Pakistan’s tariff reforms: The path to prosperity or peril

Economists, since Adam Smith, have argued that open markets drive prosperity by channeling resources to their most efficient uses. In line with this, Pakistan’s five-year tariff reform plan intends to lower the average tariff from 19 percent to 9.5 percent. Yet, as economic scholars Nathan Nunn and Daniel Trefler highlight in their seminal work, Domestic Institutions as a Source of Comparative Advantage, the success of such trade policies relies on having robust contracting and property rights institutions. These are not mere backdrops but active drivers of comparative advantage, enabling countries to specialize in complex, high-value goods that require trust and enforceable agreements.

For Pakistan, this insight underscores a vital truth: robust governance is the bedrock of effective trade policy. Markets require transparent, predictable rules enforced by impartial institutions. Without solid governance, inclusive politics, and significant investment in human capital, tariff reforms risk benefiting entrenched elites while leaving millions behind, potentially failing to harness the comparative advantages these reforms could enable. Can Pakistan defy the odds, or will it repeat the mistakes of past liberalizations?

A key reason past liberalization faltered lies in politics, which invariably shapes trade outcomes. The benefits of liberalization, including cheaper goods and expanded markets, are never evenly distributed. The Stolper-Samuelson theorem suggests that trade favors a country’s abundant factor, such as Pakistan’s low-cost labor. But who ensures that labor shares in the gains? History offers cautionary tales. In post-colonial Africa, trade benefits were siphoned off by patronage networks. Latin America’s 1980s liberalizations yielded uneven results when institutions faltered. Pakistan is no exception. Without independent judicial oversight, politically connected firms exploit regulatory loopholes, undermining the Ricardian logic of comparative advantage.

Pakistan’s weak institutional capacity could hinder its ability to negotiate favorable trade deals, such as free trade agreements with neighboring blocs like the Gulf Cooperation Council.

Javed Hassan

In the 1990s, tariff reductions boosted textile exports but also emboldened cronyism, as privileged firms secured subsidies and evaded taxes. A 2022 study by Adeel Malik and William Duncan reveals how post-1990s reforms were undermined by opaque protective measures; for example, non-tariff measures and regulatory duties that disproportionately benefited the politically connected, especially after the PML-N’s rise to power in 2013. 

These policies enriched a narrow set of elite interests, leaving small producers and ordinary consumers with little more than empty promises. As economist Dani Rodrik notes, the benefits of globalization do not flourish in barren institutional soil. They require strong domestic frameworks anchored in democratic legitimacy and civic trust so that economic policy serves the citizenry, not only the elite. 

Human capital represents another critical factor. Pakistan’s low investment in education, merely 2.5 percent of GDP (among South Asia’s lowest), leaves it ill-prepared for a knowledge-driven global economy. The Heckscher-Ohlin model suggests that countries export goods intensive in their abundant factors, but Pakistan’s abundant labor largely remains unskilled. Tariff reforms might enhance exports such as textiles, yet without investments in technical training, the country risks being trapped in low-value sectors. South Korea’s 1970s trade liberalization, coupled with strong education reforms, propelled it up the global value chain. In contrast, Pakistan’s 2023 literacy rate of 59 percent (UNESCO) underscores the challenges ahead. Expanding programs like the Ehsaas initiative could help bridge this gap, but only if policymakers prioritize human capital.

Women’s workforce participation, often overlooked, is a macroeconomic imperative. Pakistan’s female labor force participation rate, a mere 22 percent (World Bank, 2023), holds back growth. Trade liberalization often increases demand for labor-intensive exports, such as garments, where women dominate. Bangladesh’s textile boom demonstrates how trade can empower women, adding millions to the workforce and boosting GDP. Yet in Pakistan, cultural barriers, discriminatory laws, and inadequate childcare limit this potential. Closing the gender gap could increase GDP by 15-20 percent, according to World Bank estimates, but this requires reforms beyond tariffs, including maternity leave policies and safe transportation for female workers. Without these, trade’s benefits may perpetuate exploitative conditions rather than empowerment.

Pakistan does not liberalize in isolation. Global trade operates under asymmetric power dynamics where advanced economies and multinationals often dictate terms. Pakistan’s weak institutional capacity could hinder its ability to negotiate favorable trade deals, such as free trade agreements with neighboring blocs like the Gulf Cooperation Council, or to enforce labor and environmental standards. Moreover, the tariff reforms, although ambitious, fail to address the entrenched bureaucratic inefficiencies and rent-seeking behaviors that have long hindered trade outcomes. Low tariffs must be paired with disciplined administration to facilitate seamless integration into global markets.

This column has always championed tariff reforms and free trade as engines of prosperity, but Pakistan’s tariff reforms are no cure-all. Prosperity demands more than open markets; it requires governance that curbs cronyism, politics that ensure an equitable distribution of gains, and investments that unlock human potential, especially for women. Policymakers must act boldly, pairing tariff cuts with reforms that build resilience and equity while learning from past liberalizations that enriched elite families but bypassed broader society. The choice is stark: build the foundation now or watch liberalization’s promise fade.

– Javed Hassan has worked in both the profit and non-profit sectors in London, Hong Kong, and Karachi. He tweets as @javedhassan. The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Arab News.