Privileged few game the system

Pakistan's economic discourse has become increasingly dominated by a single phrase: elite capture. It describes a quiet diversion of public policy, state resources, and institutional authority away from the national interest and toward private gain.

It is embedded in important areas of Pakistan's economic framework, particularly in tariff structures, tax policy, and sector-specific concessions. These mechanisms do more than create inefficiency; they transfer wealth and opportunity from ordinary citizens to a small group of well-connected beneficiaries.

The scale is striking. The Federal Board of Revenue's three principal revenue streams ie, sales tax, income tax, and customs duties dole out exemptions, concessions, and special treatments with an estimated value of Rs2,435 billion, or roughly $8.5 billion. This amounted to nearly one-quarter of the FBR's total tax collection.

Concessions to the connected are a hidden tax on the unconnected. Every rupee of exemption granted to a rent seeker must be recovered from someone without access to power. If those concessions did not exist, overall tax rates could be reduced considerably for everyone else, widening the base, simplifying enforcement, and ending the perverse subsidy of inefficiency. It is within Customs that the mechanics of elite capture are most visible. Customs duty exemptions have risen sharply over time.

Over the past five years alone, they increased from Rs288 billion in 2019-20 to Rs652 billion in 2023-24, representing compound annual growth of around 23%. Successive governments have justified these concessions in the name of industrial development, export promotion, or strategic support. Yet experience suggests that poorly designed incentives rarely create genuine competitiveness. Instead, they encourage businesses to pursue tariff advantages rather than invest in productivity, technology, innovation, or exports.

The mechanism is simple: secure a policy that allows a select few to import components at low duty, sell finished goods behind a high tariff wall, and pocket the difference. The World Bank reports that Pakistan's tariff cascading, among the world's highest, has trapped the economy in a high cost, low competitiveness equilibrium where resources flow to protected rent seekers rather than productive exporters. The result is stagnant exports, rising imports, and virtually no technology transfer.

The automobile sector pioneered this model. For four decades, assemblers secured special SROs allowing them to import knocked-down kits at low duty, perform minimal local operations, and sell cars at exorbitant prices behind substantial tariff protection. With no competition, vehicles did not have to meet international safety or other standards. Exports remained virtually non-existent, as the products were not competitive globally. When policymakers tried to impose export requirements, the industry resisted through litigation. Only after greater competition was introduced did prices start falling and the practice of charging "on money" largely disappear. What had appeared to be market pricing was, in reality, policy created rent.

The mobile device manufacturing programme launched in 2020 follows the same pattern. As in automobiles, assemblers import components at preferential rates, perform simple screwdriver assembly, and pocket the tariff differential. Local value addition is negligible, foreign exchange outflows rival those of importing fully built phones, and exports are virtually zero.

Independent estimates put the economic rent extracted over five years at between Rs250 billion and Rs300 billion. Now, these same assemblers are seeking an extension of the policy for another five years, with the caveat that they want more subsidies and higher protection through fresh levies.

Pakistan is not unique in experiencing this problem. Most other developing countries once operated similar systems. Over time, however, most of these countries recognised that the model produced rents rather than competitiveness. Their response was simple but effective: lower tariffs broadly, open the economies to greater competition, and focus support on activities capable of generating exports.

Finally, Pakistan is starting on this path. With the 2025 budget, the government committed to a five-year export-led roadmap and began implementation at the start of the current financial year. Early results are promising. Pakistan's value-added exports are picking up.

Customs duty exemptions, which had previously been rising by around 23% annually, have begun to decline. During the first nine months of the financial year, customs duty expenditures fell from Rs628 billion to Rs562 billion, a reduction of Rs65 billion. While modest, it demonstrates how quickly distortions can diminish when policy begins to change.

The government must ensure that the reform process keeps going. The connected few are already fighting to carve out exceptions and roll back progress. Fortunately, the government's commitment to its five-year trade policy and IMF's guardrails are holding.

Pakistan's choice is stark: protect privilege or build a competitive economy. No more extensions for those who have produced nothing but substandard products for captive consumers. Complete the reforms. Do not look back.

The writer is serving as an international trade arbitrator. Previously, he has served as Pakistan's ambassador to WTO