins of this system lie in the colonial extractive state, which viewed indigenous enterprise with suspicion and organised administration around control rather than economic dynamism. Its objective was to maintain order, collect revenue and preserve imperial interests, not to create competitive markets or encourage entrepreneurship. Unfortunately, Pakistan inherited not merely this administrative machinery but its underlying philosophy.

Instead of replacing a control-oriented state with an enabling one, successive governments deepened the regulatory apparatus. Planning, industrial licensing, nationalisation, environmental controls, security concerns and donor-driven governance reforms all added new layers of regulation, while virtually none of the old ones disappeared. Every crisis became an excuse for another rule, every scandal for another approval and every market imperfection for another intervention, until the state evolved into an elaborate system of permissions in which administrative discretion increasingly replaced market freedom.Like cholesterol in the human body, individual regulations may appear harmless, even beneficial. The problem lies in accumulation. A single permit rarely destroys investment. A hundred permits certainly can. Just as cholesterol slowly narrows arteries until blood can no longer circulate efficiently, regulatory sludge slowly clogs an economy until enterprise itself struggles to move.

This is regulatory cholesterol. Unlike fiscal expenditure, whose costs appear transparently in annual budgets, regulatory costs remain almost entirely invisible. Governments know how much they spend on roads, hospitals or defence. They have almost no idea how much compliance costs they impose on firms and households through regulation. No ministry estimates the hours businesses devote to obtaining approvals. No annual report calculates how much investment is delayed while files circulate between departments. No budget documents the opportunity cost of administrative discretion.

What cannot be measured is rarely managed. Economic theory has understood this problem for decades. Ronald Coase demonstrated that transaction costs shape the organisation of markets and firms. Douglass North argued that institutions determine long-run economic performance because they influence the cost of exchange. Hernando de Soto showed that excessive regulation traps entrepreneurs in informality by making legality prohibitively expensive. Public choice economists such as James Buchanan reminded us that bureaucracies, like all organisations, respond to incentives and naturally seek to expand their authority.

Pakistan illustrates all of these insights simultaneously. Our administrative system has become a factory for transaction costs. Starting a business, constructing a building, registering property, expanding production, importing machinery or introducing a new service frequently requires navigating overlapping jurisdictions, conflicting regulations and discretionary approvals administered by agencies that rarely coordinate with one another. The result is not merely inconvenience. It is a systematic increase in the cost of doing business that reduces investment, discourages innovation and protects incumbents against competition.

These costs are not accidental. They sustain what might be called the Secretary’s State. Since colonial times, Pakistan’s governance structure has concentrated extraordinary authority in senior civil servants. Ministries draft regulations, interpret regulations, issue exemptions, supervise regulators and often exercise quasi-judicial powers over disputes arising from the very rules they administer. The secretary becomes legislator, regulator, interpreter and gatekeeper simultaneously. Markets operate only within the space permitted by administrative discretion.

This is the precise opposite of a liberal market economy, where government establishes broad rules while leaving economic decisions to citizens and firms. Such a philosophy inevitably produces rent-seeking because discretion has economic value. Every approval withheld creates bargaining power. Every license limiting entry protects existing firms. Every inspection increases opportunities for negotiation. Complexity therefore becomes an asset for those who administer it, which explains why regulatory systems continue expanding even when they plainly reduce national welfare.

Successive governments have attempted to solve this problem through digitization, one-window operations and “ease of doing business” initiatives. While worthwhile, these measures confuse administrative efficiency with regulatory necessity. An online portal requiring twenty unnecessary approvals remains twenty unnecessary approvals. Electronic paperwork is still paperwork. Technology can accelerate bureaucracy but cannot justify its existence.

That reversal requires a regulatory decapitation.

Unlike conventional reform programmed, a decapitation begins with a presumption that existing regulations possess no automatic right to survive. It should follow the following steps:

1. The cabinet should therefore announce that within six months every subordinate regulation, notification, circular, license, permit, inspection protocol and administrative approval issued under delegated authority will expire unless explicitly renewed.

2. Every ministry should therefore be required to demonstrate, within six months, that each regulation satisfies four straightforward tests. Is there a clear statutory basis? Does the regulation address an identifiable market failure or public objective? Have its economic costs been rigorously measured through Regulatory Impact Analysis? Do its social benefits demonstrably exceed its compliance costs through transparent cost-benefit analysis? Failure to satisfy any of these tests should result in automatic expiry.

3. The review itself should not be entrusted to ministries evaluating their own powers. An independent Regulatory Review Commission appointed by the cabinet should for the duration of the “ Decapitation” and which should include eminent economists, legal scholars, engineers, business leaders, consumer representatives and academics with expertise in institutional analysis. Bureaucrats should provide evidence, but they should not sit in judgment over regulations from which their own authority derives.

4. Later the competition commission or some think tank should be set up to present regular regulation review and impact analysis to the parliament and the people. Perhaps there should parliamentary standing committee on regulation.

5. Transparency is equally important. Every month the commission should publish a Regulatory Impact Report listing regulations abolished, regulations renewed, compliance costs reduced, administrative time saved and ministries failing to complete their reviews. Just as governments publish fiscal accounts measuring expenditure, they should publish regulatory accounts measuring the costs imposed upon society.

Such reports would fundamentally change the incentives of government itself. Ministries would begin competing not over how many new rules they could issue but over how many obsolete rules they had successfully removed.

The objective is not an absence of regulation but intelligent regulation. Environmental standards, financial supervision, consumer protection and competition policy remain essential functions of a modern state. What must disappear is regulation that exists simply because no one has ever questioned its necessity.

Growth ultimately depends less upon what governments spend than upon how governments govern. Pakistan’s debate about economic reform has remained trapped within macroeconomics for too long. We obsess over taxation while ignoring transaction costs. We debate fiscal deficits while neglecting administrative burdens. We seek investment through incentives while preserving institutions that systematically discourage enterprise.

Until Pakistan replaces the Secretary’s State with an enabling state, until regulation becomes evidence-based rather than authority-based, and until every rule is required to justify its continued existence, the country will continue searching for prosperity while carrying the dead weight of accumulated administrative sludge.

We keep asking why is investment so low? Why is the economy not growing? Why is the informal economy so large? I will argue that one answer is hiding in plain sight. Pakistan has not built financial markets. It has built a banking corridor.

Almost every serious financial transaction must pass through banks. Government paper is heavily bank-intermediated. Foreign exchange is routed through authorized dealer banks. Mutual funds depend heavily on bank distribution. Retail access to treasury bills and Pakistan Investment Bonds remains cumbersome and bank-centered. Entry into banking is difficult.

Non-bank financial institutions have been deliberately weakened by the SBP over the years. Capital markets remain peripheral as they are encumbered by regulations , controlled by brokers and too small and thin to matter to individual investors.

A modern financial system is not a banking monopoly with a few decorative capital-market institutions around it. It is an ecosystem. Banks compete with money markets, non bank financial institutions, mutual funds, pension funds, insurance companies, securities dealers, custodians, fintech platforms, exchanges and independent advisers. Savers have choices. Borrowers have choices. The government borrows in a deep and competitive market. Exporters and importers see transparent foreign-exchange prices. Investors can move easily between deposits, money-market funds, bonds, equities, pensions and other instruments.

Pakistan has done the opposite. It has made banks the gatekeepers of finance. This is a failure of market-making by the State Bank of Pakistan.

The central bank’s job is not merely to regulate banks. Nor is it simply to announce interest rates, manage reserves, supervise payments and lecture the public on inflation. A modern central bank must help create liquid, transparent and competitive markets. Monetary policy works through markets. Debt management requires markets. Foreign-exchange stability requires markets. Savings become investment through markets.

In Pakistan, this competing financial markets are absent in fact they are narrow, clubby and bank-dominated. The result is a financial system that is comfortable for incumbents but costly for growth.

Banks an government both love this arrangement. The former control most financial transactions without competition earing super profits without any financial innovation, while paying their senior management huge fees and giving them huge stature. A captive banking system makes government borrowing easier. It also allows government to influence interest rate and exchange rate policy in a state of macro policy in a state of fiscal dominance.

But the economy pays the price. When banks dominate finance, private credit suffers. Banks prefer large, familiar, collateral-rich borrowers. They prefer government paper. SBP finds it easier to control foreign exchange through banks than through an open market. Bank run money market does not put pressure on interest rates as there is no external challenge.

Growth requires risk capital. Here we have a system for risk avoidance. Growth requires price discovery. We have built negotiated corridors. Growth requires deep markets. Here we have banks competing in money markets, banking, exchange markets mutual funds and government and private debt. Growth requires savers to become investors. Pakistan keeps them as depositors.

This is why Pakistan’s financial sector remains small relative to the needs of the economy. Institutions and markets that allocate and price sick capital efficiently and dynamically are missing. It finances government, large corporates and politically familiar sectors. It does not create the competitive financial ecosystem required for productivity growth.

Take government securities. In a serious market economy, treasury bills, PIBs and sukuk should be widely and easily accessible. A household should be able to buy them directly. A pension fund should be able to trade them easily. A mutual fund should be able to compete openly with deposits. A broker should be able to make a market. Prices should be visible. Secondary-market trading should be active. Yield curves should be meaningful. Repo markets should provide liquidity. Government debt should become the benchmark for pricing private debt.

Foreign exchange shows the same institutional failure. FX cannot be a free-for-all. No serious country allows unregulated foreign-currency trading. But there is a difference between regulation and cartelization through bank control. A transparent electronic FX market with many regulated participants is very different from a closed authorised-dealer system where price discovery remains limited and the market repeatedly becomes hostage to administrative management.

Pakistan’s exchange-rate crises are not caused only by deficits. They are worsened by weak markets. When markets are thin, rumours move prices. When access is restricted, shortages become panic. When the exchange rate is managed administratively for too long, adjustment becomes abrupt. When hedging markets are underdeveloped, firms cannot manage risk. When forward markets are shallow, exporters, importers and investors are forced to speculate rather than hedge.

Mutual funds tell a similar story. Pakistan should have a large, competitive asset-management industry offering savers serious alternatives to bank deposits. Money-market funds, income funds, pension funds, equity funds and ETFs should be competing for household savings. Instead, distribution remains heavily dependent on banks and affiliated networks. The customer goes to a bank and is sold what the bank wants to sell.

The result is a low-growth equilibrium. Banks remain profitable. Government keeps borrowing. Savers remain passive. Capital markets remain shallow. Mutual funds remain underdeveloped. Bond markets remain illiquid. Private credit remains rationed. SMEs remain excluded. Long-term investment remains scarce. Innovation remains unfunded. The same complaints return every year: low investment, low exports, low productivity and low growth.

What should Policy do?

First, build a debt market by consolidating national savings and the debt office into one agency on par with the SECP to manage, develop and regulate the debt market. This agency can then develop a debt market to compete with other instruments by opening government securities to direct, simple, digital access. Every citizen should be able to buy treasury bills, PIBs and sukuk through a secure national platform linked to custody and settlement systems. Banks may provide settlement accounts, but they should not control the doorway.

Second, develop non-bank dealers. Well-capitalised brokers, securities firms, pension funds, insurance companies and asset managers should be able to participate meaningfully in government securities markets, repo markets and secondary trading. Primary dealership should not remain a protected banking privilege.

Third, build a transparent repo and secondary bond market. Without a liquid repo market, there is no serious money market. Without secondary trading, government debt remains an accounting instrument rather than a market benchmark. SBP should publish volumes, spreads, turnover and liquidity indicators regularly.

Fourth, require open architecture in fund distribution. Banks should not be allowed to privilege affiliated products without full disclosure and comparison. Pakistan needs independent fund supermarkets, digital investment platforms and licensed financial advisers.

Fifth, deepen FX markets instead of merely policing them. Regulated non-bank participants should be gradually allowed into transparent electronic FX platforms. Exporters and importers need hedging instruments. Forward markets should be developed. Price discovery should be improved. Administrative management should give way to market depth.

Sixth, make banking contestable. Pakistan does not need reckless bank licensing, but it does need competition. Digital banks, narrow banks, custodians, payment banks, fintech distributors and specialised lenders should be encouraged. Entry should be risk-based, not club-based.

Seventh, separate regulation from market protection. SBP should not behave as guardian of the banking club. It should regulate systemic risk while encouraging competition. SECP should build capital markets. The Ministry of Finance should want a broader investor base for government debt. The Competition Commission should examine whether financial-sector structure is suppressing competition.

The principle is simple: banks should be participants, not gatekeepers.

Pakistan cannot grow on a financial system designed mainly to finance the state and protect incumbents. Growth requires capital mobility, risk pricing, market access, investor choice and institutional diversity. A bank-centred system may look stable, but it is stable in the wrong way. It stabilises low growth. It stabilises elite access. It stabilises government borrowing. It stabilises financial exclusion.

The real test of financial reform is not whether banks remain profitable. They will. The test is whether a young firm can raise capital, whether a saver can invest outside deposits, whether government debt trades in a real market, whether exporters can hedge, whether pension savings finance productive assets, whether mutual funds compete openly, whether prices are visible, and whether finance serves growth rather than merely recycling deposits into public debt.

Pakistan’s tragedy is that it has confused banking depth with financial development. They are not the same. A country can have powerful banks and still have weak finance. That is Pakistan today.

SBP must move from bank supervision to market creation. Until it does, Pakistan will remain trapped in a financial system that is comfortable for banks, convenient for government, and costly for growth.

Pakistan’s tax policy has become an exercise in extraction rather than statecraft. It is not guided by coherent principles, supported by serious research, or evaluated against the incentives it creates. Each year, revenue targets are simply raised, new withholding taxes are introduced, rates are increased, exemptions are withdrawn, and another layer of complexity is added. The objective is not to build a productive tax system but to collect more money, regardless of the economic cost.

This is closer to the medieval logic of the Sheriff of Nottingham than to the fiscal institutions of a modern state. The Sheriff’s “grabbing hand” sought whatever could be extracted from those who were easiest to reach, paying little attention to whether trade, enterprise or prosperity survived. Pakistan’s tax administration often follows the same instinct. Formal businesses, documented transactions, imports, salaries and bank accounts are repeatedly targeted because they are visible, while the harder task of expanding markets, improving compliance through trust and simplifying administration is neglected.

