How to Fix Pakistan’s Crashing Economy

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To redesign its economy, the country’s leaders must take on the moneyed elite and religious extremism.

By Atif Mian December 10, 2019

If an airplane took off a dozen times only to come crashing down each time, the only logical conclusion would be that the aircraft requires a fundamental redesign. Pakistan’s economy, like the airplane, has crashed 13 times in the last 60 years, each time requiring an International Monetary Fund bailout.

It wasn’t always so. During the 1980s, in per capita terms Pakistan was richer than India, China and Bangladesh by 15, 38 and 46 percent. Today Pakistan is the poorest. Its most recent gross domestic product growth estimate was only 3.3 percent, barely sufficient to keep pace with population growth.

Pakistan’s federal government is effectively bankrupt. Last year, the sum of interest payment due on the government’s debt obligations and pension payments owed to retired employees was more than the federal government’s net revenue. The entire government machinery, including the military, is running on borrowed money.

The consequences of Pakistan’s crashing economy have been devastating for its over 200 million people. They are instinctively aware of how far they have fallen behind and there is a clamor for change for a future where their children can live in dignity and comfort.

It was this public desire for change that propelled Pakistan’s most famous cricketer, Imran Khan, and his relatively new party, the Pakistan Tehreek-e-Insaf, into power in 2018. Prime Minister Khan promised change and a “naya” or new Pakistan to his people, but change is proving far more difficult than imagined.

The fundamental challenge in bringing change is that those who are benefiting the most from the dysfunctional economy and stand to lose the most from change would fight every attempt at reform and attack the people trying to ensure reform.

Pakistan’s leadership must muster the courage to take on two primary forces of the status quo that hold the country back. First, the moneyed elite who tip the scales of markets in their favor through unfair business practices, tax evasion and preferential access to power. They use their privilege to grab the fruits of other people’s labor rather than create something of value through their own enterprise.

The second force inhibiting Pakistan’s progress is religious extremism. Decades of patronage by successive military and civilian governments for promoters of religious hate has created a culture of institutionalized intolerance. The result has been devastating for society. Thousands have been killed, communities have been ripped apart and hundreds of thousands of people have been displaced or forced to flee the country altogether. It is no wonder then that few want to invest in an environment afflicted with violence and intolerance. Many whose talents are sorely needed in Pakistan are forced to flee the country because of extremism.

The combined effect of extremism and an unproductive rent-seeking elite is that Pakistan has one of the lowest investment rates in the world. Pakistan invests only 15 percent of its output compared with 30 percent for the rest of South Asia. This has led to diminished productivity. Pakistan’s total volume of exports has not risen since 2005. It has become a nation of consumers with limited capacity to produce and innovate. Last year, the country imported more than two times as much as it exported.

Reversing those trends requires a courageous commitment to fight the entrenched elements and extremists. Consider the unproductive moneyed class which instead of investing in real businesses buys urban land and sits on it. This is an idle activity that adds nothing to the country’s output and contributes directly to Pakistan’s low investment rate. The value of land keeps rising, not because of any effort by the landowners but because of an urbanizing population.

The correct policy response to discourage such activity would be to tax the value of land appropriately. This would dissuade the rich from hoarding land and instead incentivize them to invest in real businesses. Land would then be available for more productive uses and at cheaper prices. Moreover, the revenue generated from land taxes could fund much-needed urban infrastructure.

While instituting a land tax addresses multiple problems in a single strike, carrying through with the policy requires courage as a large percentage of urban land is held by the powerful elite. Pakistan’s leadership must develop the courage to put the interests of the collective above those of the privileged few.

Similar challenges exist in other parts of the economy. For instance, sugar cane, which is one of the most water-intensive crops, is grown on nearly 2.5 million acres in Pakistan. This makes no economic sense for a country with a very serious water shortage. Rationalizing agriculture toward more efficient farming choices requires that the government take on the landed aristocracy by removing subsidies and charging for excessive water use.

The government also continues to dole out large export subsidies without an iota of proof that these subsidies have helped increase exports. Will the government develop courage to say no to special interests and devise a performance-based assistance mechanism? The auto sector is another example that has not innovated in decades but continues to be protected heavily by the government. And the power sector is dominated by private producers who enjoy high government-guaranteed returns in dollars only to run grossly inefficient plants.

It is even harder to find courageous leadership when it comes to dealing with religious extremists. One would have hoped that decades of suffering at the hands of religious extremism would convince at least one government or major political party to roll back the purveyors of hate. But no one seems interested. Or perhaps no one has enough courage. 

All major political parties continue to fraternize with the merchants of hate whenever it politically suits them, thus empowering the extremists further. Last month, a cleric who specializes in spewing hate against minorities marched on Islamabad with his followers to put pressure on the government. As he rallied his crowd with dog whistles and extremist rhetoric, the leadership of Pakistan’s two main opposition parties, the Pakistan People’s Party and the Pakistan Muslim League-Nawaz, stood next to him in solidarity. The ruling political party, Pakistan Tehreek-e-Insaf, was no different when it was in the opposition.

This is Pakistan’s ultimate dilemma. It takes courage to put principles above petty political advantages, to stand firm against vested interests and to openly call out religious bigotry when you see it.

Prime Minister Khan was known for his fearless play on the cricket field as if he were a “cornered tiger.” Pakistan needs similar spirit in the political field today as its politicians have unfortunately developed a habit of conniving with vested interests and those who trade in religious hatred. Pakistan will change only when its leadership develops the courage to act otherwise. For the sake of Pakistan’s children, may that day come soon.

Atif Mian (@atifrmian) is John H. Laporte Jr. Class of 1967 Professor of Economics, Public Policy and Finance at Princeton University and the co-author of “House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It From Happening Again.”