Pakistan's broken economic contract

Structural flaws, policy zigzags and neglect of people continue to drag the economy downwards

ISLAMABAD:

Economic challenges persistently haunt Pakistan. The country is facing economic crises that have become a common refrain. Despite the efforts of successive governments and their tall claims, the economy remains on a downward trajectory.

Debt repayment is a major challenge in the current context, further aggravated by rising circular debt. Inflation has returned, and the inflation rate has begun to rise again. Declining purchasing power is a major contributor to rising poverty. Agriculture, the guarantor of food security, is facing one challenge after another and has been consistently undermined by successive governments. Major export sectors are shrinking, while imports continue to rise, contributing to widening fiscal deficits.

The question, then, is why the economy remains on a downward path when governments claim to be working for improvement. The answer lies in deep structural flaws and in the failure of economic contracts among stakeholders, such as the state, private businesses, state-owned enterprises and, most importantly, the real stakeholders: the people. Let's try to understand the flaws.

It is a universal rule that the fundamental goal of any state is the welfare and prosperity of its people. This principle constitutes the economic contract between the state and citizens. In return for welfare and security, people pay taxes, obey laws and submit to state authority. Unfortunately, the state has failed to deliver according to people's needs, not merely their demands. Food insecurity affects millions. According to the FAO, 82% of people in Pakistan cannot afford a healthy diet, while 18% of children under the age of five suffer from acute malnutrition. Pakistan now ranks 107 out of 127 countries on the global hunger index.

Education, a fundamental element of human capital development and a pathway to a better life, presents an even bleaker picture. Unicef estimates that 25.1 million children aged 5-16 are out of school, while other sources place the number at 26.2 million. Poverty continues to rise, and according to the World Bank, the poverty rate reached 44.6% in 2025. These indicators clearly demonstrate the state's failure to honour its economic contract with citizens.

The state has also failed to maintain balance among stakeholders. Over the decades, it has oscillated between nationalisation and privatisation without developing a coherent, long-term strategy. In the 1960s, Pakistan blindly pursued a private-sector-led growth model that concentrated wealth in a few hands and gave rise to the slogan of "22 families."

In the 1970s, the state made an abrupt U-turn and embarked on nationalisation. This demoralised the private sector and concentrated economic resources in state hands. Lacking experience in running businesses, the state filled enterprises with political appointees, laying the foundation for the deterioration of state-owned enterprises, including newly nationalised firms.

In the 1980s, the state took yet another U-turn, raising the slogan of Islamisation of the economy. In practice, this proved to be little more than rhetoric. The policy effectively revived private-sector-led growth while misusing the term "Islamic economy" for political mileage. A model that could have offered practical solutions and a sustainable path to growth was reduced to a slogan, leaving behind confusion and disillusionment.

The state used subsidies to oblige political cronies or a few selected sectors rather than to pursue long-term national objectives. The textile industry, for instance, has received subsidies for decades without a clear vision or defined future goals. This has turned the sector into a subsidy addict that performs only when state support is provided. It failed to invest in value addition or global brand-building, remaining content with low-value supply orders. The sugar industry is another prominent example of crony capitalism. By favouring select sectors, the state neglected others that also required support.

In the 21st century, the state adopted yet another mantra: wholesale privatisation. It advanced the argument that the state has no responsibility for job creation or business activity – directly violating the economic contract between the state and the people. Now the state is putting assets up for auction, which is another extreme. The state has moved to auctioning its assets, without assessing long-term fiscal needs or the importance of tax and non-tax revenue streams.

Throughout these ventures, one sector remained consistently ignored: agriculture. Despite being included in every economic survey of Pakistan as the backbone of the economy, it has been among the most neglected sectors. This neglect has led to declining productivity, farmer distress and growing food insecurity. The farming community faces severe discrimination and has been treated as voiceless and politically weak. In reality, successive governments have undermined the foundations of the economy, and the consequences are now evident.

The National Finance Commission (NFC) framework is another example. Intended as a mechanism for fair resource distribution, the NFC award has become a political tool for point-scoring. The 18th Amendment sought to devolve powers and financial resources to lower levels of governance, but devolution stalled at the provincial level. Instead of empowering local governments, the process became another arena for power struggles, further weakening service delivery. The business environment presents an equally disturbing picture. It is unnecessarily complex, characterised by rent-seeking, corruption and inefficiency. Rather than addressing root causes, successive governments have relied on short-term fixes, ad hoc policies.

On top of everything, the Constitution of Pakistan declares Riba (interest) incompatible with the state's Islamic ideology, yet the entire economic system operates on interest-based mechanisms. Riba encourages wealth concentration and exploitation.

If the state wants to revive the economy and serve the people, it must forge a new economic contract with stakeholders, especially citizens. This new contract must address structural flaws and deliver on its promises. For instance, subsidy policies should be tied to clearly defined objectives and timeframes. The state may subsidise the textile sector, but the sector must be required to build globally competitive brands within a specified period, say 25 years. After the brand-building phase, the sector should share dividends with the public and with related industries and sectors.

Second, the NFC award should be linked to three conditions: complete devolution to the lowest tier of governance, needs-based allocation, and performance-based distribution. Third, Pakistan must strike a balance between tax and non-tax revenue, and clearly define the respective roles of state-owned enterprises and private businesses in growth and development. Lastly, the new economic contract and system must conform to Pakistan's Constitution and make a genuine effort to eliminate Riba (interest).

In conclusion, a renewed economic contract can ensure fairer resource distribution under the NFC award and help end the politics surrounding it.

THE WRITER IS A POLITICAL ECONOMIST AND VISITING RESEARCH FELLOW AT HEBEI UNIVERSITY, CHINA