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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They express not only frustration and disgust with our current political situation but also offer hope to the younger generation, particularly Generation Z. It is as if they are saying: “Dear frustrated young people! We are opening the doors to your future. You will rise, dominate the scene, and sweep away all the debris of the past—that is, the traditional politicians—with the force of your determination and enthusiasm.” However, this humble writer sees, behind these beautiful words, not a bright future but the same worn-out and ugly mirage of the past. In reality, those who are truly responsible—the real culprits—cleverly distance themselves from blame, divert the attention of the youth toward others, and then present themselves as the young people’s sympathizers and supporters. In our poetry, it is through such tricks that the beloved murderer becomes an innocent beloved, and the criminal appears as the trusted confidant. But this humble writer calls it what it really is: “the thief making the loudest outcry.” Our national poet, Iqbal, once wrote: There is an outcry that Muslims have vanished from the world; We ask: Were true Muslims ever really present? In appearance you resemble Christians, in civilization the Hindus; These are the Muslims before whom even the Jews would feel ashamed. If, in today’s circumstances, you replace the word “Muslims” with “system,” the verses take on a striking new meaning: There is an outcry that the system has vanished from the country; We ask: Was there ever really a system to begin with? If we were to parody the remaining verses, they might be difficult for some to digest. Suffice it to say that those in power never truly allowed a genuine system to develop here. And whenever, after much struggle, some semblance of a system did emerge, there were always certain “respectable gentlemen” who seemed to have taken an invisible oath—or perhaps a vow of deliberate silence—that it must never be allowed to function. In the eyes of this humble writer, our system truly collapsed on 16 August 1946, when, under the guidance of the British establishment, the Direct Action Day was observed, reducing the foundations of any future system to rubble. From that point onward, the struggle was no longer for a functioning system but for personal rule. That struggle strangled democracy, human rights, liberty, and freedom, and instead built a grand highway of coercion and dictatorship. Anyone who dared to step off that path or disagree with it was labeled a traitor, an enemy of the nation, an Indian agent, or part of the so-called “Fitna-e-Hind” (the Indian conspiracy). These labels were then applied to whomever those in power wished. The first victim was Dr. Khan Sahib’s democratically elected provincial government in the North-West Frontier Province (now Khyber Pakhtunkhwa), which was dismissed within the very first week. Soon afterward, the same authoritarian mentality struck the government of Ayub Khuhro in Sindh. It was also decided that any cabinet member who failed to say “Yes, Sir” to the Governor-General would be considered dispensable. Once the founding generation established such principles of governance, why would later generations lag behind in following them? Thereafter, the race for personal power was inevitable. In the end, victory was bound to go to whoever possessed the greater force—whether the power of the stick or the gun. How could it be otherwise? If, instead of making the Constitution and the rule of law your source of authority, you rely on personal superiority, intimidation, prestige, and the power of office, then someone carrying a gun will inevitably dominate the throne of personal power. And once that happens, the cycle simply continues. It is a law of nature that the bigger fish eats the smaller fish. Muhammad Ali Jinnah, Liaquat Ali Khan, Ghulam Muhammad, and Iskander Mirza all played their respective roles. Later, when greater power confronted lesser power, the result was the rise of powerful military rulers such as Ayub Khan, Agha Yahya Khan, Zia-ul-Haq, Pervez Musharraf, Ashfaq Parvez Kayani, and Qamar Javed Bajwa. (To be continued)

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