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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Doshi masterfully uses these elements not as mere decorative motifs, but as integral parts of the narrative’s thematic architecture. The statue of Diana, a representation of a powerful, self-possessed female deity, becomes a haunting presence throughout the novel, a mirror for the narrator’s own lost power and a link to her past self. The story of Diana’s commissioning as a weathervane, a great goddess forced to turn at the whim of the wind, becomes a potent symbol for the diminishment the protagonist feels in her marriage and society at large. The revelation of the architect’s violent death at the foot of the statue adds

  • Second Darkest Day For Kashmiris

    Kashmiris including men, women, youth and children who underwent the second longest lockdown, complete curfew, for a pretty long time, are observing it as the second darkest day in their history on August 05, 2026. On August 05, 2019, the Indian Government of Prime Minister Narendra Modi had quite unexpectedly, illegally and unilaterally scrapped the special status of Jammu and Kashmir under Article 370 of the Indian Constitution making it an integral part of the country. These measures had ended the occupied territory’s limited autonomy and sought to alter the internationally recognized disputed status of Jammu and Kashmir in blatant violation of the United Nations Security Council resolutions and international law. The second darkest day in Kashmiris’ history is now better known and is observed every year on August 05 as Youm-e-Istehsal (Day of Exploitation). The observance of Youm-e-Istehsal not only serves as a reminder of the continued sufferings of the Kashmiri people but also reaffirms Pakistan’s unflinching solidarity with their just struggle for the realization of their right of self-determination. Pakistan’s civil and military leadership has all along been extending moral, diplomatic and political support to the Kashmiris in their just and indigenous freedom struggle. Kashmiris on both sides of the Line of Control (LoC), around the world as well as the Pakistan government and the people are observing yet another Youm-e-Istehsal on August 05, 2026 to mark the 7 years of quite regretful, deplorable Indian siege of its illegally occupied Jammu and Kashmir valley and denying the Kashmiris their birth right of self-determination in accordance with the UN Security Council resolutions. Needless to mention here that Kashmir conflict continues to remain as perhaps the oldest lingering and unresolved international dispute dating back to 1947. It also continues to be recognized by the world body, the United Nations, as an issue requiring peaceful settlement in accordance with its Security Council resolutions and the wishes of the Kashmiri people who were engaged in one of the longest unarmed struggles for freedom from the Indian shackles. Kashmiris in the occupied valley, on both sides of the Line of Control, in the world over are observing August 5, 2026 as the second darkest day of their history. The first one being observed every year on October 27 is to continue marking their protest and agitation against illegal and forcible occupation of their territory by India on this day in 1947 after its last Dogra ruler Maharaja Hari Singh, one of as many as 565 princely states, had an Instrument of Accession signed in Delhi, had opted to join India in accordance with the provisions of the Sub-Continent Partition Plan against the wishes and aspirations of the valley residents. Following this ugliest development, India had airlifted its security forces into the occupied territory. Since August 05, 2019, India has accelerated its efforts for consolidating its control over its Illegally Occupied Jammu and Kashmir (IIOJK) through a series of political, legal, and administrative measures. The Indian Government was also making attempts, which are a great source of concern for everybody, to engineer demographic changes in its occupied territory through the issuance of forged domicile certificates to non-Kashmiris, mainly Hindus, changing the land ownership laws, and electoral delimitation measures which were designed to arbitrarily alter the region’s demographic and political landscape. There were reports that in pursuance of Indian PM Narendra Modi’s devilish intentions of promoting Hindutva more than 350,000 fake and forged domicile certificates have been issued to non-Kashmiris (Hindus) enabling them to settle in the occupying territory since August 05, 2029. These measures, quite obviously, were a crude attempt to dilute the identity of the indigenous Kashmiri population, undermining their political representation, and creating irreversible changes to the disputed territory in flagrant violation of all international laws and the Fourth Geneva Convention. The years following August 5, 2019, have also witnessed a worsening and quite alarming human rights situation in IIOJK. Reports of arbitrary detentions, extrajudicial killings, enforced disappearances, custodial torture, women’s rapes, restrictions on freedom of expression and peaceful assembly, and systematic curbs on media freedom continue to surface and emerge frequently. Observance of another Youm-e-Istehsal on August 05, 2026 as such is not only a painful and tragic commemoration of August 05, 2019 events but also a reminder of the ongoing challenges being faced by the Kashmiris but will also highlight the urgent and dire need for the international community to take cognizance of the situation in IIOJK and exert pressure on India to respect international law and human rights and firmly support the efforts aiming at achieving a just and peaceful resolution of the Jammu and Kashmir dispute. Observance of the Youm-e-Istehsal by the government and the people of Pakistan is also a renewed commitment of Pakistan to continue extending political, diplomatic and moral support to the Kashmiris until they are enabled to exercise their inalienable right of self-determination in accordance with the UN Security Council resolutions. Kashmiris all over the world earnestly believe that their observance of the darkest days on August 5 and October 27 besides other protests and rallies in occupied territory and elsewhere will sooner or later awake the sleeping conscience of the international community and they will be getting their birth right of self-determination in accordance with UN Security Council resolutions and they will be free to either stay with India or join Pakistan. They are hopeful that this will happen but are unable to say surely as to when this is going to happen.

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