beyond public finance

Beyond Public Finance: Towards  Constitutional Po…

The fourth part of this series argued that reforms fail when their design ignores the constitutional rules, institutional incentives and political interests that determine implementation. Pakistan’s problem, however, goes deeper than the capture of individual tax measures. The state itself has gradually become accustomed to obtaining resources through rents rather than creating the conditions for sustained production.

A rent is an economic benefit obtained through control over a privilege, resource, regulation or strategic position rather than through corresponding productive activity. Rent-seeking begins when individuals, institutions and organised groups devote their energies to obtaining such benefits from the state instead of producing goods, improving services, developing technology or competing in open markets.

Pakistan’s political economy has long rewarded access more generously than enterprise. Access to state land, subsidised credit, protected markets, statutory exemptions, import licences, public contracts, regulatory concessions, tax amnesties, administered prices and preferential treatment has frequently generated returns exceeding those available from productive investment. The result is an economy in which political connections can matter more than innovation, and proximity to authority can be more valuable than efficiency.

This system is sustained at two interconnected levels. Domestically, privileged groups compete for benefits distributed through state power. Externally, the state repeatedly seeks resources by converting Pakistan’s strategic location and security relevance into financial assistance, debt rollovers, deposits, concessional oil arrangements and diplomatic support. The interaction between these two levels is central to understanding Pakistan’s continued dependence.

External financing is not inherently harmful. Developing countries require foreign capital, technology and access to markets. Borrowing can finance infrastructure and productive capacity that generate future income sufficient to service the debt. Strategic partnerships can provide security and economic opportunities. The problem arises when external inflows substitute for domestic transformation.

Pakistan has repeatedly treated foreign exchange availability as proof of economic recovery. Reserves rise after an IMF disbursement, bilateral deposit, commercial loan or rollover. The immediate threat of default recedes. The exchange rate stabilises and the government declares that confidence has returned. The underlying productive structure, however, may remain unchanged.

The IMF completed the third review of Pakistan’s Extended Fund Facility in May 2026, permitting immediate disbursements of approximately US$1.1 billion under the EFF and US$220 million under the Resilience and Sustainability Facility. 

Total disbursements under the two arrangements consequently reached about US$4.8 billion. The Fund also reported progress in rebuilding reserves and achieving the agreed primary surplus. These developments provide necessary breathing space. They do not constitute economic independence.

Recent events offer an unusually clear illustration. Pakistan reportedly requested a US$10 billion exchange-stabilisation facility from the United States after playing a diplomatic role in the Middle Eastern conflict. Economists quoted by Reuters questioned whether fresh financing would address the reforms Islamabad had repeatedly avoided. One analyst described the proposed support as “geopolitical rent”. Pakistan had earlier repaid US$3.5 billion to the United Arab Emirates and obtained a US$3 billion Saudi backstop to help fill the resulting gap. 

The episode is not remarkable because Pakistan sought assistance during a difficult external shock. Responsible governments must protect reserves and manage emergencies. Its significance lies in the familiar institutional response: once again, strategic usefulness is expected to generate the liquidity required to postpone a deeper restructuring of the economy. However, fresh liquidity can purchase time. It cannot manufacture productivity.

Pakistan’s external relationships have repeatedly followed this pattern. During the Cold War, the country received assistance because of its strategic position. The Afghan war transformed Pakistan into a frontline state and brought large flows of military and economic support. The post-2001 “war on terror” renewed the same bargain under different circumstances. Regional conflicts, security alliances and diplomatic mediation continue to create opportunities for financial support.

Each inflow temporarily relaxes the pressure for reform. It also strengthens those institutions capable of negotiating and managing the strategic bargain. The constitutional consequence is profound. A state financed substantially through its citizens must negotiate with them. It requires a productive economy capable of generating taxable income and a political order capable of securing broad consent. A state able to obtain resources externally can delay that negotiation.

This is one reason why taxation and representation cannot be separated. Dependence upon external rents weakens the fiscal relationship between citizen and state. Governments remain less accountable to taxpayers when foreign creditors, strategic partners and captive domestic sectors provide the resources necessary for survival. 

The burden of adjustment is then transferred to those lacking political protection. Salaried persons face deduction before receiving their income. Documented businesses encounter withholding taxes, minimum taxes, advance taxes and delayed refunds. 

Consumers pay indirect taxes and levies through electricity, fuel, telecommunications and ordinary purchases. 

Powerful sectors negotiate exemptions, reduced rates, amnesties or deferred enforcement. External rents and domestic privileges are therefore not separate distortions. They reinforce each other.