Modern tax policy rests on well-established principles.

· Taxes should raise revenue with the least distortion to investment, innovation and work.

· They should be predictable, transparent, simple to administer and perceived as fair.

· Above all, they should encourage the growth of the tax base rather than merely squeeze those already inside it.

Pakistan’s system violates nearly every one of these principles. It taxes transactions instead of value creation, documentation instead of informality, compliance instead of evasion, and production instead of productivity.

The result is a shrinking formal economy. Every additional tax on investment, hiring, imports, exports or financial transactions encourages firms to remain informal, reduce investment, relocate activity or simply stop growing. The tax base narrows, forcing the government to impose even higher rates and more withholding taxes on the remaining compliant taxpayers. This vicious cycle has repeated itself for decades.

The tragedy is that Pakistan could collect substantially more revenue with a better-designed system. International evidence consistently shows that countries raise more sustainable revenue by broadening tax bases, simplifying tax laws, reducing discretion, strengthening property rights, encouraging formalization and supporting economic growth. Revenue rises because there is more income, more investment and more profitable firms to tax—not because the state has become better at coercion.

Instead, Pakistan has pursued ever more ambitious revenue targets to finance an ever-expanding state. Government has accumulated ministries, agencies, authorities, subsidies, guarantees, state-owned enterprises, perks, plots and protocols, while expecting the tax system to pay for this expansion regardless of its consequences. Revenue targets have become detached from the economy’s productive capacity. The objective is no longer to tax a growing economy but to extract more from a stagnant one.

This approach ignores a fundamental lesson of state formation. A state’s fiscal reach cannot expand faster than the economy and the institutions that sustain it. In societies marked by weak institutions, regional disparities, informality, contested property rights and limited trust in government, attempts to rapidly increase extraction often weaken both the economy and the legitimacy of the state. A durable tax system grows alongside markets, secure property rights, effective local government and rising incomes. It cannot simply be legislated into existence through higher rates and more aggressive enforcement.

Pakistan therefore needs a different philosophy of taxation. The first objective should be to enlarge the economy, encourage investment and make compliance easy rather than punitive. Tax reform should begin with simplification, the elimination of nuisance taxes and withholding regimes, lower transaction costs, transparent administration, market-based valuation systems, and the gradual integration of currently untaxed sectors through institutional reform rather than coercion. As economic activity expands, government revenues will expand with it.

The purpose of taxation is not to feed the beast of government but to finance a capable state that enables prosperity. Pakistan has reversed that relationship. It has allowed the demands of an ever-growing state to determine tax policy, and in doing so has undermined the very economy on which sustainable public finance ultimately depends.

Pakistan’s circumstances make this strategy especially dangerous. A country marked by large regional disparities, widespread informality, weak property rights, uneven public services and persistent political fragmentation cannot build a modern fiscal state simply by imposing ever-higher revenue targets. Fiscal capacity is the outcome of social and political development, not its substitute.

Chasing arbitrary tax targets before building the institutional foundations of trust, legitimacy and economic opportunity discourages investment, slows growth and shrinks the formal economy. The resulting stagnation deepens inequality, intensifies regional and social grievances, and further erodes confidence in the state. Instead of strengthening the government’s fiscal capacity, excessive extraction weakens the economy from which that capacity must ultimately be derived, creating a vicious cycle of lower growth, lower legitimacy and an ever more fragile social contract.

Every week this column finds the same two diseases. The news pages practise stenography: officials speak, reporters transcribe. The opinion pages write in silos: each op-ed diagnoses one fragment, cites no local research, and waits for a donor report to set the agenda. This week supplied textbook cases of both — and, as always, the question neither side asks: what are Pakistan’s real economic issues?

The week in news

The data was plentiful. Textile exports stagnated at $17.9bn, up just 0.26 per cent, with the national export target missed by $4.87bn (Dawn). FDI fell 34 per cent; Bahrain pulled $30m from government securities, adding to over half a billion dollars of foreign outflows from domestic bonds in FY26 (Dawn). Record remittances of $41.6bn still left a $139m current-account deficit as imports rose 8.5 per cent (BR). SBP reserves fell to $17.228bn on external debt servicing (Dawn). LSM grew 5.77 per cent despite a May slump (Dawn). IT exports hit $4.6bn. The IMF’s WEO Update put FY27 growth at 3.5 per cent, cut from 4.1, with inflation raised to 8.4 per cent and the projected current-account deficit doubled (BR).

The institutional items were quieter but telling. The maritime minister claimed record fish exports of $568m; PBS showed $482m — an $86m gap nobody reconciled (Dawn). The Privatisation Commission appointed the ADB as financial adviser for a transaction (BR). Drug price revisions for 105 medicines have sat unimplemented for over two years (BR). A committee was formed to review 24 tax tribunal appointees on Rs2.6m salaries; another to assess GM maize. A GSP+ compliance report warned that trade success has not been matched by progress on 27 convention commitments (BR). A Senate panel demanded scrutiny of foreign-funded projects. The prime minister announced, again, that agriculture can revive the economy quickly (Dawn).

The week in opinion

Dawn ran “Doomed tax initiative”, “Barren reforms”, “GSP-Plus renewal”, and a strong Business and Finance Weekly set: “Financing consumption through SMEs”, “Retail investments in debt”, “Unprepared for artificial intelligence”, “Mangoes in distress”, and the reported-analysis piece “Conventional banks favour Islamic lending”. Business Recorder carried “Beyond Rs13 trillion tax collection!”, “Record remittances: but no room for over-celebration”, “The cost of insecurity”, editorials on the IMF projection and medicine pricing, and op-eds on the PSDP mandate problem, the single-variable habit in economic debate, the seed-company paradox, the education-revolution ritual, and the Strait of Hormuz. On fiscal federalism, Kaiser Bengali’s “World Bank and fiscal distribution” (Dawn) and Shahid Kardar’s “World Bank’s ‘magical discovery’” (Dawn) gave opposite verdicts on the same donor report — the week’s most revealing pairing.

Disease one: stenography

The news pages did not report the economy this week; they took its dictation. The prime minister said agriculture can revive the economy quickly — printed as news, with no return to the last agricultural package, the last seed initiative, the last livestock scheme, or what any of them achieved. The SBP governor said digital transactions hit 12bn — printed, with no question about who controls the infrastructure, what banks charge, or why fintech entry stays restricted. The Prime Minister’s Office described its own preparedness for renewed conflict — printed. When the source of the story and the interpreter of the story are the same official, journalism has not occurred. A press release has.

Stenography is worst when the numbers contradict the dictation — and the press prints both without noticing. Ministers announce facilitation councils and Gulf billions; FDI fell by a third and foreign holders exited domestic debt. A minister claimed fish exports of $568m; PBS said $482m — an 18 per cent gap between a cabinet member and the state’s own statistics bureau, in the same news cycle, unreconciled and unpunished. When official numbers can diverge without consequence, they stop being measurement and become announcement. The press taught officials that lesson by staying silent.

Stenography also means no memory. Textiles is the most subsidised, protected and lobbied industry in Pakistan’s history; decades of packages, cheap credit and energy concessions produced 0.26 per cent growth. That is a verdict on an entire policy architecture — but delivering the verdict requires a ledger of past promises, and no desk keeps one. Reserves fell “due to debt servicing”, and that was the whole sentence: no calendar of what falls due, to whom, on what rollover terms. Treasury-bill inflows are still called “investment” when they are sovereign financing rented at some of the world’s highest yields. The one story that rose above transcription — Dawn’s piece on conventional banks routing credit through profitable Islamic windows — asked why once, got an answer (higher margins, lower depositor returns), and stopped one question short of the thesis: Pakistan’s banks are a sovereign-financing industry with a deposit franchise attached, and the SBP presides over it.

Disease two: silo op-eds, tailing donors

The opinion pages were sharper — and just as fragmented. “Doomed tax initiative” remembered the lineage of failed trader schemes. “Beyond Rs13 trillion” separated nominal collection from fiscal performance. “Barren reforms” refused the fantasy of agriculture-by-command. The remittance editorial said plainly that $41.6bn measures labour export, not strength. The PSDP mandate piece asked why Islamabad runs provincial projects while failing at the macroeconomy only it can manage. Each piece is good. Together they are a pile of fragments. Tax, banks, remittances, agriculture, PSDP — five op-eds, five silos, no one connecting them, and not one citing the local research that already connects them. Pakistan has two decades of domestic scholarship on regulatory sludge, the footprint of the state, banking’s sovereign exposure and the political economy of protection. The op-ed pages write as if it does not exist. Commentary that cites no research cannot cumulate; every columnist starts from zero, every week.??

Then there is the tale of two grade sheets — and what it says about tailing donors. Dawn delivered two verdicts on the World Bank’s fiscal federalism report, a week apart, from two men who have run the system being diagnosed. Kaiser Bengali — a member of the 7th NFC — awarded it “an A+ for technical standard” while faulting its political naivete. Shahid Kardar — former Punjab finance minister and SBP governor — called it a “magical discovery”: a report presenting itself as fresh diagnosis when there is little in it that is new or thought-provoking. Kardar is right. The A+ reflex — receiving foreign restatement of local knowledge as technical excellence — is precisely how donor authority reproduces itself, and how a national debate ends up scheduled around Washington’s publication calendar rather than local inquiry. Kardar’s deeper question deserved the week’s headlines: why have the World Bank and the donors quietly turned their backs on decentralisation? The report tinkers with the NFC formula while the real unfinished business of the 18th Amendment — empowered, elected, fiscally resourced local government — goes unmentioned by the Bank, unpushed by the press, and undemanded by the op-eds. Both the commentariat and the donor stop exactly where the political equilibrium wants them to stop: redistributing between Islamabad and four provincial capitals, never devolving to the citizen.

What are Pakistan’s real economic issues?

Since neither the news pages nor the op-eds will assemble the picture, this column will. Pakistan’s problem is not a missing lever — not credit, not seeds, not digitisation, not a better NFC formula. It is a self-reproducing institutional equilibrium with five load-bearing walls.

First, the permission economy. Every transaction — building, importing, opening, expanding — passes through a wall of licences, NOCs and inspections. This week’s exhibit: drug prices recommended for revision two years ago, still frozen. A state that claims every power and exercises none is not a regulator; it is a toll collector.

Second, a protected insider economy. Textiles’ 0.26 per cent after decades of subsidy is what happens when policy serves incumbents — the Seth firm — rather than competition. Protection without exit produces neither productivity nor exports; it produces lobbying.

Third, a financial system that funds the state, not enterprise. Banks earn risk-free returns on government paper; the Islamic-window story shows them optimising margins within that game, not escaping it. Investment cannot recover while the sovereign is the best borrower in the country.

Fourth, a state that consumes itself. Committees, tribunals at Rs2.6m a seat, PSDP projects in provincial mandates, perks and plots absorbing what transfers deliver — the World Bank found NFC money went to wages and pensions and called it a discovery. The civil service’s own privileges are the budget’s first charge and reform’s first casualty.

Fifth, an exported workforce and an undeveloped citizen. Record remittances are the mirror image of failed job creation; schools that don’t teach and cities run as permission regimes push people out. Labour is now Pakistan’s leading export, and the press celebrates the proceeds.

Binding all five: the knowledge system itself. Research is donor-funded and non-cumulative; journalism is stenographic; commentary is siloed. A country that outsources its self-understanding cannot reform itself — it can only await the next report and grade it A+.

The remedy: memory and integration

Every economic desk should keep six public trackers: targets versus outcomes; donor and PSDP projects from approval to completion; tax initiatives and realised yields; the debt-servicing calendar against weekly reserves; subsidies and their beneficiaries; reforms promised versus implemented. And every op-ed page should demand one thing of its writers: cite the local work, connect your fragment to the system. Until then, officials will keep supplying both the story and its interpretation, columnists will keep polishing fragments, and donors will keep collecting A-plusses for telling us what we already knew.

Journalism: active reporting, weak inquiry

The week’s economic journalism was busy. Dawn, Business Recorder and Express Tribune covered export underperformance, tax collection claims, growth forecasts, inflation, remittances, ports, banking, startups, digital Punjab, AI-based tax notices and the World Bank’s fiscal federalism report. The coverage was useful as a record of events. It was less useful as inquiry.

The strongest reporting was on exports. Dawn reported that exports missed the FY26 target by nearly $5 billion, falling well short of official ambition. This should have been the central economic story of the week. Pakistan keeps announcing export targets without an export-capability model. The press noted the missed target, but did not sufficiently connect it to repeated missed reform opportunities in energy, tax and tariff policy, firm productivity, logistics, regulatory sludge and the anti-export bias of domestic policy. An export number was missed; the machinery that keeps producing missed targets remained mostly unexamined.

Growth forecasts were treated in the same mechanical way. The IMF expected growth around 3.5 percent, the ADB projected 3.7 percent, and the government kept talking of 4 percent. Newspapers reported the differences but did not interrogate the models. Statistically these numbers cannot even be distinguished. Yet they made headlines. What investment assumptions underlie these forecasts? What is being assumed about exports, imports, remittances, agriculture, energy prices and fiscal compression? Pakistan’s forecasts are routinely over-optimistic, yet each forecast revision is treated as news rather than evidence of a weak planning and measurement system.

Tax reporting remained too impressed by technology. The finance minister’s claim that artificial intelligence would drive a new tax model was reported as reform. Business Recorder also reported the FBR’s use of buoyancy-based tax forecasting. But neither story adequately asked the prior question: what happens when technology is added to a discretionary, complicated and adversarial tax system? AI-generated notices may reduce personal contact, but they may also automate harassment. Who trains the model? Who audits it? What is the appeal process? Does the FBR model separate inflation, import-stage taxation, withholding, refunds and genuine base broadening? Technology became the story before institutional design was examined.

The remittance story was close to official stenography. Record remittances were celebrated as evidence of confidence. But remittances primarily reveal the scale of Pakistan’s labour export. When remittances exceed merchandise exports, the deeper story is uncomfortable: people, not firms, have become Pakistan’s leading export. A serious story would connect remittances to migration, weak domestic employment, skills, exchange-rate policy, financial-sector rents and the failure to build export firms. Instead, the story mostly reproduced official celebration.

