How elite capture is undermining Pakistan’s growth

LAHORE: The core challenge facing resource-rich Pakistan is not a lack of potential, but a deeply entrenched elite that is unwilling to relinquish even the smallest of privileges. As a result, the country has lived beyond its means for far too long -- a crisis rooted in poor governance.

The privileged classes have repeatedly secured bailouts, largely due to Pakistan’s strategic geopolitical importance. While these bailouts have safeguarded elite interests, they have left the broader economy in a state of chronic instability.

State-owned enterprises (SOEs) continue to impose a heavy burden on the national exchequer. These entities enjoy significant competitive advantages, including outright subsidies, concessionary financing, government guarantees, monopoly status and exemption from bankruptcy rules. Such preferential treatment has created an uneven playing field, making it nearly impossible for private enterprises -- which operate without these benefits and face strict banking regulations -- to compete effectively.

The cumulative losses of major SOEs such as Pakistan International Airlines (PIA), Pakistan Railways, and Pakistan Steel Mills amount to approximately Rs1 million per minute, based on annual losses of Rs500-700 billion.

Despite these challenges, a turnaround remains possible -- provided that merit-based governance and prudent reforms are adopted. The ongoing economic turmoil is more a consequence of mismanagement than corruption. Decades of elite capture have led to a crowding out of investment in human development, leaving over 110 million young people with limited skills and education, and unable to participate meaningfully in economic growth. What could have been a demographic dividend is fast becoming a demographic crisis.

To catch up with regional competitors such as India and China, Pakistan must aim for a growth rate of 8-9 per cent annually. This would require significant reductions in the size of government, clear priority setting, and urgent investment in infrastructure.

Foreign aid, rather than catalysing reform, has often postponed it -- with vested interest groups capturing donor funds. Greater emphasis should be placed on regional trade, particularly with fast-growing markets in the East. Pakistan has yet to effectively integrate with neighbouring economies; despite proximity, trade with Bangladesh, Sri Lanka, the Maldives, Myanmar, and the Central Asian Republics accounts for less than 2.0 per cent of total trade. Although Afghanistan remains a lucrative market, it is also unstable. The China-Pakistan Economic Corridor (CPEC), if fully operational, could open up opportunities for expanded trade with Central Asia, China and Russia.

Sustainable growth will require Pakistan’s elite to abandon narrow self-interest and support meaningful reforms. While the business community continues to call for lower interest rates, such a move is not currently feasible due to high government borrowing, which places upward pressure on demand within the banking sector. Interest rates can only be reduced once this demand subsides.

Macroeconomic indicators such as inflation and exchange rate stability remain encouraging. In the meantime, planners must urgently set the right priorities and fix infrastructure gaps to bring the economy back on track.