The article, “The age of implosion: exhaustion and the hollow core”, recently published in Business Recorder, offers a useful metaphor for this condition. It argues that financial movement can create the appearance of vitality while the productive foundations of the economy continue to weaken. Loans, deposits and other inflows may keep institutions operating outwardly even when their inner capacity is being exhausted. 

The metaphor requires institutional precision. Pakistan has not ceased functioning. Taxes are collected, budgets are passed, debt is serviced, imports continue and administrative structures remain active. The state survives through a combination of borrowing, external support, remittances, taxation of captive sectors and periodic transfer of costs to future generations. This should not be mistaken for resilience. It is deferred adjustment. 

The official Pakistan Economic Survey 2025–26 continues to organise the country’s performance through conventional categories of growth, investment, trade, fiscal development, public debt and social indicators. These measurements are necessary, but they do not fully capture the political mechanisms determining why available resources flow towards consumption, protection and rent extraction rather than productivity, human development and technological advancement. 

A rent-based economy also shapes the behaviour of the private sector. Businesses rationally adapt to the incentives created by the state. Where profits depend upon tariff protection, regulatory discretion, government contracts, tax concessions or privileged access to credit, investment shifts from innovation to influence. Entrepreneurs become petitioners. Competition becomes negotiation. Policy becomes a marketable privilege.

The language of “industry protection” often conceals transfers from consumers to producers. High tariffs raise input costs and shelter inefficiency. Tax concessions benefit selected activities while increasing the burden upon the rest of the economy. Administered prices and regulatory barriers create opportunities for those already inside the system while excluding potential competitors. The resulting private sector may be privately owned without being genuinely competitive.

State-owned enterprises create another channel for distributing rents. Employment, procurement, pricing, appointments and financing decisions can serve political or institutional objectives unrelated to commercial performance. Losses are socialised through the budget, public debt or banking system, while influence remains concentrated among those controlling the enterprise.

The IMF’s present programme again identifies state-owned enterprise reform, competition, productivity, energy-sector viability and improvement of the business environment as central priorities. Similar prescriptions have appeared repeatedly because the underlying political incentives have repeatedly prevented their completion. 

Constitutional Political Economy asks why such reforms remain unfinished. The answer cannot be reduced to lack of technical knowledge. Reform threatens established claims over public resources. Beneficiaries are organised; those bearing the cost are dispersed. Governments seeking immediate political stability prefer accommodation over confrontation.

Rent-seeking thus becomes self-reinforcing. Privileged groups acquire resources that strengthen their capacity to obtain further privilege. Documented and competitive enterprises face greater burdens, reducing their ability to invest and expand. Informality becomes a means of protection. The tax base remains narrow, encouraging higher rates and more withholding from those already visible. Economic weakness then creates a new justification for external assistance.

The cycle is complete: external support postpones reform; postponed reform weakens productive capacity; weaker capacity creates fresh external dependence; renewed dependence strengthens those controlling the strategic bargain.

The cycle cannot be broken merely by raising the tax-to-GDP ratio. Extracting more revenue from the existing structure may finance the rent-distributing state without transforming it. The central question is whether taxation alters incentives in favour of production, competition and accountability.

Nor can the solution be indiscriminate withdrawal of the state. Markets themselves can be captured. Concentrated economic power, cartels, monopolies and regulatory influence may reproduce private forms of coercion. Pakistan requires a capable state, but one constitutionally restrained from distributing arbitrary favours and strong enough to enforce equal rules.

The principles required for such a transformation are not confined to modern Western economic thought. Muslim scholars recognised that public revenue could not be separated from justice, accountability and productive capacity. Abu Yusuf warned against oppressive collection and emphasised the responsibility of public officials. Ibn Khaldun connected excessive taxation, elite luxury, declining incentives and political deterioration within a single theory of state development. Their insight remains relevant: prosperity cannot be sustained where rulers and privileged groups consume the foundations of production.

Pakistan’s challenge is not merely to secure the next loan, rollover or strategic facility. It is to transform a political economy organised around access into one organised around production; to replace privileges with general rules; and to make public authority answerable to those whose labour, enterprise and consumption finance the state.

Strategic relevance may prevent immediate collapse. It cannot create a self-reliant economy. A country survives through external support. A constitutional democracy prospers through the productive energies and willing participation of its citizens.

In the next part, we shall examine Ehtisham Ahmad’s “buffer state” thesis—its valuable recognition of Pakistan’s historical dependency, and the limits of explaining that dependency primarily through conventional public-finance institutions.

[To be continued]

 

 ____________________________________________________________________

Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds an LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996. 