The World Bank fiscal federalism/NFC story was the major missing analytical opportunity. Dawn and Business Recorder reported the Bank’s argument that Pakistan’s fiscal federalism system needs reform: provincial revenue effort must improve, spending responsibilities should match resources, local governments must be empowered, and the NFC framework should be revisited. This is important. But the coverage largely remained inside the Bank’s frame.

The first question should have been institutional and political: why is the World Bank producing a report on what is essentially a constitutional settlement? The NFC is not merely fiscal arithmetic. It is a federal bargain tied to the 18th Amendment, provincial autonomy, mistrust of centralised rule and the unresolved absence of local governments. Is this really the mandate of an IFI, or another case of donors entering Pakistan’s domestic political agenda through the language of “fiscal reform”? Journalism should have asked that directly.

The harder domestic questions were also underplayed. Why did the federal footprint not shrink after devolution? Why do federal ministries still occupy devolved space? Why have provincial bureaucracies failed to deliver services? Why are cities and local governments absent from the fiscal compact? Why is the debate framed as federation versus provinces rather than state versus citizen? Once again, donor research became the news event, while Pakistani institutional memory remained secondary.

The foreign-funded power-project story was the most investigative of the week. It raised questions of donor loans, contracts, parliamentary oversight, provincial burden, institutional responsibility and possible corruption. This is the direction economic journalism should take. Pakistan borrows heavily for projects, but the press rarely follows the money from approval to procurement to completion to outcomes. Donor-funded projects should be investigated like public debt, not reported like gifts.

Overall, journalism was timely but shallow. It followed the official calendar and donor documents. It rarely used local research on PSDP failure, regulatory sludge, tax complexity, energy reform, civil service incentives, cities, university reform or market development. It recorded the economy, but did not yet investigate the state.

Op-eds: sharper diagnosis, incomplete reform narrative

The op-eds were better than the reporting. They asked more structural questions: why investment is low, why fiscal federalism is being rewritten, why the Annual Plan lacks credibility, why exports remain trapped, why foreign exchange stability is fragile, why capital markets are thin, why technology is not reform, and why donor wisdom so easily becomes domestic policy language.

The first theme was low investment and policy unpredictability. Dawn’s “Economic path lost — the policy puzzle” was one of the stronger pieces because it connected declining investment to policy inconsistency and speculative activity. It moved beyond budget arithmetic toward political economy. But it still did not go far enough into the machinery of unpredictability: ministries, regulators, tax officials, courts, SROs, NOCs, inspections and discretionary permissions. Pakistan’s investment problem is not only “confidence.” It is the daily cost of dealing with the state.

The second theme was budget transparency. Dawn’s piece on missing “actuals” in the Khyber Pakhtunkhwa White Paper was important. Budgets are not speeches; they are claims tested against outturns. When actuals disappear, accountability disappears. This is exactly the kind of fiscal journalism Pakistan needs: not just what was budgeted, but what was actually spent, where it was spent, and what it achieved.

The third theme was foreign exchange illusion. Business Recorder’s “Pakistan’s foreign exchange mirage” captured the central external-sector problem: remittances hide export weakness. A country cannot build prosperity on labor leaving and dollars returning while firms remain uncompetitive at home. Remittances may stabilize the balance of payments, but they do not by themselves build productivity.

The fourth theme was exports. Business Recorder’s “Pakistan’s export trap” pushed the debate in the right direction by looking at structure: low value addition, narrow product baskets, cotton dependence and weak competitiveness. But the export debate still remains too sectoral. The real issue is the whole operating system: taxes, energy, customs, logistics, standards, finance, courts, regulation, land and skills. Export failure is not a commerce-ministry problem. It is a state-capacity problem.

The fifth theme was ownership and capital markets. The piece on equity appetite and owner control anxiety raised a neglected question. Pakistan does not merely lack capital; it lacks willingness to dilute control. Owners want bank credit, state support and protection, but not market discipline. This connects directly to the broader problem of family capitalism, weak corporate governance and thin public markets. Capital-market reform is not only about investors. It is about owners accepting transparency, dilution and accountability.

The sixth theme was fiscal federalism. Khurram Husain’s “World Bank and NFC Award” took the World Bank report seriously and highlighted its evidence that post-7th NFC transfers were largely absorbed by wages, pensions and current spending rather than better outcomes. Business Recorder’s editorial on NFC reform and limits of fiscal devolution also argued that the World Bank report should trigger a more serious debate on the 18th Amendment and NFC. No on one seemed to notice the World Bank’s deep intrusion into constitutional matters.

But even the op-eds accepted too much of the Bank’s frame. The NFC is not merely a badly designed incentive system. It is part of a political settlement after decades of centralised rule. Any reform debate must begin with constitutional politics, not only fiscal efficiency. It must ask why the center did not shrink, why provinces did not empower local governments, why provincial bureaucracies became mini-federations, and why cities — the engines of growth — remain fiscally and administratively weak. The missing unit in both donor and newspaper analysis is still local government.

The seventh theme was the Annual Plan. Business Recorder’s piece on the 2026-27 Annual Plan was useful because it examined Planning Commission targets rather than only the budget. But op-eds need to be harsher on planning itself. Annual Plans routinely announce growth, investment and export targets without a credible theory of implementation. The real question is not whether the target is attractive. It is whether the state has instruments, incentives and capacity to deliver it.

The eighth theme was digital policy. The pieces on digital payments and Pakistan’s digital blind spot recognized that technology can reduce friction only when incentives and institutions support it. Digitalization is not reform if it merely gives the same bureaucracy faster tools. It matters when it lowers transaction costs, enables entry, expands markets, builds trust and limits discretion. This lesson applies directly to taxation: people document themselves when participation is useful; bureaucracies document people to control them.

The op-eds did better than journalism on local narratives, but still did not fully connect to domestic reform literature. FEG, RAPID, regulatory guillotine, cities as engines of growth, PSDP reform, civil-service reform, university reform and markets rather than permissions remain underused. Pakistani commentary repeatedly rediscovers problems already studied locally.

Set up in 2014 as a Section 42 not-for-profit, it was built around the UK Foreign, Commonwealth and Development Office’s £187 million Enterprise and Asset Growth Program. By March 2021, according to FCDO’s own mid-term assessment, £111 million — PKR 23.42 billion at the program’s conversion — had already been deployed through it. Its audited accounts show it took Rs5.6 billion in fresh grants in 2022, none at all in 2023, and did not shrink. It kept running on accumulated funds, investment income, recyclable capital and program assets. A body that receives no new money in a year and keeps its footprint intact is no longer a program. It is an endowment with a board.

And the recent money is no longer buying microloans. In December 2025 the Gates Foundation committed $13.7 million, over four years, to strengthen the governance of Raast — Pakistan’s sovereign instant-payment rail — and to wire it into cross-border payments across six Gulf states. In November 2025 it funded Karandaaz to help the State Bank of Pakistan make “data-driven decisions” about its agent networks. Further 2026 commitments extend toward digital-government systems. Together these recent Gates commitments run to roughly $18 million. Karandaaz already moves Benazir Income Support Program payments to the poorest households through Raast. A foreign foundation is now financing the governance of the national payment infrastructure, the central bank’s network strategy, and the plumbing of digital government — through a private vehicle no citizen elected and no legislature audits.

But the clearest illustration of what this entity has become is the tax authority. In 2024, on the Prime Minister’s instructions, the Federal Board of Revenue signed a memorandum of understanding with Karandaaz to modernise Pakistan’s tax system. Using Gates Foundation money, Karandaaz then hired the global consultancy McKinsey & Company to build the FBR’s digital and IT transformation strategy. Karandaaz ran the procurement: its own digital-services director briefed the government steering committee on the tender, and the Gates Foundation’s country lead sat at the table as a “key stakeholder” in the affairs of the country’s revenue authority.

Stop and look at what that sentence describes. A company whose mandate is financial inclusion, and whose expertise in tax administration is open to question, was placed inside the FBR to redesign how the state collects its revenue — and to procure a foreign consultancy to do it, with a foreign foundation’s grant, with that foundation seated as a stakeholder in the process. Senators noticed. On the floor of the house, one asked who had authorised hiring McKinsey while bypassing the Public Procurement Regulatory Authority’s rules, and how a foundation that came to Pakistan for micro-financing had become a stakeholder in tax matters. Others worried, reasonably, about a foreign firm’s access to the most sensitive data the state holds.

The defenders will say Karandaaz simply moved faster than a government tender ever could. That is precisely the problem, and it is worth naming plainly. Routing the contract through a Section 42 company is what makes the procurement law not apply. PPRA binds government agencies; it does not bind a private company. So the state did not merely hire a helper — it used a private vehicle to place a sovereign function outside its own rules. The conduit is not incidental to the story. The conduit is the mechanism.

And here the affair meets its perfect description. In The Big Con, Mariana Mazzucato and Rosie Collington anatomise how governments become dependent on consultancies such as McKinsey, which operate as advisors, legitimators and outsourcers while cultivating the illusion that they are objective sources of expertise and capacity. Their central claim is a warning we should have heeded: the more governments outsource, the less they know how to do. The state stops learning by doing, because someone else is always doing the doing. The FBR case is that thesis in miniature — with an added twist Mazzucato does not quite anticipate. In her account, a government hires the consultant directly. In ours, the revenue authority does not hire McKinsey at all. A donor-funded company hires McKinsey, on a foundation’s grant, with the foundation in the room. It is outsourcing squared: the state outsources to a vehicle built to be an outsourcer, which then outsources to a consultancy. Each layer puts more distance between the sovereign function of taxation and any citizen who might hold it to account. A tax authority that collects trillions of rupees a year could not, apparently, find the money or the legal room to modernise itself without a foreign foundation’s grant and a private company’s procurement. That is not a capacity gap. It is a sovereignty question.

None of this is a Pakistani eccentricity. It has a name in the scholarship. Daniela Gabor and Sally Brooks call it the fintech–philanthropy–development complex: development organised through networks of state agencies, donors, philanthropic capital and consultancies, with “financial inclusion” and “digital transformation” as the unifying frame (Gabor & Brooks, 2017). Karandaaz is a textbook node in exactly that network. Recognising the type matters, because it tells us the questions to ask are not about intentions. They are about power, ownership and accountability.

The first issue is accountability — or its absence. In her study of the Gates Foundation, Linsey McGoey makes the point plainly: large foundations are unelected, opaque, and answerable to no electorate for their failures, yet they increasingly shape policy in the countries they fund (McGoey, 2015). Now apply that lens at home. Karandaaz sits off-budget. It is outside the Auditor General’s remit and outside the Public Accounts Committee’s scrutiny. Its board is self-selecting. Its accountability runs upward, to FCDO and Gates, not downward, to the citizens whose payment rail and tax system it now helps run. When Parliament tried to ask basic questions about the FBR contract, it discovered how little purchase it had. That difficulty is not a glitch. It is the design.

The second issue is sovereignty. Tax collection and the national payment rail are sovereign functions, in the same category as the currency. Who governs them is a question of constitutional weight, not procurement. Deborah Bräutigam and Stephen Knack showed two decades ago that aid can quietly corrode governance precisely by loosening the state’s dependence on its own taxpayers — the fiscal link that forces governments to answer to citizens (Bräutigam & Knack, 2004). The World Bank admitted the mechanism in its own Assessing Aid review: donors have repeatedly done “end runs” around local institutions because bypassing them is the easiest route to a successful project (World Bank, 1998). The FBR episode is that end run made literal — a foreign foundation and a foreign consultancy placed inside the sovereign revenue function, with the citizen as a spectator to the operation of his own state.

The third issue is the one I want to dwell on, because it is the most revealing: autonomy. Karandaaz enjoys a degree of operational independence that almost no attached department in Pakistan can claim. An attached department must live inside the government’s budget cycle, its procurement rules, its audit objections, its establishment controls and pay scales, its transfer-posting politics, its ministerial direction and its parliamentary scrutiny. Karandaaz, by contrast, operates as a Section 42 company with donor funds, its own board, its own hiring and salary structures, its own procurement practices, its own investment vehicles, and its own program priorities negotiated directly with donors and partner agencies. This gives it speed and flexibility. It also gives it an autonomy that the state’s own implementation arms are simply not allowed to possess.

The irony is total, and it should be the headline of this whole debate. Donors claim to build state capacity. Yet they give their preferred delivery vehicle exactly the freedoms — to hire, to pay, to procure, to invest, to experiment — that no Pakistani public agency is permitted to exercise. This is what Matt Andrews, Lant Pritchett and Michael Woolcock call a capability trap, sustained by isomorphic mimicry: the state acquires the outward appearance of modern delivery — instant payments, a digital tax stack, agent networks — while the actual capacity to build and run these things migrates outside the state and comes to rest in a company the state does not control (Andrews, Pritchett & Woolcock, 2017). Every workaround SPV is one more reason never to fix the thing that made the workaround necessary. The scaffolding becomes the building.

And here the argument turns from complaint to prescription. If such autonomy is genuinely necessary for performance — and it plainly is — then the lesson is not to keep multiplying donor SPVs until the real state is a hollow shell surrounded by nimble substitutes. The lesson is to reform the state so that its own departments can hire, procure, invest, experiment and deliver — with accountability rather than suffocation. This is not a lonely conclusion. Mazzucato and Collington, arriving from the opposite end of the development spectrum, reach the same cure: stop treating consultants and outside vehicles as substitutes for public capacity, and rebuild the capability in-house. The freedoms we have quietly granted to a private company are an unanswerable indictment of the rules we impose on our own public agencies. We have proved, with Karandaaz, that a Pakistani institution can be fast, flexible and effective. We have simply decided that our own state may not be.

The honest counterargument deserves a hearing. Raast works. The FBR did need help the bureaucracy could not supply on its own timetable. Financial inclusion has widened. Better a functioning system delivered through a donor vehicle, the argument runs, than another decade of committees and nothing built. I concede the delivery. But it answers the wrong question. The question was never whether the work gets done. It is who owns the capacity when the grant ends, who answers when the system fails, who sets its priorities while it runs, and whether the sovereign functions of the state should be operated by entities accountable to foreign funders. Delivery is not institution-building. A rail that works but that the state cannot govern, audit or reproduce is not a national asset. It is a dependency with good uptime.

