Pakistan keeps converting relevance into rent

Pakistan has rarely lacked geopolitical importance. It has often lacked much else.

Pakistan is once again approaching a familiar moment. The next checkpoint under its IMF program is due shortly, in a country that has entered 25 Fund-supported arrangements since joining the IMF in 1950. Each has offered breathing space. Few have changed the underlying economy.

That is the deeper problem. Pakistan has repeatedly converted strategic importance and external assistance into temporary relief. It has rarely converted either into economic transformation.

Borrowing can postpone adjustment; it cannot manufacture productivity.

- Javed Hassan

The pattern began in the 1960s. Under Ayub Khan the economy grew at more than 5 percent a year. The World Bank called Pakistan one of the most promising developing countries.

The growth was real. So was what it was producing. Industrialization concentrated wealth among a narrow group. Import licenses, subsidized credit and protected markets rewarded connections more readily than competitiveness.

Mahbub ul Haq, one of the strategy’s principal architects, became one of its most devastating critics. In November 1968, he told the Pakistan Economics Association what a decade of planning had delivered: 22 families holding two-thirds of industrial assets, 80 percent of banking capital and 70 percent of insurance. His retrospective judgment was starker still. Economic and political power, he wrote years later, had “gravitated toward a small minority,” and development could not be saved from being “warped in favor of a privileged few” unless the basic premises of the system changed.

The reversal reveals more than the familiar story of inequality. Haq’s 1963 Strategy of Economic Planning had defended concentrating investment in large-scale industry, on the assumption that inequality was a stage on the road to equality. On social investment he was candid: housing, health and welfare could be justified on social grounds, he wrote, but the economic case for human capital had “seldom been argued” strongly enough to outweigh returns from more materialistic projects.

That hierarchy proved costly. Pakistan built physical capital while neglecting the human capital needed to make it productive. Education spending stayed below 2 percent of GDP and literacy barely moved across the decade. South Korea and Taiwan, by contrast, treated education and technical skills not as social charity but as instruments of industrial transformation.

The difference was not simply that East Asia grew faster. It was that East Asia used growth to transform its economy. Pakistan used growth to reinforce the one it had.

Foreign assistance made the distinction easier to ignore. American aid financed imports, infrastructure and consumption while reducing the pressure to tax agriculture, reform landholding and build fiscal capacity. Aid bought time. It did not compel the reforms that would have made growth self-sustaining.

The same logic returned under Zia-ul-Haq. Pakistan’s role in the American-Saudi effort against the Soviet occupation of Afghanistan produced another enormous geopolitical rent. Aid surged, war-related spending flowed through the country, and Gulf employment generated remittances.

Again, Pakistan received a windfall. Again, it did not build an economy capable of thriving without one. When those rents diminished in the 1990s, the weaknesses resurfaced: low domestic savings, weak exports, narrow taxation, and an industrial sector shielded from the competitive pressure that might have forced it to become globally productive.

Then came the China-Pakistan Economic Corridor, hailed as a game-changer. It delivered roads, power plants, ports and connectivity the country badly needed. But infrastructure is not transformation; it is an input into it. The second stage that was meant to follow, competitive industry, integration into global supply chains and sustained export growth, has yet to materialize at scale. Pakistan acquired the physical capital without acquiring the productive ecosystem to use it.

The years from 2018 to 2022 showed what happens when the rent thins out. Imran Khan’s government inherited a record current-account deficit and turned first to Gulf support, then to another IMF program. COVID interrupted it. By 2022 the current-account and fiscal pressures had returned. Another government, another round of stabilization, the same underlying model.

That model now sits beside the current IMF program. Stabilization is real: reserves have been rebuilt and confidence has improved. But growth remains modest, and the external environment has turned. The Fund puts real GDP growth at roughly 3.6 percent, while higher global commodity prices driven by the war in the Middle East have pushed inflation back up after two years of decline. The program itself calls for broadening the tax base, strengthening competition, raising productivity and competitiveness, and investing in human capital. Those are precisely the reforms that previous stabilization episodes postponed.

Geopolitical rents are uncertain. Remittances are crucial, but they are income transfers, not substitutes for competitive exports. Borrowing can postpone adjustment; it cannot manufacture productivity.

That leaves Pakistan confronting a problem deeper than another balance-of-payments crisis. It is not simply repetition. Each cycle solves an immediate constraint while leaving the economy less competitive, less productive and more dependent on the next source of external relief. The IMF can provide financing. It cannot provide the political coalition needed to sustain transformation.

Pakistan is once again geopolitically relevant. The question is what it does with the relevance.

It can turn the moment into another temporary rent: foreign financing, deposits, contracts, remittances, more breathing space. Or it can finally do what previous cycles avoided, and build human capital, broaden the tax base, expose firms to competition, reward exports rather than connections, and invest in the capabilities that make an economy productive.

Pakistan has spent decades making itself strategically relevant. It has spent far less time making itself economically competitive.

That is the transformation not made.

Javed Hassan has held senior executive positions in both the for-profit and non-profit sectors in Pakistan and internationally. He is a former Senior Visiting Fellow at Fudan University, Shanghai. X: @javedhassan