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    A nation’s destiny is not written by chance. It is written by the choices its people and institutions make in times of both crisis and opportunity. Seventy-nine years after independence, Pakistan stands at a decisive juncture. The country holds immense potential: a population of 241.49 million according to the 2023 Digital Census, strategic location at the crossroads of Asia, abundant natural resources, and a society that has repeatedly demonstrated resilience. Yet potential alone does not translate into prosperity. The path forward requires clarity of purpose and action on the fundamental drivers of national advancement. For Pakistan, five factors stand out as decisive: human capital, institutional credibility, economic diversification, technological adoption, and national cohesion. The most urgent factor is human capital. Pakistan is one of the youngest nations in the world. The United Nations Population Fund estimates that 64% of Pakistanis are under the age of 30, and the median age is 20.8 years. This demographic dividend can either accelerate growth or become a liability if left untapped. The World Bank’s Human Capital Index for Pakistan is 0.41, which means a child born today will be only 41% as productive as they could be with full education and health. Closing this gap demands investment that is both broad and deep. Foundational education must be prioritized, technical and vocational training must be aligned with industry, and health and nutrition must be treated as economic inputs, not social expenses. The inclusion of women is non-negotiable. With female labor force participation at 24.1% in 2021, Pakistan is underutilizing half of its talent. McKinsey estimates that advancing gender parity could add $60 billion to Pakistan’s GDP. Every girl in school and every woman in the workforce is a direct contribution to national prosperity. The second factor is institutional credibility. Prosperity is built where people trust that rules are fair, contracts are honored, and merit matters. Pakistan’s economy has shown resilience despite challenges. The State Bank of Pakistan reports GDP at $341.2 billion for FY2025 with projected growth of 3.6%, and remittances hit a record $35.3 billion. IT exports reached $3.55 billion in FY2025, a 24% increase year-on-year. These gains occurred even with regulatory uncertainty and energy constraints. Imagine the scale of investment and innovation if governance were more predictable. This requires digitizing public services, protecting property rights, depoliticizing key institutions, and empowering local governments with resources and accountability. When a young graduate in Multan or a startup founder in Karachi believes the system will reward effort, they will choose to build at home. Third is economic diversification. An economy dependent on a narrow base remains vulnerable. Pakistan must move beyond textiles and remittances toward value-added exports, modern agriculture, and new industries. Agriculture still employs 36.8% of the labor force but contributes less than 23% to GDP, signaling a major productivity gap. Climate change compounds this challenge, with Pakistan ranked 5th on the 2025 Global Climate Risk Index. Investing in climate-smart agriculture, water efficiency, and agri-tech is therefore both an economic and survival imperative. At the same time, the digital economy offers Pakistan its fastest route to high-value growth. With 142.3 million broadband subscribers and internet penetration crossing 54% as of June 2025, the infrastructure for a knowledge economy exists. Pakistan ranked 3rd globally on the 2024 Online Labour Index. Scaling IT exports toward the $15 billion target by 2030 will require tax incentives, venture funding, and global market linkages for startups. The $23.1 million raised by Pakistani startups in 2024, amid a global funding slowdown, proves that investor confidence exists and can be expanded. Fourth is technological adoption and innovation. The world is being reshaped by AI, renewable energy, and advanced manufacturing. Pakistan cannot afford to be a late adopter. The Alternative and Renewable Energy Policy target of 30% renewable share by 2030 must be met to address both energy security and climate risk. Technology must also transform service delivery. Telemedicine, digital payments, and AI in agriculture can bring quality services to remote areas at lower cost. Universities must become hubs of research and industry collaboration. Innovation thrives where there is capital, mentorship, and protection of intellectual property. The state’s role is to create that ecosystem. The fifth and binding factor is national cohesion. Economic policy fails without social trust. Pakistan’s diversity in language, culture, and region is a strength if it is united by a shared commitment to justice and opportunity. Cohesion is built when citizens feel they have an equal stake, when public discourse is grounded in facts, and when achievements in science, sports, and culture are celebrated as national, not regional. A country that trusts itself can make difficult reforms and sustain them. These five factors do not operate in isolation. Better education produces better institutions. Strong institutions attract investment for diversification. Diversification funds technology. Technology creates jobs that strengthen social unity. The absence of one undermines the others. The global context adds urgency. While many nations face aging populations, Pakistan has a 20 to 25 year window to leverage its youth. That window will not remain open indefinitely. Prosperity will not arrive through slogans or external assistance alone. It will come from millions of deliberate acts: a teacher focused on learning, a farmer adopting new techniques, an engineer building solar solutions, a policymaker choosing reform over delay. Pakistan’s history proves that the nation can achieve what seems impossible when it acts with unity and purpose. The factors for progress and prosperity are now clear. What remains is the will to pursue them consistently. If Pakistan invests in its people, strengthens its institutions, diversifies its economy, embraces technology, and unites its society, the next chapter will be one of sustained advancement. The opportunity is here. The responsibility is ours.

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