This is why Karandaaz stops being a story about one organisation and becomes a story about us. It fits, almost too neatly, the structural dysfunction I have argued for years — in the Framework for Economic Growth (2011) and the PIDE Reform Agenda (2022): a state that outsources its thinking to donors and its building to their vehicles; a permission economy in which capacity is rented rather than owned; capital deployed at scale with no domestic principal behind it. Karandaaz is not the disease. It is the most sophisticated symptom yet — the donor-funded parallel state, no longer confined to a microfinance window, now operating the country’s most modern and most sensitive infrastructure.

What should be done does not require shutting anything down. It requires ending the pretence.

First, transparency and public audit. An entity of this scale, now helping run a national payment rail and the tax system, should publish its audited accounts, board decisions and grant agreements, and should fall within the reach of the Auditor General and the Public Accounts Committee. Public functions demand public scrutiny.

Second, sovereign functions must be governed by the sovereign. The governance of Raast belongs with the State Bank; the design of tax administration belongs with the FBR and the Finance Division. Donor roles in these domains should carry an explicit sunset, not an open-ended sequence of renewals.

Third — and most important — reform the state’s own arms instead of multiplying substitutes. Give public agencies the autonomy Karandaaz already enjoys: to hire on merit, to pay competitively, to procure and experiment quickly — but paired with real accountability, not the current mixture of suffocating control and negligible results. If PPRA is too rigid for modern delivery, the answer is to fix PPRA, not to route sovereign contracts around it through private companies.

Fourth, a parliamentary debate — and a real one. Parliament has already begun to ask the right questions about the FBR contract. It should not stop at a single exchange on the floor. A £187 million, Gates-co-funded body governing national payments and modernising the revenue authority deserves a sustained hearing.

The issue is not the competence of Karandaaz. It is the ownership of the state. We have built a company to do the things we forbid our own government to do, funded it from abroad, and let it operate our most important public functions with freedoms no public servant is allowed. The task is not to build more such companies. It is to build a state that no longer needs them.

Sources and further reading

• Andrews, M., Pritchett, L., & Woolcock, M. (2017). Building State Capability: Evidence, Analysis, Action. Oxford University Press. (See also Pritchett, Woolcock & Andrews, “Capability Traps? The Mechanisms of Persistent Implementation Failure,” CGD Working Paper 234, 2010.)

• Bräutigam, D. A., & Knack, S. (2004). “Foreign Aid, Institutions, and Governance in Sub-Saharan Africa.” Economic Development and Cultural Change, 52(2), 255–285. (See also Bräutigam, Aid Dependence and Governance, 2000.)

• Gabor, D., & Brooks, S. (2017). “The Digital Revolution in Financial Inclusion: International Development in the Fintech Era.” New Political Economy, 22(4), 423–436.

• Mazzucato, M., & Collington, R. (2023). The Big Con: How the Consulting Industry Weakens Our Businesses, Infantilizes Our Governments, and Warps Our Economies. Allen Lane / Penguin.

• McGoey, L. (2015). No Such Thing as a Free Gift: The Gates Foundation and the Price of Philanthropy. Verso.

• World Bank (1998). Assessing Aid: What Works, What Doesn’t, and Why. Oxford University Press.

• FCDO / A&M (2021). Mid-Term Assessment of the EAGR Program (£111m / PKR 23.42bn figure).

• Bill & Melinda Gates Foundation, Committed 2025Grants Database (December 2025, November 2025 and 2026 Karandaaz grants).

• On the FBR–Karandaaz–McKinsey engagement and the Senate objections: Express Tribune (”Pakistan partners with Gates’ Foundation to overhaul FBR,” March 2024); The Nation / Business Recorder / Mettis Global (steering committee approval of McKinsey, April 2024); Dawn (”Senators question US firm’s role in FBR digitisation,” April 2024; “Quest for economic sovereignty,” September).

Officials and professors frequently point to freelancing as a possible career. Young people are told to learn a digital skill, open an account on Upwork or Fiverr and start earning dollars. Convenient story because it shifts responsibility away from universities, firms and government. Universities can continue producing graduates with weak professional skills. Government can evade the harder task of creating a competitive economy that generates productive employment.

Freelancing is a real opportunity. A programmer in Peshawar, a designer in Multan or an accountant in Bahawalpur can sell services abroad without migrating. For capable workers, this may provide better income than the domestic job market, international exposure and access to clients who would otherwise remain out of reach. But this does not prove that freelancing is a career or a stable living, or a substitute for a functioning labour market.

A career is more than a stream of payments. Good jobs place people among colleagues, supervisors, mentors and clients. They learn through collaboration, feedback and observation. They work on projects larger than anything they could manage alone. Over time, they become better not only at a task, but also at communication, teamwork, negotiation, leadership and managing conflict.

Much of freelancing offers little of this structure. It is often lonely work performed from a bedroom, frequently at odd hours because clients are in different time zones. The freelancer moves from one assignment to another without a stable team, mentor, promotion path or institutional home. A worker can become more efficient at completing tasks without acquiring the broader social, managerial and emotional capabilities that develop inside functioning organisations.

Some freelancers do move beyond this. They build long-term client relationships, specialize, recruit colleagues and establish agencies or export firms. The real career begins when freelancing becomes a bridge to a firm, a team and a body of accumulated knowledge.

International evidence shows how large this gap can be. One major study estimated that online labour platforms contained around 163 million registered worker profiles. Only about 19 million had ever obtained work, while roughly five million had completed ten projects or earned at least US$1,000. Most registered workers had therefore earned little or nothing.

These are global figures, not Pakistan estimates, but they expose the weakness of our arithmetic. A person who completes a training course and opens an account may never obtain a client. Yet that person can still appear in program publicity as part of a growing freelance workforce.

We also do not know what the typical Pakistani freelancer earns. There is no credible estimate of median income. This matters because freelance earnings are highly skewed. A small group of programmers, designers, consultants and agency owners may earn several thousand dollars a month. Beneath them is a much larger group with irregular assignments. At the bottom are many entrants who bid repeatedly but earn little or nothing.

An average would therefore mislead. A few successful workers can pull it sharply upward. The more useful number is the median: the income of the person in the middle. Pakistan does not know that figure. Nor does it know how many freelancers remain active after one or two years, how many depend on freelancing as their main income, or how many eventually return to the conventional job market.

Gross receipts are also not wages. Freelancers pay for computers, software, internet, electricity backup, platform charges and payment fees. They spend unpaid hours searching for work, writing proposals, preparing samples and negotiating with clients.

Someone advertising an hourly rate of US$10 may secure only 15 paid hours after spending 40 hours working and searching. The effective rate is then US$3.75 before expenses. There is no paid leave, pension, severance, health insurance or guaranteed flow of work. Illness stops income. A poor review can reduce future opportunities. A platform suspension can destroy a reputation built over years. The worker carries nearly all the risk.

This is why freelancing may be a career for some, a temporary arrangement for others and an extended job search for many. For a student or unemployed graduate, it may provide useful income while waiting for a stable position. For a parent seeking flexible hours, it may be a practical supplement. For a highly specialized professional, it may become a serious business. The reality is that it is neither a career nor ready income!

Artificial intelligence will make the market more difficult and more unequal. Routine writing, basic design, translation, elementary coding and simple research are becoming easier to automate. AI does not need to eliminate the freelancer completely. If one worker can now complete in two hours what previously required six, clients will buy fewer hours. The likely result is not the disappearance of freelancing but a sharper division between those with real expertise and those selling generic tasks.

The key distinction will not be between people who use AI and those who do not. Almost everyone will use it. It will be between those who can evaluate, correct and improve AI output and those who merely reproduce it.

That makes Pakistan’s current training model increasingly obsolete. Short courses in platform use, digital marketing or prompting cannot substitute for education, technical depth, communication, teamwork and professional judgement. Universities cannot continue producing weak graduates and then advise them to become freelancers. They must create environments in which students work with others, solve complex problems and learn how professional communities function.

Government also cannot use freelancing to excuse the absence of growth. A healthy economy still needs expanding firms, competitive markets, investment and organizations in which people can build careers rather than merely complete tasks.

Freelancing is a genuine opportunity. For some, it will become a rewarding career. For others, it will remain supplementary income or a temporary refuge. But lonely work at odd hours, without colleagues, mentoring or a path of advancement, should not automatically be confused with professional development. It is an opportunity, not a substitute for universities, firms or a serious jobs policy.

With Shahid Kardar

OFFICIALS often describe Pakistan as an underperforming country plagued by low tax obedience and high informality. A country where citizens supposedly evade regulation, conceal incomes and avoid the formal economy out of habit or delinquency. This narrative, echoed endlessly by donor agencies and technocrats, misses the mark entirely. Far from being a reflection of mass dishonesty, informality is the population’s response to egregious governance and erratic policymaking, not a cause of it.

Markets have existed long before states-imp­o­sed rules on them. For most of human history, economic exchange was informal and self-regulated. Post the Great Depression states attempted to ins­titutionalise comprehensive market regulation. But in countries where the state apparatus is extr­active, regulatory structures are punitive, and public services lacking, the informal economy does not shrink; it thrives. People do not disengage from the formal system because they reject order or rules; they do so because the system punishes participation and rewards avoidance.

In Pakistan, the informal sector is not an aberration. It is the economy’s lifeboat. With estimates ranging from 30-70 per cent of GDP and over 70pc of non-agricultural employment, informality underpins the real economy. It is found in bazaars, construction sites, workshops and transport hubs. It keeps the economy afloat, cushions the poor and supplies goods and services to the formal sector itself. Where the formal economy is hamstrung by high entry barriers and stifling compliance costs, the informal economy is nimble, responsive and inclusive.

This is not unique to Pakistan. Informal economies exist globally, but their size reflects the quality of governance. In the US and UK, informality hovers around 8-12pc of GDP, limited to undocumented labour or off-the-books services. In Germany, it’s about 10pc, while in Italy and Greece, it climbs to 20-25pc. China maintains a large informal labour force, especially among internal migrants. In countries like India, Nigeria and Bangladesh, the informal sector constitutes 50-65pc of GDP and often over 80pc of employment. These variations are not cultural; they are institutional. Informality grows when the state fails to provide stability, justice and opportunity.

Economists use various proxies like electricity consumption patterns, discrepancies in national accounts and labour force surveys to estimate the informal economy. But the most powerful evidence is not statistical. It is experiential. The prevalence of informality is a mirror held up to the state. And what it reflects is dysfunctionality.

The informal entrepreneurs are often more innovative, dynamic and risk-tolerant than their formal counterparts. They operate without subsidies, navigate unruliness without protection, and finance their ventures through personal savings. In contrast, the formal sector in Pakistan is weighed down by a complex and inequitable tax regime, arbitrary inspections, bribe-seeking officials and documentary requirements that are out of step with a low-literacy population. Add to this the dysfunction of slow and unreliable courts, and unsurprisingly rational businesses choose to stay small and invisible.

Contrary to popular belief, informal markets are not chaotic or untrustworthy. They often function with remarkable efficiency. Informal foreign exchange markets in Pakistan and Latin America have operated for decades without systemic defaults, relying instead on trust, reputation and performance. Even the so-called smuggler-run supply chains generally outperform state-run systems, offering better prices, reliability and speed. It is formal systems, burdened by overregulation and captured by vested interests that frequently undermine operational sustainability, and contribute to procurement failure and crises.

This budget illustrates yet again why the convoluted and anomalies-ridden tax structure incentivises businesses to exit the formal system. The already prohibitive rate of withholding tax on the sale value of services has been raised from 11pc to an extortionate 15pc. Furthermore, while non-Tier 1 retailers can now pay a flat 2pc as full and final tax for digital transactions, formal Tier 1 businesses must suffer an 18pc GST. The system mocks and punishes them for shunning the safer option, embracement of informality!

This speaks to a deeper issue. For years, the Pakistani government has launched aggressive drives to ‘document’ the economy through non-filer crackdowns, torturous withholding taxes, and digital documentation mandates. Yet each wave brings with it shifting rules, legal ambiguities and administrative overreach. Firms respond predictably: they avoid growth, minimise visibility and stay under the radar. The volatility of policy, and not just its content, is a key driver of informality.

This volatility is not without consequence. It distorts investment decisions, discourages innovation and freezes businesses at the micro level. Many entrepreneurs, capable of scaling, deliberately stay small — not because they lack ambition, but because they fear what state visibility might bring: harassment, penalties, unpredictable audits and compliance traps. In such an environment, informality becomes a rational economic shield rather than a temporary condition.

Regrettably, many in policy circles still speak of ‘eliminating informality’ as if it were a disease. It is not. What needs eliminating is the state’s predatory and capricious behaviour — a system that taxes without serving, regulates without enabling and punishes without protecting.

As Peruvian economist Hernando de Soto once put it, informality is “the people’s spontaneous and creative reaction to the obstacles that the state places in their way”. It is a rational, often brilliant, response to institutional failure. Rather than crush it, the state should learn from it.

If Pakistan genuinely wants to expand the formal economy, it must begin by reforming itself. Simplify taxes and compliance procedures, lower rates, stop arbitrary enforcement, and offer real benefits, such as access to credit, legal protection and market infrastructure. Make formality attractive, not punitive. People will formalise when the state earns their trust, not before.

Until that happens, informal markets will remain the true face of Pakistan’s economy, not because people want to cheat, but because the state gives them no better option. Informality is not a crime. It is a verdict.

Pakistan’s most celebrated economics paper changed nothing in Pakistan. Khwaja and Mian’s 2005 study of political lending is a landmark of the world literature — the universe of the country’s corporate lending, airtight identification, a finding of devastating clarity: politically connected firms borrow 45 percent more and default 50 percent more often, exclusively from government banks, at a cost of up to 1.9 percent of GDP every year. It is cited in the thousands. It made careers. It is taught in Cambridge and Chicago, where it was written. And in the twenty years since, it has produced in Pakistan itself: no replication across subsequent credit cycles, no extension to procurement or land or tariff exemptions, no reform of state bank governance, and no domestic research program of any kind. Our most influential paper is about Pakistan without having built anything in Pakistan. That sentence should disturb the profession more than it does — because it is not an anomaly. It is the model.

