The missing take-off

PAKISTAN periodically receives what policymakers describe as a ‘window of opportunity’: debt rollovers, IMF programmes, diplomatic goodwill, or the promise of foreign investment. Each time, hope returns that the economy will finally take off. Yet tangible, sustained improvement for ordinary Pakistanis remains elusive. Recent official data now show why. Poverty is rising sharply, purchasing power is shrinking, inequality is widening and the economy shows little sign of genuine take-off.

According to the Planning Commission’s latest poverty assessment, nearly 29 per cent of the population (around 70 million) now lives below the national poverty line, up from about 22pc in 2018-19. Rural poverty exceeds 36pc. This is a reversal of nearly two decades of progress and is happening at precisely the moment when policymakers talk most about stabilisation and external support. It tells us something fundamental has gone wrong, not just with growth, but with the structure of the economy itself.

The standard explanation points to external shocks: Covid-19, global inflation, floods and geopolitical instability. These factors matter. But they do not explain why poverty continues to rise even when Pakistan secures international financial support, nor why each recovery seems weaker and shorter-lived than the last. Political economy offers the unsettling explanation that Pakistan is stuck in a bad equilibrium that powerful actors have little incentive to change. Modern political economy theory teaches us that economic take-off is not merely a technical challenge; it is a political one. Sustained growth requires creative destruction; new firms, new sectors, rising productivity, expanding exports, and a broadening tax base. But this process also redistributes power. It weakens monopolies, reduces the value of political connections and empowers new economic actors. When elites derive their wealth and influence from control rather than competition, they may rationally resist transformation, even if society would benefit.

Pakistan’s economy is organised around rents, not rewards. These rents are created through policy discretion — tax exemptions, trade protection, administered prices, subsidised credit, public procurement, land allocation and selective enforcement. They allow profits to be earned not by becoming more productive, but by securing access. In such an environment, the returns to lobbying and connections often exceed the returns to innovation, skills or entrepreneurship. Crucially, rents are easier to preserve in a low-growth economy than in a competitive one. High growth threatens entrenched privilege. It creates independent sources of income, strengthens the middle class and raises demands for accountability. For elites whose position depends on discretion and protection, rapid and inclusive growth is not an unambiguous blessing; it is a risk. From their perspective, slow growth with high rents can dominate fast growth with diluted control.

Nearly 29pc of the population is reported to live below the poverty line.

This logic helps explain a recurring puzzle in Pakistan’s economic history: the country can adjust, but it cannot transform. When crises hit, painful stabilisation measures are accepted: IMF programmes, fiscal tightening, emergency interventions. But once collapse is avoided, deeper changes stall. Exemptions quietly return, protection is rebranded and competition weakens. Discretion re-enters through informal channels. The economy survives, but the structure remains intact.

My own research on rent-seeking and growth helps explain why this equilibrium is so persistent in the long run. When policy rewards rent extraction, economies do not merely grow slowly. They accumulate the wrong kind of capital. Investment flows into unproductive or low-linkage assets such as real estate speculation, protected manufacturing, trading activities and politically connected ventures. These generate private wealth but weak spillovers for the wider economy. At the same time, incentives to invest in human capital; education, skills, managerial capability and innovation weaken, because such investments pay off only in competitive, rules-based environments. Over time, this misallocation reinforces a self-sustaining low-growth trap — physical wealth concentrates at the top, productivity stagnates and inequality deepens across generations.

This dynamic also explains why recent international goodwill is unlikely to change outcomes. External financing can ease balance-of-payments pressure and buy time but can’t alter domestic incentive structures. In fact, repeated bailouts may unintentionally reinforce the bad equilibrium by lowering the cost of elite resistance. If crises are repeatedly resolved without dismantling rent-creating arrangements, there is little reason for powerful groups to support genuine transformation.

The Planning Commission’s poverty figures make this political-economy logic painfully concrete. From the early 2000s to around 2018, Pakistan achieved significant poverty reduction. Since then, despite repeated stabilisation efforts, poverty has surged. This is not simply because growth slowed but also because whatever growth occurred failed to translate into broad-based opportunity. Real incomes stagnated, inflation eroded purchasing power and employment creation lagged behind population growth, while protected sectors and asset-based rents remained comparatively resilient.

In political economy terms, poverty persists not because elites fear poverty, but because they fear loss of control. A poorer population with weak bargaining power and limited mobility is easier to manage than a prosperous, politically assertive middle class. This does not require conspiracy. It follows naturally from incentives embedded in existing institutions. The economy thus settles into a low-growth equilibrium where it is stable enough to avoid collapse, but weak enough to preserve rents. Investment tilts towards real estate, protected industries and government-linked contracts rather than productivity-enhancing sectors. Exports struggle to diversify. The tax base remains narrow. Inequality widens. And when shocks occur, poverty rises, because resilience at the bottom is limited.

The Planning Commission’s latest poverty numbers should therefore be read not as a temporary setback, but as a warning. When nearly a third of the population lives below the poverty line, the issue is no longer short-term volatility but structural exclusion. An economy that consistently rewards access over effort and control over competition cannot deliver sustained improvements in living standards.

The writer is an associate professor of economics at the Lahore School of Economics.

X: @waqarwadho

Published in Dawn, April 4th, 2026

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