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Pakistan’s economic trajectory over the past decade reflects enduring policy missteps and leadership failures. Since 2013, the country has averaged just 3.5 per cent GDP growth annually, significantly trailing regional peers. During the same period, the external trade deficit has persistently hovered around 7–8pc of GDP, financed increasingly by external borrowing. These dynamics underline deep structural imbalances rather than transient fiscal shortfalls.
The International Monetary Fund’s 2024 Extended Fund Facility of $7 billion mandated a sharp increase in Pakistan’s tax-to-GDP ratio, which has remained stagnant around 9–10pc for years. While raising revenues is important, Nobel laureate Milton Friedman cautioned that “the government solution to a problem is usually as bad as the problem and very often makes the problem worse”, highlighting the risks of blanket tax hikes without addressing underlying economic weaknesses.
Indeed, the central challenge for Pakistan is not revenue mobilisation alone but chronic export stagnation. Exports-to-GDP fell from 9.6pc in 2013 to 8.1pc in 2023, eroding foreign exchange earnings and placing constant pressure on the rupee. In May 2025, the trade deficit was reported at $2.4bn, illustrating the ongoing imbalance. Rather than diversifying exports, policymakers have relied on currency devaluation to manage deficits, a short-term fix that aggravates inflation and debt service.
Prominent development economist Dani Rodrik argues that neglecting export diversification perpetuates structural vulnerability. Pakistan’s narrow export base — dominated by textiles accounting for 20pc of earnings — contrasts sharply with South Korea’s pre-1970s experience, when diversified manufacturing laid the groundwork for rapid growth. Vietnam, for example, achieved an exports-to-GDP ratio of 70pc by 2023, supporting a tax-to-GDP ratio of 18pc, demonstrating that robust export performance can underwrite fiscal health.
Achieving a 25pc investment-to-GDP ratio and 20pc exports-to-GDP ratio within 10 years will demand dismantling elite control, strengthening institutions, and leveraging major initiatives for exportable production
Fiscal data for the 2023–24 fiscal year further expose mismanagement. Total tax revenues stood at Rs12.2 trillion, of which Rs7.9tr (65pc) were absorbed by interest payments. Transfers to provinces and civilian operations accounted for Rs6.3tr, leaving a primary deficit of Rs1.8tr before defence expenditure. Defence and related pensions consumed Rs2.1tr, while development outlays languished at Rs850bn, with an additional Rs55bn allocated to politically driven local projects.
Economic historian Mancur Olson asserts that when elites secure disproportionate rents, resources are siphoned away from public investment, undermining growth. Pakistan’s bloated civilian sector costs an estimated $3bn annually due to overstaffed bureaucracies and patronage networks, further diverting resources from productive investment.
Public education spending in 2023–24 amounted to approximately Rs900bn at the provincial level, yet literacy remains below 60pc. In contrast, South Korea under Park Chung-hee increased education expenditure alongside export promotion, lifting GDP per capita from $100 in 1960 to $1,100 by 1980.
East Asia’s “miracle” economies offer instructive lessons. Anne Krueger attributes rapid growth to export orientation, while Ha-Joon Chang documents China’s surge from 6pc to over 9pc annual growth after 1978 under Deng Xiaoping’s reforms. Singapore, under Lee Kuan Yew, sustained a 30pc investment-to-GDP ratio and saw exports rise to 180pc of GDP by 2023. By comparison, Pakistan’s 2023 investment-to-GDP ratio of 14.1pc and exports-to-GDP of 8.1pc lag significantly.
To emulate these successes, Pakistan should adopt a dual-target strategy: raising investment-to-GDP to 25pc and exports-to-GDP to 15pc within a decade. This would broaden the tax base organically, as Mr Chang highlights, and reduce reliance on external borrowing. Priority sectors include textiles, information technology, and value-added agro-processing, supported by targeted incentives such as tax holidays and streamlined regulations, modelled on Vietnam’s export diversification policies.
Infrastructure remains a binding constraint: Pakistan’s logistics costs equal to around 15pc of the GDP compared to Vietnam’s 10pc. Addressing bottlenecks in energy supply, transport networks, and customs procedures will require coordinated public-private partnerships and transparent governance frameworks to prevent elite capture.
Governance reform is equally crucial. Pakistan’s hybrid civilian-military governance undermines policy continuity and accountability. Jeffrey Sachs emphasises that coherent, capable institutions underpin resilience in the face of shocks. Conversely, Amartya Sen warns that authoritarian structures lacking checks and balances stifle innovation, underscoring the need for democratised empowerment of capable civil service.
Elite dominance — evident in an untaxed agricultural sector accounting for 25pc of GDP — and concentrated wealth patterns reflect Mr Olson’s analysis of ‘stationary bandits’, necessitating comprehensive land and tax reforms to dismantle entrenched privileges and build capacity at provincial and federal levels.
Regional security dynamics add urgency. May 2025 border skirmishes with India heighten the importance of economic resilience. Mr Sachs links export-driven growth to shock absorption, reducing vulnerability to external pressures. With $30bn in Chinese loans since 2013, Pakistan’s fiscal sovereignty depends on expanding export earnings and reducing debt service burdens.
In sum, Pakistan stands at a crossroads: continue with International Monetary Fund-led stagnation or pursue transformational export-led growth. Achieving a 25pc investment-to-GDP ratio and 20pc exports-to-GDP within 10 years will demand dismantling elite control, strengthening institutions, and leveraging initiatives like the China-Pakistan Economic Corridor for exportable production. As Mr Friedman cautioned, superficial government fixes often exacerbate problems; only a strategic, structural approach can deliver sustainable prosperity.
Published in Dawn, The Business and Finance Weekly, July 14th, 2025