It was not always so. Pakistan was present at the creation of this literature. Before “rent-seeking” had a name, Mahbub ul Haq stood up in 1968 and counted twenty-two families. Papanek had already made the opposing case — that concentration was the price of accumulation, greed with social utility. White’s 1974 study then measured the concentration systematically, and the licensing raj that produced it became, through Krueger’s 1974 formalization on Indian and Turkish data, the founding empirical material of rent-seeking theory itself. We did not import this debate from the West. We staged it first, on our own data, with our own protagonists — and then we abandoned it. White (1974) remains, fifty years later, the last systematic study of who owns and controls the Pakistani economy. Half a century, a Competition Commission, dozens of economics departments, and not one successor study of market concentration. That silence is not an oversight. In a rent economy, the unasked questions are the ones whose answers would name beneficiaries.

What replaced the original tradition were three substitutes, each a way of doing research without consequence. The first is aping: importing frameworks decades late and applying them as ritual. Our regulatory literature of the 1990s and 2000s surveyed Pakistan’s regulators earnestly within the public-interest frame — regulation as market-failure correction — a quarter century after Stigler had demolished it by asking whom regulation actually serves. We ran the regressions the journals were running, with Pakistan as the “context” and never the question. The second substitute is publishing for the West: Pakistani data as raw material for careers made elsewhere, while frameworks drafted here go unread. Ishrat Husain’s Economy of an Elitist State laid out an elite-capture theory of Pakistani growth in 1999 — a decade before North, Wallis and Weingast formalized “limited access orders” and thirteen years before Why Nations Fail made extractive institutions fashionable. Husain was reinvented, not built upon. And now the IMF’s 2025 governance diagnostic tells us, on multilateral letterhead, what Haq said in 1968 — and we will cite the letterhead. Pakistan exports data and imports its own ideas back at a markup. The third substitute is publishing for donors: a research economy in which the questions are set by project logframes, the topics follow the funding windows, and the profession answers what is financed rather than what matters. Notice what three decades of donor-financed research on “governance” and “business climate” has never once measured: the incidence of SRO exemptions, the beneficiaries of state land allotments, the composition of public procurement awards, the interlocking directorates of banks and industry. The gaps are not random. They are the map of power.

The exceptions prove that another kind of research is possible — and they share a signature. The PIDE sludge audits took a concept the international literature had kept small — Thaler and Sunstein’s behavioral “sludge,” Herd and Moynihan’s administrative burdens on citizens — and did something with it no one else had: scaled it to an economy-wide accounting, pricing Pakistan’s permission stack at 39 percent of GDP and embedding it in a general-equilibrium framework. The Seth-firm thesis took the international business-group literature — Khanna and Palepu’s benign story of conglomerates filling “institutional voids” — and answered it with a darker and more accurate Pakistani reading: our groups are organized around access, not capability; they are adaptations to the permission economy, not substitutes for missing markets. And the power-sector work quietly extended capture theory itself: Laffont and Tirole imagined an independent regulator seduced by industry; Pakistan documents the regulator captured at birth — subordinated by design through ministry control, civil-service rotation, and fee financing, before any lobbyist arrives. Constitutive capture is a category the theory needed and Pakistani evidence supplied. What these contributions share is the direction of intellectual trade: they exported a framework instead of exporting data. Each began with a Pakistani puzzle, not a Western template, and each ended by telling the international literature something it did not know.

Industrial organization work is seriously lacking. The closest modern work to White’s 1974 study is Haque and Husain’s “A Small Club,” which revives the old question of who controls Pakistan’s corporate economy. Its strength is that it moves beyond anecdote and uses network analysis to show how family nodes, directors and listed firms are connected in Pakistan’s financial markets. In that sense, it comes closer than most recent research to mapping economic power rather than merely measuring firm performance. But it is still not a full successor to White. White’s study examined industrial concentration and economic power across business groups, sectors, assets, banking connections and state patronage. Haque and Husain provide an important map of concentration and networks in the listed market, but the larger question remains open: who owns Pakistan today across sectors, through cross-shareholdings, board interlocks, banks, industrial groups, SOEs, contracts, land and regulatory privilege? One honest study on that scale would reset the entire reform debate.

So the standard for the next generation is not more publication. It is better questions. A short list, each answerable with registers that already exist, each guaranteed to matter:

Who owns Pakistan? Redo White (1974): concentration by sector, cross-shareholdings, board interlocks, the banking-industrial nexus. One honest study would reset the entire reform debate.

Where else does the Khwaja-Mian mechanism run? Their design — comparing politically connected and unconnected recipients within the same allocating institution — transfers directly to land allotment files, procurement awards, and the SRO register. Twenty years is long enough to wait.

What do our markets actually look like? Entry and exit rates, price-cost margins, and concentration, by sector, published annually. We measure our paperwork obsessively and our markets not at all; deregulation is being conducted blind.

Who is the regulator? Study the regulatory body as an economic agent — its fee income, its career incentives, the rotation of its officers — rather than as a legal fiction that occasionally “lacks capacity.”

What do the perks cost? Price the land-based compensation of the civil and military services, the currency in which the coalition actually pays itself.

Did the reforms reform? Somebody must ask, with data, whether Asaan Karobar changed entry, whether the IPP renegotiations changed tariffs, whether any privatization ever raised competition. Evaluation of our own reforms is almost entirely absent from our own literature — we leave the report cards to the lenders who assigned the homework.

Every one of these passes what I have elsewhere called the Nani Test: a Pakistani reader who knows the country would learn something true and new about it. Most of what we currently publish would not.

The objection will come that local publication is not rigorous and international publication is the discipline. The real choice is between research oriented to Pakistan’s questions, wherever published, and research oriented to others’ incentives, however prestigious. A profession that runs on the second will keep producing what it has produced: careers abroad, consultancies at home, silence about power, and a policy debate fed by everyone’s evidence but our own.

Research is a claim on a society’s scarce talent, and it should be judged the way we judge any allocation: by what it changes. The founders of this tradition understood that. Haq counted the families because counting them was an act with consequences; White measured concentration because measurement is where reform begins. The task now is to resume that tradition — to measure what power prefers unmeasured, to name what the logframes decline to name, to build cumulatively so that the next generation inherits findings rather than fog, and to trade with the international literature as an equal: exporting frameworks, not just data; setting questions, not just answering them. Pakistan does not need its economists to be cited. It needs them to be consequential. Those have not, so far, been the same thing — and closing that gap is the most important research question of all.

References

Acemoglu, D., & Robinson, J. A. (2012). Why nations fail: The origins of power, prosperity, and poverty. Crown.

Government of Punjab. (2025). The Punjab Asaan Karobar Act. Lahore.

Haq, M. (1976). The poverty curtain: Choices for the Third World. Columbia University Press. (Incorporating the “twenty-two families” address, Karachi, 1968.)

Haque, N. U. (2007). Entrepreneurship in Pakistan (PIDE Working Paper 2007:29). Pakistan Institute of Development Economics.

Haque, N. U. (2017). Looking back: How Pakistan became an Asian tiger by 2050. Kitab.

Haque, N. U., & Qasim, A. W. (2022). Regulatory bodies: Sludge and the cost of doing business in Pakistan. Pakistan Institute of Development Economics.

Haque et al PIDE. (2021). The PIDE reform agenda for accelerated and sustained growth. Pakistan Institute of Development Economics.

Haque-Qasim PIDE. (2021–2023). PIDE sludge audit (Vols. I–III). Pakistan Institute of Development Economics.

Haque and Husain A small Club. PIDE

Herd, P., & Moynihan, D. P. (2018). Administrative burden: Policymaking by other means. Russell Sage Foundation.

Husain, I. (1999). Pakistan: The economy of an elitist state. Oxford University Press.

International Monetary Fund. (2025). Pakistan: Technical assistance report — Governance and corruption diagnostic assessment. IMF.

Khanna, T., & Palepu, K. (2000). Is group affiliation profitable in emerging markets? An analysis of diversified Indian business groups. Journal of Finance, 55(2), 867–891.

Khwaja, A. I., & Mian, A. (2005). Do lenders favor politically connected firms? Rent provision in an emerging financial market. Quarterly Journal of Economics, 120(4), 1371–1411.

Krueger, A. O. (1974). The political economy of the rent-seeking society. American Economic Review, 64(3), 291–303.

Laffont, J.-J., & Tirole, J. (1991). The politics of government decision-making: A theory of regulatory capture. Quarterly Journal of Economics, 106(4), 1089–1127.

Laffont, J.-J., & Tirole, J. (1993). A theory of incentives in procurement and regulation. MIT Press.

Malik, A. (2012). Power crisis in Pakistan: A crisis in governance? (PIDE Monograph). Pakistan Institute of Development Economics.

Malik, A. (2020). Circular debt — an unfortunate misnomer (PIDE Working Paper). Pakistan Institute of Development Economics.

North, D. C., Wallis, J. J., & Weingast, B. R. (2009). Violence and social orders: A conceptual framework for interpreting recorded human history. Cambridge University Press.

Papanek, G. F. (1967). Pakistan’s development: Social goals and private incentives. Harvard University Press.

Stigler, G. J. (1971). The theory of economic regulation. Bell Journal of Economics and Management Science, 2(1), 3–21.

Sunstein, C. R. (2021). Sludge: What stops us from getting things done and what to do about it. MIT Press.

Thaler, R. H. (2018). Nudge, not sludge. Science, 361(6401), 431.

White, L. J. (1974). Industrial concentration and economic power in Pakistan. Princeton University Press.

Pakistan’s economic research has become better at describing symptoms than at identifying mechanisms. It tells us that growth is low, exports are weak, investment is depressed, informality is high, public finance is strained, regulation is cumbersome, and rents exist. But much of this is already known. The harder question is whether research gets granular enough to show where the rents come from, who receives them, through which rules, with what cost, and with what reform instrument.

This distinction matters. Rents are not inherently bad. Some rents are justified. Innovation creates temporary Schumpeterian rents. Scarcity creates Ricardian rents. Learning by doing may justify temporary protection. Infrastructure investment may require a risk premium. Regulation can be essential for health, safety, financial stability and consumer protection. The question is not whether rents exist. The question is whether they are earned through value creation or created by restriction; whether they are conditional on performance or connection; whether they expire or become permanent; and whether they are visible or hidden. The rent-source framework in the earlier draft correctly pushes us toward this question: permissions, credit, contracts, land, protection and regulation must each be studied as separate sources of rent creation, not collapsed into the lazy phrase “governance failure.”

Khwaja and Mian’s paper on politically connected lending is a good example, though it should not be exaggerated. It did not reveal something unknown: Pakistanis already knew that political influence affects banking. Its contribution was empirical precision. Using firm-level loan data, it showed that politically connected firms borrowed more and defaulted more, with preferential treatment concentrated in government banks rather than private banks. The paper located the rent source in discretionary credit allocation through state-influenced banks, not in finance as a whole. (OUP Academic)

We need to go further than “finance is captured,” to understanding which administrative and institutional arrangements allow such connected lending and specific measures can be taken to prevent this. The next questions should have been obvious. Do development finance institutions create similar rents? Do refinance schemes and subsidized credit windows favor politically exposed borrowers? Do provincial funds and government guarantees reproduce the same pattern? Do public-sector bank boards have enough independence to resist pressure? Does privatization reduce rent-seeking only when ownership is dispersed, or does concentrated ownership convert political lending into insider lending?

Trade policy research shows a mixed picture. Jamil Nasir’s “Tariff Tripod of Pakistan” is useful because it identifies the three competing uses of tariffs: protection of local industry, export promotion through exemptions and SROs, and revenue generation through import-stage levies. (IDEAS/RePEc) This is more granular than simply saying Pakistan is protectionist. It shows that tariff policy is doing too many things at once, and that this creates discretion. SROs and exemptions are not merely technical devices; they are instruments through which firms and sectors bargain with the state.

Haque and Siddiqui’s work on nominal and effective rates of protection also goes beyond broad complaint. It calculates sector-level protection and finds that although protection declined between benchmark years, sectors such as vegetable oil, motor vehicles and “other manufacturing” remained highly protected. (IDEAS/RePEc) PIDE’s later work on effective protection in an input-output framework continues this line by quantifying protection across sectors during 2011–20 and linking trade barriers to sectoral productive capacity. (PIDE)

But even this literature often stops one step too early. It tells us which sectors are protected, but not always which firms benefit, which consumers pay, which associations lobby, which SROs matter most, or whether protection produced export discipline. A granular research agenda would trace the chain from tariff line to firm benefit to consumer cost to political defense. It would ask whether protected firms became exporters, whether protection was time-bound, and whether failure led to withdrawal. Without that, the infant-industry argument remains rhetorical. We know East Asia used rents, but those rents were disciplined. Pakistan’s research must show whether Pakistani protection is a learning rent or a permanent lobbying rent.

The research on regulatory sludge has opened another promising path. Haque-Qasim sludge audit defines sludge as excessive and unjustified frictions such as complicated forms, duplicative paperwork and procedural burdens that make transactions costly (PIDE). It costs more than 60% of GDP on a small number of sectors audited. Haque-Raja work on the government footprint estimates that the state’s footprint is far larger than formal spending because SOEs, SRO culture, control over downtown for VIP housing and cumbersome regulations expand the state’s control over economic activity. (IDEAS/RePEc)

This is valuable because it moves beyond macroeconomic aggregates and asks how the state enters daily economic life. But the research still needs to become more operational. If sludge is costly, which rules should be repealed first? Which NOCs are redundant? Which licences protect safety and which merely protect incumbents? Which approval creates the longest delay? Which department imposes the highest transaction cost? Which forms ask for information already held by the state? Sludge research becomes reform research only when it produces a repeal list, a negative list, a deemed-approval rule, and a regulatory guillotine schedule. Otherwise, it risks becoming another estimate of a problem everyone already experiences.

Tax research faces the same issue. Pakistan has a large literature on tax effort, informality, compliance, exemptions and indirect taxation. Ahmed’s paper on “withholdingisation” is useful because it moves the discussion from aggregate tax-to-GDP ratios to the transaction chain. It argues that withholding taxes at multiple points can raise end-prices and transfer the cost of collection from the state to citizens and firms. Haque’s PIDE-PRIME tax reform work also argues for simplifying withholding taxes and reducing their spread in the economy. (PIDE) Research on indirect taxes similarly shows Pakistan’s heavy reliance on indirect taxation and studies who bears the burden. (Rasta)

But much tax research remains donor-facing: broaden the base, improve compliance, digitise, increase filers. These are not wrong, but they are incomplete. Granular research would ask which withholding provisions are pure revenue devices, which are never refunded, which distort transactions, which create cascading costs, and which survive because they are administratively convenient for FBR. It would compare the burden of taxing transactions with the under-taxation of land, property gains, exemptions and elite perks. It would identify which tax expenditures are defensible policy instruments and which are hidden rents. The research question should not be “how can FBR collect more?” It should be “which taxes raise revenue with the least damage to growth, investment, transactions and trust?”

Urban land research is perhaps the most important missing frontier. Haque’s work on flawed urban development policies argues that Pakistan’s cities are constrained by dirigiste regulation, low-density planning and underdeveloped construction and real-estate markets. (IDEAS/RePEc) The Cities as Engines of Growth agenda also argues that Pakistani policy has neglected cities as centers of productivity, markets and innovation. Yet even this literature has not been taken far enough by the wider profession.

Land is not just an urban planning subject. It is a rent system. It includes state land allotment, official housing, GORs, cantonments, development authority schemes, zoning changes, conversion approvals, cooperative housing, plot compensation, and the political economy of property taxation. Research must ask: who holds public land, under what legal title, at what opportunity cost, and with what alternative use? What is the value of prime land locked in official residences, clubs and low-density administrative estates? How much public compensation is hidden in plots and housing rather than salaries? How do zoning and conversion powers create fortunes? Without such work, Pakistan’s research will keep discussing “investment” while ignoring the asset class that absorbs savings, shapes politics and distorts cities.

Power-sector research is abundant but often insufficiently institutional. There are many papers and policy notes on circular debt, tariffs, distribution losses and subsidies. PIDE’s work on circular debt and electricity tariffs studies tariff burdens across household quintiles and the link with sectoral debt dynamics. (PIDE) But circular debt is not only an accounting gap. It is the accumulated result of contracts, guarantees, pricing rules, losses, non-payment, subsidies and political delay. The granular research question is contract design. Which power purchase agreements shifted which risks to the public? Which capacity payments were competitively discovered, and which were negotiated? Which guarantees were justified by risk and which simply capitalized private returns into public liabilities? Which renegotiations reduce excess rents and which damage credibility?

Here again, rents can be justified. Infrastructure investors may require compensation for country risk. But justified rents must be transparent, competitively priced and time-bound. Research should therefore compare negotiated contracts with auction outcomes, identify risk allocation clause by clause, and design a rule that no future state purchase above a threshold occurs without competitive bidding. Pakistan does not need another paper saying circular debt is large. It needs research showing how the debt-producing contract machine works.

Regulatory research has begun but remains underdeveloped. Haque and Qasim’s monograph on regulatory bodies argues that Pakistan’s regulators often hurt growth and investment because regulation is treated as control rather than market development. (IDEAS/RePEc) The paper is valuable because it shifts attention from “more regulation” or “less regulation” to the purpose and incentive structure of regulators. Markets need rules. But when regulators become licensing authorities, they create entry barriers rather than competition.

The next research step should be highly specific. How are regulators funded? Do license fees incentivize more licenses? How many regulatory heads are sector specialists and how many are rotating generalists? How many rules are supported by cost-benefit analysis? How often do regulators measure entry, concentration, prices, innovation and service quality? Which regulatory orders favour incumbents? How long do appeals take? Which regulators publish usable data? This is the level of evidence needed to redesign regulation. Otherwise “regulatory reform” becomes another phrase without an instrument.

So, does Pakistani research get granular? Sometimes, yes. Khwaja-Mian on political lending, Nasir on the tariff tripod, Haque-Siddiqui and PIDE on effective protection, Ahmed on withholdingisation, PIDE on sludge, Haque-Ullah on the government footprint, Haque on urban policy, and Haque-Qasim on regulators all move in the right direction. They identify channels rather than only symptoms. But as a research ecosystem, Pakistan still remains too superficial. It often stops at diagnosis, avoids naming beneficiaries, and rarely translates evidence into repeal lists, auction rules, disclosure templates, board reforms, model laws or transition plans. And there is little extension of these papers. It is almost as if our economists don’t read each other’s work. Or they are no able to pick up important themes.

The deeper problem is incentive. Academic publishing rewards novelty in method more than usefulness in reform. Donors reward questions that fit their externally driven agendas, not necessarily those that challenge domestic power. Government prefers research that recommends capacity-building without disturbing discretion. As a result, Pakistani economists often study poverty, schooling, compliance and firm constraints without asking how the state’s own rent-creating machinery works.

A better standard is needed. Research should be judged by five tests. Does it identify the rule or institution that creates the rent? Does it identify the beneficiary and the payer? Does it distinguish justified from unjustified rent? Does it estimate the cost in fiscal, consumer, investment or productivity terms? Does it propose an implementable reform instrument? If it cannot answer these, it may be descriptive, but it is not reform research.

Pakistan does not need research that merely proves the obvious. It needs research that opens the file, follows the permission, reads the contract, maps the board, values the land, traces the SRO, measures the delay, identifies the beneficiary, and designs the rule to end the rent. Only then will economic research move from commentary to change.

Pakistan does not have an income tax system. It has a transaction tax system pretending to be an income tax system. This is not a technical distinction. It is the heart of our tax failure.

Some definitions:

· An income tax should tax income. It should ask a simple question: how much did you earn, after legitimate costs, and what tax do you owe?

· Withholding tax, in theory, is only a collection device. A little is deducted in advance, credited to your account, and adjusted when you file your return.

Pakistan has converted this modest administrative instrument into a fiscal dragnet. We now tax transactions before income is measured, before profit is known, and often before any real tax liability exists. The FBR’s withholding regime reaches imports, salaries, dividends, bank profit, supplies, services, contracts, rent, exports, prizes, petroleum products, cash withdrawals by non-filers, motor vehicles, electricity bills, phone and internet bills, property transactions, auctions, functions, foreign card use, bonus shares and more. What began as withholding has become a net thrown over almost every visible transaction in the formal economy.

This is not income taxation. It is taxation by ambush. The state taxes you when money moves. It taxes you when you buy. It taxes you when you sell. It taxes you when you receive payment. It taxes you when you pay bills. It taxes you when you use a bank. It taxes you when you register a car. It taxes you when you buy property. It taxes you when you sell property. It taxes you when you invest. It taxes you when you receive profit. It taxes you when you use formal channels.

Then it tells you: do not worry, it is adjustable. This is the great refund fiction. In law, many withholding taxes are adjustable. In practice, they often behave like final taxes. The taxpayer must file, reconcile, prove, document, chase certificates, match deductions, answer notices and wait. While ministers and bureaucrats run around on television shows saying that “people are dishonest and don’t pay taxes” every Pakistani rich and poor is paying huge withholding transact ton taxes in lieu of income. Sadly, the rich have a way of getting some refunds. The poor can never get a refund. Once again that state robs the poor.

So the state takes first and explains later. The refund exists on paper. The burden exists in cash. This is why Pakistan’s tax system feels far more oppressive than its tax-to-GDP ratio suggests. We are told the country is undertaxed. That is true at the aggregate level. But the visible, formal, documented taxpayer is not undertaxed. He is over-withheld, over-documented, over-harassed and under-refunded.

The result is a lazy tax state. A competent tax administration would identify income, match expenditure, trace assets, use third-party data, audit intelligently, and enforce fairly. Pakistan’s tax administration prefers the easier route: intercept every transaction and force someone else to deduct. The withholding agent becomes an unpaid tax collector. The taxpayer becomes a suspect. The refund becomes a maze.

This is not merely inefficient. It is anti-growth. Pakistan keeps saying it wants documentation. But the tax system punishes documentation. The moment you enter the formal system, every transaction becomes visible and every visible transaction becomes taxable. Use a bank and you are taxed. Receive formal payment and you are taxed. Pay through documented channels and you are taxed. Register assets and you are taxed. Buy from formal firms and they price in the withholding burden. Sell to formal buyers and they deduct before paying you.

The state says it wants people to file returns, open bank accounts, document businesses, use digital payments and enter the formal economy. But its own tax machinery tells citizens that visibility is dangerous. Formality brings deduction. Deduction brings paperwork. Paperwork brings exposure. Exposure brings harassment. Harassment brings cost. So people rationally choose cash, informality, under-invoicing, benami arrangements, small-scale operations and avoidance of formal records.

This is how a tax system becomes a growth policy — in the wrong direction. The state also uses withholding to disguise its own failure. Complexity has become policy. The citizen cannot understand the system. The businessman cannot plan. The accountant becomes indispensable. The tax lawyer becomes powerful. The official gains discretion. The compliant taxpayer pays. The connected taxpayer negotiates. The informal taxpayer disappears.

This is not reform. This is extraction without governance. A serious reform must start by cutting the withholding regime down to size. Withholding should be retained only where it makes administrative sense: salaries, dividends, interest, payments to non-residents and a few clearly defined high-risk payments. It should not be attached to every bill, every registration, every service, every contract and every routine transaction.

Second, every adjustable withholding tax must be automatically credited. If the state has taken the money, the taxpayer should not have to prove endlessly that the state took it. Credits should appear in the taxpayer account automatically. Refunds below a threshold should be automatic and time-bound. If FBR delays refunds, it should pay interest. The state must face a cost for holding citizen money.

Third, withholding on utilities, phones, banking channels and routine transactions should be phased out. These are not serious income taxes. They are nuisance taxes on formal life. They tell people that documentation is costly and cash is safer.

Fourth, the filer versus non-filer distinction must not become a permanent substitute for real tax administration. Punitive withholding on non-filers may look clever, but it often becomes another way of taxing transactions rather than income. The objective should be simple filing, low rates, credible enforcement, automatic data integration and risk-based audit — not a jungle of deductions.

Fifth, Pakistan must stop treating refunds as charity. A refund is not a favor from FBR. It is taxpayer money. When the state over-collects and then delays repayment, it is using citizens and firms as involuntary lenders. In a country where businesses complain of liquidity shortages, this is not a minor issue. It is a tax on investment.

The deeper problem is trust. The state does not trust citizens, so it grabs money at source. Citizens do not trust the state, so they avoid visibility. The more the state withholds, the more citizens hide. The more citizens hide, the more the state withholds. This is the low-trust fiscal equilibrium in which Pakistan is trapped.

It is also politically convenient. Withholding allows government to raise revenue without confronting entrenched privilege. It is easier to tax a phone bill than a mansion. Easier to tax electricity than elite land. Easier to tax a bank transaction than undeclared wealth. Easier to tax formal firms than politically protected sectors. Easier to tax movement than power.

That is why the system survives.

But Pakistan cannot build a modern economy through fiscal ambush. We cannot ask people to formalize while punishing every formal transaction. We cannot build capital markets while taxing investment at multiple points. We cannot deepen banking while making bank visibility costly. We cannot grow firms while draining working capital. We cannot broaden the tax base by making entry into the tax base unattractive.

The reform agenda is therefore simple: tax income, not every transaction; tax profits, not movement; tax capacity to pay, not visibility; refund automatically, not grudgingly; simplify radically, not cosmetically.

Pakistan’s withholding regime is now a transaction tax on formality. It is a penalty on documentation. It is a cash-flow tax on business. It is a nuisance tax on citizens. It is also a confession: the state cannot tax income properly, so it taxes everything it can see.

This series reviews how Pakistan’s English-language press covers the economy each week. The test is simple: does the journalism investigate, or merely transcribe? Does the commentary build on Pakistan’s own research, or rediscover problems already documented locally? The press we read shapes the economy we get.

I. The Week’s News

The fiscal year closed and the numbers arrived — mostly bad, mostly under-examined. Dawn reported that exports fell to $30.13 billion in FY26 against the budgeted $35 billion target — a miss of nearly $5 billion — with the trade deficit swelling 21.57 percent to $39.47 billion, a four-year high. June alone saw exports drop 9.61 percent while imports surged 26 percent. The Commerce Ministry, remarkably, issued no statement explaining the decline. Dawn also reported the Senate Standing Committee on Economic Affairs deciding to refer alleged corruption in foreign-funded power projects directly to NAB and the FIA; the State Bank abolishing two remittance incentive schemes — the Sohni Dharti Remittance Programme and the Telegraphic Transfer Charges Incentive Scheme — after IMF scrutiny of their Rs100–120 billion annual cost; the Prime Minister claiming record tax collection as the fruit of FBR “reforms”; Finance Minister Aurangzeb’s taxpayer facilitation and digitization message; and a $70 million World Bank loan for “digital Punjab.”

Business Recorder carried the week’s routine data flow: petrol and HSD prices cut by Rs1.97; SPI down nearly one percent week-on-week; the SBP chief projecting FY27 growth above government estimates; inflation hitting 11.1 percent in June; a record 43,559 new company registrations in FY26; and a chorus of provincial revenue authorities — KPRA, PRA, SRB — each announcing “highest-ever” collections, with Sindh’s SRB at Rs370 billion.

The Express Tribune led with the official macro narrative: GDP growth at 3.7 percent, “highest in four years,” built around remittances, IT exports and current-account stability — alongside its own report of the export target missed by $5.2 billion. The two stories sat side by side without anyone asking how both could define the same economy.

II. The Week’s Op-Eds

Dawn’s opinion pages carried “Economic path lost — the policy puzzle” on investment decline and policy unpredictability; “The missing ‘actuals’ in Khyber Pakhtunkhwa’s 2026-27 White Paper” on budget transparency; and pieces on sovereignty through resilience, the need for robust debate, the farm economy, abiana hikes, and Sindh’s troubled mango season.

Business Recorder’s op-ed set was the richest of the week: “Pakistan’s foreign exchange mirage”; “Every Finance Act tells two stories”; “Reflections on provincial budgets FY27—I”; “Towers, satellites, and Pakistan’s digital blind spot”; “The 2026-27 Annual Plan”; “Pakistan has equity appetite; its owners have control anxiety”; “Pakistan’s export trap—II”; “Pakistan’s fiscal federalism has been rewritten in plain sight”; “A new direction at SECP”; “The solar paradox”; and “Reflections on federal budget FY27—II.”

III. The Journalism: Official Numbers, Little Institutional Curiosity

The journalism was active but not investigative. The week offered genuinely important material: missed exports, tax collection claims, remittance incentives abolished under IMF pressure, provincial tax records, World Bank lending, foreign-funded power projects under parliamentary fire, and rising inflation. Yet most reports remained event-driven. They told us what officials said, what the SBP circular said, what the World Bank approved, what the PM claimed, what PBS numbers showed. That is record-keeping. It is not economic journalism.

The export story was the week’s better piece of reporting. It did not merely transmit the number; it set the $30.13 billion outcome against the $35 billion target and noted — pointedly — that the Commerce Ministry offered no explanation. That is inquiry. But the story stopped before the deeper question: why does Pakistan repeatedly announce export targets without any export-capability model behind them? Where is the connection to tariff policy, energy costs, logistics, firm productivity, exchange-rate management, customs delays, stuck refunds and industrial structure? A target missed by 14 percent is not a news event; it is evidence about the state’s planning machinery. Nobody treated it as such.

The FBR stories were stenography with a byline. Reporting the Prime Minister’s claim that “reforms” produced record tax collection is transcription unless the report decomposes the number: how much is nominal growth and inflation, how much is import-stage taxation, how much is withholding squeezed from the already documented, what happened to refunds, what was the revised target, and where — if anywhere — is genuine base-broadening? Dawn did note the revised target in the Aurangzeb story, but the larger frame accepted the official reform vocabulary wholesale. Pakistani tax journalism still cannot distinguish between reform and extraction, and until it can, every “record collection” headline is a press release in disguise.

The remittance story mattered more than its treatment suggested. The IMF forcing closure of a Rs100–120 billion annual incentive regime — with a single large bank reportedly billing Rs30 billion in a year — is a story about rents inside the financial sector, not a circular about reward points. And beneath it sits the structural story nobody wrote: Pakistan has built its external stability on labour export while goods exports shrink. That is not resilience; it is a disguised failure of domestic productivity, monetised through the bodies of migrant workers. Journalism should be connecting remittance policy to migration, skills, labour-market failure, the exchange rate, and who exactly earns the float. It connected it to nothing.

The foreign-funded power-projects story was the strongest journalism of the week. It had everything real economic journalism needs: conflict, institutions, parliamentary oversight, alleged corruption, EAD–Power Division tension, a bureaucracy questioning a Senate committee’s jurisdiction, senators documenting that loans concentrate in Punjab while cost escalations burden Balochistan and KP, project designs altered after loan approval, contract prices deliberately lowballed for later escalation, and possible NAB/FIA referrals. This follows money, contracts and accountability. It should become the template. Pakistan’s donor-funded project economy is enormous, yet journalists almost never track whether foreign borrowing produces assets — or merely delays, cost escalations and another layer of rent-seeking.

The World Bank “digital Punjab” story was the weakest genre of development reporting: the loan announcement carried in donor language. Broadband, digital services and cashless payments may all be useful. But the report asked none of the questions that matter: What happened to previous digital loans? What baseline will be measured? Who implements? What are the procurement risks? What do local firms gain? Does the project build state capability or another donor-designed island that dissolves when the financing ends?

The World Bank’s fiscal federalism intervention was the week’s largest missed story. Dawn, Business Recorder and Tribune all reported the Bank’s call to revisit the NFC, sharpen provincial revenue incentives and improve service delivery — and all three stayed inside the Bank’s frame. The first question should have been the obvious one: why is an international financial institution producing a report on an essentially political and constitutional settlement? The NFC is not a technocratic spreadsheet. It is a federal bargain embedded in the 18th Amendment, in provincial autonomy, representation, trust, and the long history of centralized rule. Is redesigning it within an IFI’s mandate — or is this another instance of donors entering Pakistan’s domestic political agenda through the language of fiscal reform? The harder domestic questions went unasked too: why did the federal government not shrink after devolution; why do federal ministries still occupy devolved space; why have provincial bureaucracies not delivered services; and why are local governments absent from the fiscal compact altogether? Once again, donor research became the event. Pakistani institutional memory remained missing.

IV. The Op-Eds: Sharper, But Still Fragmented

The commentary was better than the reporting. It asked structural questions: why investment is low, why fiscal federalism is being rewritten, why the Annual Plan lacks credibility, why exports remain trapped, why capital markets are thin, and why foreign-exchange stability is not the same as productive strength.

“Economic path lost — the policy puzzle” was among the strongest pieces because it connected low investment to policy unpredictability, citing the fall in investment-to-GDP from 17.2 percent in 2018 to 13.1 percent in 2024 and correctly arguing that speculative activity flourishes when policy is inconsistent. That moves past budget arithmetic into political economy. But it still stopped short of the machinery of unpredictability itself: the ministries, regulators, tax officials, courts, SROs, NOCs, inspections and discretionary permissions that generate the uncertainty. Naming “unpredictability” without naming the permission economy that produces it leaves the diagnosis half-finished.

“The missing actuals” performed a genuine public service. Budgets are not speeches; they are claims tested against outturns. When actuals disappear from the main tables, accountability disappears with them — leaving only estimate versus estimate. This is exactly the fiscal scrutiny Pakistan needs, and it should be applied to every budget document in the country, federal and provincial.

Business Recorder’s set was rich and occasionally excellent. “Pakistan’s foreign exchange mirage” captured the central external-sector illusion: remittances hide export weakness. “Pakistan’s export trap—II” pushed toward structure — low value addition, cotton dependence, a narrow basket. “Pakistan has equity appetite; its owners have control anxiety” raised a neglected and critical point: Pakistan’s capital problem is not only savings; it is ownership concentration and the Seth-firm’s refusal to dilute control. “Pakistan’s fiscal federalism has been rewritten in plain sight” correctly treated the FY27 budget as a constitutional-political-economy event rather than a spreadsheet.

The Annual Plan piece reviewed the Planning Commission targets as if they were based on some hard research and evidence. Pakistan’s Annual Plans routinely announce growth, investment and export targets with no credible theory of implementation. The question is never whether the target is attractive. It is whether the state possesses the instruments, incentives and institutional capacity to deliver it. Decades of evidence say it does not, and each new Plan is written as if that evidence did not exist.

The weaker op-eds still ran on the standard vocabulary: stability, reforms, digitisation, facilitation, investment climate. These words are harmless until they become substitutes for institutional diagnosis — and in Pakistan’s commentary, they usually are.

V. The Local Research Test

This is the question this series exists to ask, and the answer this week was again “NO”. Almost nothing in the week’s journalism or commentary drew on Pakistan’s own research base. The finance ministry, IMF, World Bank, SBP and FBR supplied the frames; the press supplied the transmission.

The missing bridge is well documented and readily available. The Framework for Economic Growth (2011) diagnosed the productivity, cities and markets agenda fifteen years ago. The PIDE Reform Agenda and RAPID mapped the regulatory sludge, PSDP throw-forward and civil-service incentive problems now being rediscovered piecemeal in op-ed columns. My work on cities, university reform, market development and the permission economy speaks directly to this week’s stories — the export miss, the investment collapse, the planning charade. The Haque–Nayab work on graduate unemployment bears directly on any serious discussion of the remittance economy and labour export. None of it was cited. Not once.

The consequence is a national conversation without memory. Pakistani commentary repeatedly rediscovers problems already documented locally, each time as if for the first time, each time within a frame supplied by a donor or a ministry. The literature’s silences are structural: government and donors are treated as sources of truth rather than subjects of investigation, and domestic research is treated as if it did not exist. A profession that will not cite itself cannot accumulate, and a press that will not read the domestic literature cannot interrogate the officials who ignore it.

Reading the Economy is a weekly review published by Socioeconomic Insights and Analytics (SIA).

Every year Pakistan publishes an Annual Plan with growth targets, sectoral targets, investment targets, export targets, and a Public Sector Development Program. Last 4 annual plans targeted a growth rate of about 4% and exports of about 8% of GDP—a lackluster economy at best! Where do these numbers come from? Should they be taken seriously?

1. Where do the targets come from?

Not really — except for a day of newspaper reporting and commentary by old-fashioned economists. These are not bottom-up estimates built from firm-level investment plans, capacity utilization, productivity trends, export orders, crop conditions or serious sectoral modelling. They are numbers backed by little research or investigation. An aggregate growth target is chosen first — largely for political and presentational reasons — and then broken into sectoral numbers that add up neatly.

Agriculture is not assigned 3.6 percent because anyone has modelled water availability, seed quality, fertilizer use, climate risk or crop incentives. It is assigned 3.6 percent because the aggregate arithmetic needs it. Industry and services are treated the same way. The number comes first. The story is written later.

A number chosen to make the table work is not a forecast. It cannot be tested because it was never derived from a testable mechanism.

2. What policies or instruments are these targets based on?

This is where the Plan is thinnest. A credible growth forecast should specify the policy levers expected to produce the result: which reforms, which prices, which institutional changes, which market openings, which incentives, and which constraints will be removed.

The Annual Plan instead asserts outcomes without instruments. Investment will rise to 15 percent of GDP — through what mechanism? Tax policy, when much of it is moving in the wrong direction. Deregulation of which sector? Lower policy uncertainty? Reform of which market? Serious public investment beyond the usual political projects? The document does not say.

Exports will increase sharply — based on what? Which exchange-rate assumption? Which trade-policy change? Which energy-price reform? Which resolution of the refund backlog? Which improvement in logistics? Given weak investment in recent years, where is the capacity to export? The Plan offers ambition, not mechanism.

Without instruments, the targets are wishes with decimal points. If growth misses, there is no policy lever whose failure can be identified. There is only the familiar appeal to external shocks, global uncertainty, weather, oil prices or political instability. But a serious plan would have built these risks into scenarios from the beginning. A risk paragraph is not a forecast.

3. Tested against existing research, do the targets hold up?

Pakistan’s academic and policy research seldom examines Annual Plan targets seriously. There is occasional nitpicking, often enough only to give the exercise undeserved credibility. The Plan therefore continues to publish point targets without forecast-error tables, fan charts or any decomposition of shocks, assumptions and implementation failures. Almost no one takes the numbers seriously beyond the day they appear in the press.

The strange thing is that the relevant knowledge exists. Forecasting research tells us to measure errors, publish uncertainty and compare forecasts with outcomes. Public-investment research tells us projects are delayed, overcommitted, underfunded and weakly linked to productivity. Yet the Annual Plan learns nothing from either tradition.

A serious Plan would ask: why were last year’s targets wrong? Which errors came from shocks, which from bad assumptions, and which from implementation failure? How did those errors affect revenue, imports, expenditure and borrowing? Which PSDP projects actually relieved which binding constraint? What did they add to growth?

The Annual Plan does none of this. The story resets every year. The problem is not merely that targets are missed. It is that misses are not studied by the institution that produces them. Without learning, planning becomes amnesia with tables.

4. Given PSDP, throw-forward and completion practices, is the investment plan reasonable?

No — and this is the sharpest contradiction in the document. Pakistan has its own literature on public investment failure. The Doing Development Better study showed how the planning system had deteriorated from its earlier role in public-sector-led growth. Other work documents delays, cost overruns and throw-forward. None of this alters the Annual Plan’s growth arithmetic. It still speaks as if PSDP projects are annual growth instruments, when the portfolio is really a decade-long backlog.

The IMF’s Public Investment Management Assessment found Pakistan’s PSDP had a cost-to-complete of roughly Rs10.7 trillion — more than fourteen times the FY2022–23 PSDP allocation of Rs727 billion. At that funding rate, the existing portfolio alone would take about fourteen years to finish with zero new projects. The Planning Commission’s PSDP 2025–26 document confirmed a throw-forward above Rs10 trillion against a PSDP of about Rs1 trillion. By 2026, the Planning Ministry again confirmed throw-forward above Rs10,000 billion against a development ceiling of roughly Rs1.126 trillion.

So, the Annual Plan sets a one-year growth target while its main public-investment instrument is committed a decade or more into the future. Most of this year’s allocation goes to old, partially completed schemes — many with token allocations, many revised upward mid-cycle, many chosen for political rather than productivity reasons.

There is no published estimate of the marginal productivity of this spending. No counterfactual shows what the same money could achieve through regulatory reform, tax reform, city reform or energy-market reform. No demonstrated link connects this year’s PSDP allocation to the 4 percent growth target. The link is asserted, not shown.

This matters because a large fraction of the PSDP remains brick and mortar. Even on a narrow definition, nearly half of this year’s federal PSDP goes to highways, water, power, railways, housing and communications. On a broader definition, including special-area and Cabinet Division schemes, the share moves toward three-quarters. Development is still treated as construction, not productivity, markets, reform or firm growth.

5. Which growth model is being used — Haq/Harrod-Domar or endogenous growth?

This is the underlying issue. Pakistan’s planning apparatus still runs on the Harrod-Domar logic inherited from the Mahbub ul Haq era: growth is constrained by a capital gap; public investment closes the gap; more capital stock produces more output; therefore the PSDP is the growth engine almost by definition.

That framework had some validity in an early-development economy short of basic infrastructure. It does not describe an economy where the binding constraints are institutional: weak contract enforcement, regulatory sludge, distorted tax incentives, uncompetitive markets, policy uncertainty, low firm productivity, shallow capital markets and a public investment system that cannot complete what it starts.

Modern growth theory and cross-country evidence locate the real engine of growth in productivity: firm competition, technology adoption, human capital, trade openness, urbanization, market depth, knowledge and institutional quality. Capital spending matters only when it removes a specific binding constraint on private activity. A road connecting markets to ports may raise productivity. A road duplicating an existing route for political reasons does not, regardless of how it appears in the PSDP.

The Annual Plan does not engage with this distinction. It treats PSDP allocations as inherently growth-producing without asking which constraint each project removes, whether that constraint is actually binding, or whether reform would achieve the same growth at lower cost.

That is why the Plan is not merely weak. It is built on a static theory of growth in an economy whose real constraints are dynamic and institutional.

Pakistan’s dynastic politics is usually treated as a moral failure. We complain that fathers hand seats to sons, daughters inherit constituencies, brothers rotate offices, and families dominate assemblies generation after generation. This is true, but incomplete. Dynasties persist not only because political families are ambitious. They persist because Pakistan has built a political market that rewards inheritance and punishes outsiders.

In economics, closed markets protect incumbents. Entry barriers rise, competition weakens, and insiders preserve rents. Pakistan’s political system works in much the same way. There is effectively one serious entry point into politics: securing a party ticket for a national or provincial assembly seat. Local government is weak, intermittent, or deliberately undermined. The Senate is indirectly elected. Party organizations are centralized. Policy circles are closed. The state remains highly discretionary. This means that a person without family background, inherited money, biradari networks, or party lineage may get one real chance every five years—if even that.

This is the central unfairness. A newcomer gets a rare opportunity to enter; a dynast is already inside. The outsider must persuade party leaders, raise money, build recognition, organize workers, and survive a patronage-heavy contest. The dynast begins with infrastructure: constituency networks, bureaucratic relationships, financiers, contractors, media access, family reputation, and knowledge of how the state actually works. A first-generation candidate enters with ideas. A dynast enters with an organization.

Research confirms that this is not anecdotal. It finds that dynastic legislators have constituted more than half of elected politicians in Pakistan since 1970. Another study on political dynasties and competition finds that dynastic presence reduces political competition; a one-standard-deviation increase in dynastic candidates lowers constituency competition by about 13 percent. Candidate-selection research also shows that major parties rely heavily on dynastic “electables” because they are seen as safer nominees. Dynasties do not merely win elections. They shape the menu of choices before voters arrive.

That is why the real election often happens before polling day. It happens when party tickets are allocated. Once nominations are centralized, democracy is narrowed before citizens vote. Voters may choose among candidates, but the candidate pool has already been filtered by party elites, many of whom are themselves dynastic or dependent on dynastic networks. Citizens have the right to vote, but very few citizens have the ability to compete. That is Pakistan’s democratic deficit.

The problem is made worse by the centralized colonial state. Pakistan still runs through files, permissions, postings, transfers, approvals, police access, schemes, procurement, and discretionary decisions concentrated above the citizen. This kind of state creates brokers. Ordinary citizens need someone who can “get things done” inside the state. Dynasties thrive because they are insiders in this system. They are not simply representatives; they are intermediaries between a closed state and a dependent citizenry. The more centralized and discretionary the state, the more valuable insider access becomes.

This is why dynastic politics is also an economic problem. Legislatures are not neutral arenas. They reflect the incentives of those who occupy them. A parliament heavily populated by political families is unlikely to attack land rents, real estate privilege, regulatory discretion, patronage, tax exemptions, weak local governments, or administrative centralization. These are not merely policy failures. They are part of the political capital of dynasties. Research on Pakistan has also linked dynastic persistence with weaker local development outcomes, including evidence that constituencies where dynasts narrowly beat non-dynasts had worse household indicators such as out-of-school children and lower asset ownership. (EDI)

Other countries show that the issue is not solved by rhetoric. The Philippines wrote anti-dynasty language into its 1987 Constitution, but the provision requires an enabling law. Since the legislature itself is heavily dynastic, a strong law has not emerged. This is the classic trap: the reform is placed in the hands of those who benefit from blocking it. India has vigorous elections, noisy media, and strong public debate, yet dynasties remain widespread because party nominations are still centralized in many parties. The United States has political families too, but primaries create an additional layer of competition. A family name helps, but it does not automatically guarantee nomination. Comparative evidence therefore suggests that countries reduce dynastic power not by banning surnames alone, but by reducing the value of inherited political capital and opening more routes into politics. (The Diplomat)

Pakistan must learn this lesson. The answer is not only an anti-dynasty slogan. The answer is political market reform.

Term limits matter because permanent leadership turns parties into estates. No party head should control a party indefinitely while claiming democratic legitimacy. Term limits for party offices would force circulation and create openings for new leadership. Term limits for legislators should also be debated because long incumbency hardens patronage networks and makes politics even more closed.

Primaries matter because party tickets are the real gateway to power. If tickets remain controlled by leaders, families, and small committees, the general election is already constrained. Constituency-level primaries would not eliminate dynasties, but they would force dynastic candidates to compete with party workers, professionals, local organizers, and new entrants. Internal competition would make inheritance contestable.

Local government matters most because it creates the missing ladder. Without local government, entry into politics collapses upward. A newcomer must jump directly into a national or provincial contest controlled by party elites. Strong mayors, councils, and local bodies would allow teachers, lawyers, professionals, entrepreneurs, women, workers, and young people to build credibility through performance. Local government is not administrative decoration; it is the nursery of democratic renewal.

Staggered elections also matter. When one election decides everything for five years, outsiders have too few chances and incumbents have too much time to consolidate. Some level of government should face voters regularly. Staggered elections create continuous accountability, reveal public mood, and provide more entry points for new leadership. Democracy should not go silent for five years.

Term length must also be reconsidered in this context. A five-year protected cycle in a centralized patronage state gives insiders too long to convert office into networks, resources, and future advantage. Either terms must be shorter, or mid-cycle accountability must be strengthened through local elections, party primaries, recall-style mechanisms, and real legislative oversight. The point is not instability. The point is contestability.

Finally, Pakistan must end centralized colonial control. As long as the state remains a discretionary machine, dynasties will remain valuable brokers. Decentralize authority, empower cities, digitize permissions, publish decisions, reduce transfers and postings as political currency, and make the state accessible without intermediaries. When citizens can access the state directly, the political broker loses value. When the broker loses value, dynastic inheritance weakens.

Pakistan does not have dynasties because voters are foolish. It has dynasties because the system gives outsiders too few chances and insiders too many advantages. There is one main entry point, too few elections, weak local ladders, centralized nominations, opaque finance, and a colonial state that rewards those already inside.

Democracy is not merely voting every five years. Democracy is open entry. It is the ability of new talent to compete without inheritance, patronage, or permission from a family-controlled party machine.

A republic cannot flourish when office resembles property. Democracy is supposed to circulate power. Pakistan’s system preserves it.

[1] The writer served as the Deputy Chairman of the Planning Commission. X: @nadeemhaque; YouTube: @SiaLytics and Substack: Aid, Policy and Growth

With Shahid Sattar

Pakistan keeps saying it has no capital. Firms complain that bank borrowing is expensive. Government complains that private investment is weak. Economists complain that debt dominates finance. Yet whenever a credible company comes to the stock market, investors appear.

So let us stop pretending the problem is only lack of capital. The market has appetite. What it does not have is enough supply.

More precisely, Pakistan lacks owners willing to sell meaningful equity, share control and accept serious governance.

The recent listings on the Pakistan Stock Exchange make the point clearly. When decent corporate stories came to the market, investors responded. They subscribed to tyres, takaful, dairy, poultry, logistics, petroleum retail and REITs. Several issues were oversubscribed. Some attracted demand far above the size of the offer. The market did not walk away. The sponsors held back.

The most telling example is Service Long March Tyres. SLM came to the market with a proper industrial story: manufacturing, import substitution, exports, scale, technology partnership and growth. It raised around Rs7.77 billion through the sale of roughly 389.7 million shares. Investor demand was reportedly many times the offer size. One account placed interest at around Rs70 billion.

Yet the company offered only about 5 percent of its post-IPO equity.

If investors were willing to absorb the issue so quickly, why sell only 5 percent? Why not 10 percent, 15 percent or 20 percent? Why not use the opportunity to create a genuinely broad-based public company? Why come to the market with a feast, and then serve it with a teaspoon?

The answer is simple. Pakistan’s sponsor families want the advantages of the stock market without the consequences of the stock market.

They want valuation. They want liquidity. They want prestige. They want cheaper capital. They want the credibility of being listed. But many do not want dilution. They do not want independent shareholders asking hard questions. They do not want analysts examining performance. They do not want institutional investors pushing for discipline. They do not want boards becoming real. They do not want control to shift from the drawing room to the boardroom.

For many sponsor groups, the stock exchange is not treated as a market for ownership. It is treated as a financing counter.

Recent listing data confirms this pattern. SLM offered only about 5 percent of post-IPO equity. Sitara Petroleum’s public IPO portion was around 10 percent, though the broader issue including pre-IPO placement was larger. Blue-Ex’s main-board migration involved only about 3.5 percent of post-IPO capital. Wahdat Poultry offered about 15.8 percent. Ghani Dairies offered about 24.3 percent. Pak-Qatar Family Takaful and Pak-Qatar General Takaful offered approximately 21.7 percent and 29.7 percent respectively. The REITs were better from a free-float perspective: Image REIT offered about 33.4 percent, while JS Rental REIT and Signature Residency REIT each offered about 25 percent.

Taken together, these recent listings raised roughly Rs18.6 billion. Their implied combined valuation at offer prices was about Rs220 billion. In plain language, assets and companies worth around Rs220 billion came to the exchange, but the public was allowed to buy only about Rs18.6 billion of that value. For every Rs100 of value brought to the market, barely Rs8 was offered to outside investors. The remaining Rs92 stayed with sponsors, original owners or controlling shareholders.

This is the difference between a capital market and a token listing market.

A real capital market widens ownership. It creates liquid companies. It brings in institutional monitoring. It improves disclosure. It gives minority shareholders a voice. It allows pension funds, mutual funds, insurance companies and individuals to own pieces of growing businesses. It gives companies the ability to raise equity instead of loading their balance sheets with bank debt. It forces firms to explain strategy, defend performance and improve governance.

A token listing does the opposite. It gives the company a price, but not real market discipline. It gives sponsors liquidity, but not accountability. It creates a small tradable float while leaving control untouched. It allows a company to claim the respectability of being listed while continuing to operate like a private family estate.

This also exposes the hollowness of the constant demand for lower interest rates. Business groups repeatedly argue that investment is impossible because credit is too expensive. There is truth in the complaint, but not the whole truth. If debt is so unbearable, why are owners not raising larger amounts of equity? If bank borrowing is too costly, why not sell 20 or 30 percent to the market and fund expansion through shareholders?

The answer is uncomfortable: many owners would rather pay interest than share control.

They would rather borrow, lobby, seek subsidised credit, demand relief and blame monetary policy than accept meaningful dilution. They complain about the price of debt, but the cost they fear most is the loss of control. In Pakistan, the real interest rate may be high, but the emotional cost of dilution is apparently higher.

That is why the supply of equity remains so thin. It is not because Pakistani savers refuse to invest. Recent listings show the opposite. Investors have shown appetite for industrial, financial, services and real-estate-backed offerings. The demand is there. The shortage is on the sponsor side.

The small size and vagaries of the PSX make this problem worse. Pakistan’s stock market is still narrow, sentiment-driven and vulnerable to policy shocks, currency swings, taxation changes, political noise and sudden changes in interest-rate expectations. A handful of sectors and large stocks dominate turnover, while many listed companies remain illiquid for long stretches. This creates a vicious cycle: sponsors hesitate to offer larger stakes because they fear volatility and weak secondary-market depth, while the market remains shallow precisely because sponsors keep offering tiny floats. The result is a market that can show bursts of enthusiasm during an IPO but still lacks the depth, breadth and stability required for serious long-term capital formation. Thin floats feed volatility; volatility then becomes the excuse for more thin floats. It is a neat little trap, and Pakistan has been sitting in it for far too long.

This matters because Pakistan’s financial system is badly unbalanced. Banks dominate corporate finance. Government borrowing crowds out the private sector. Firms remain dependent on debt. Private investment stays weak. The stock market remains shallow. Institutional investors struggle to find large, liquid and well-governed companies. Ordinary savers are left with too few serious opportunities to participate in corporate growth.

Then we wonder why capital formation is weak. It is weak because we have built a system in which owners want capital without sharing ownership, banks prefer lending to the state, and the stock market receives scraps from the sponsor table.

Regulators and the PSX must therefore stop measuring success merely by the number of listings. The harder questions are more important. How much equity was actually offered? How much fresh capital went into the company rather than to selling shareholders? How large is the free float? Will the listing improve governance? Will minority shareholders matter? Will the board become stronger? Will disclosure improve? Will there be real liquidity after the first few trading sessions?

A company offering 5 percent is not equivalent to a company offering 25 or 30 percent. They should not be treated as if they are making the same contribution to market development. A thin float may generate an IPO headline. It does not build a serious market.

Listing incentives should reward meaningful public floats. Companies offering larger stakes should receive faster processing, better visibility, stronger index eligibility and lower continuing costs. Token floats should receive token praise. The market does not need more ceremonial listings. It needs investable companies.

The same principle should apply to privatisation. Public assets should not be transferred quietly from the state to a handful of already-powerful private groups. Wherever possible, privatisation should be done through broad public offerings, mandatory listing, wide share distribution and strong governance conditions. Otherwise, the country merely moves assets from public monopoly to private concentration. That is not reform. That is a change of landlord.

Pakistan must also confront the culture of family control. Families can build excellent businesses. Many have. But companies that want public capital must accept public discipline. Ownership has to evolve into governance. Boards must become real. Independent directors must be independent in substance, not cousins in disguise. Minority shareholders must have rights that can be enforced. Professional management must be empowered. Disclosure must become a discipline, not a box-ticking exercise.

Dilution should not be seen as weakness. It is often the price of scale. Serious entrepreneurs dilute to grow. Serious companies dilute to attract capital, talent and credibility. Serious markets dilute concentrated ownership into broader prosperity.

The owner who refuses dilution may preserve control, but often at the cost of growth. Too many Pakistani firms want the valuation of a public company with the control structure of a private household. That bargain cannot create a modern capital market.

SLM’s listing is therefore both encouraging and revealing. It proves that investors will support a credible industrial story. It proves that Pakistan can attract equity capital. It proves that savers are willing to back growth companies. But it also proves how little of Pakistan’s better corporate stories are actually being shared with the market.

Pakistan does not merely need more listings. It needs larger floats, stronger governance, deeper liquidity, professional management and owners who are willing to let the market in.

The country’s problem is not that investors have no appetite. The problem is that too many owners have no appetite for accountability.