For its dream of economic revival, Pakistan must break free from stagnation

For over a decade, Pakistan’s economy has fallen well short of its potential, lagging behind its regional peers in nearly every dimension of growth. According to a recent IMF report (IMF SIP, Huertas, Mohammed & Porter 2024), the country has stumbled on multiple fronts, from income per capita to export competitiveness. Since 2000, Pakistan’s per capita GDP has grown at a lacklustre average of 1.9% annually, while neighboring economies surged ahead, with Bangladesh averaging 4.5%, India 4.9%, Vietnam 5%, and China an impressive 7.5%.

This economic stagnation has deep structural roots. Protectionist policies, burdensome regulations, and limited investment in human capital have stifled growth, limiting Pakistan’s ability to compete globally. Over the past decades, growth has been driven more by additional labor hours and physical capital than by gains in productivity or a more skilled workforce. Alarmingly, from 2000 to 2020, total factor productivity (TFP)—a key measure of efficiency—contributed just 0.8 percentage points annually to growth. Meanwhile, minimal improvements in labor quality added only 0.5 percentage points per year, underscoring Pakistan’s failure to build a skilled and capable workforce. This reliance on raw labor rather than innovation or workforce quality means Pakistan’s economic engine is burning more fuel each year but barely moving forward.

Economists have long argued that integration with global markets, through imports and exports, is essential for growth. Open economies encourage domestic innovation, introduce competitive pressures, and provide access to valuable production inputs. Yet, Pakistan’s trade performance has stalled over the past few decades. High tariffs and restrictive trade policies place the country among the least open economies, sapping its capacity for innovation and preventing efficient resource allocation. The predictable outcome? An economy mired in low-productivity sectors shielded from competition.

Pakistan’s per capita GDP has grown at a lacklustre average of 1.9% annually, while neighboring economies surged ahead, with Bangladesh averaging 4.5% and India 4.9%.

Javed Hassan

One of the most striking examples of policy-induced inefficiency is Pakistan’s continued reliance on low-value exports. Ranking 85th on the Economic Complexity Index — unchanged since 2000 — the economy remains firmly anchored in traditional sectors like textiles and agriculture. Policies designed to shield agriculture from market forces and preferential tax treatment have only calcified inefficiency, failing to move workers to higher-productivity industries.

Despite being one of the least productive sectors, agriculture has seen limited labor reallocation and even lower productivity gains than neighboring countries, hindering economic progress. Compared to its peers, Pakistan has seen the least decline in the share of employment in agriculture, falling by only 10.5% between 1990 and 2018. In the same period, agricultural employment declined by 25.9% in both Bangladesh and India, by 34% in China, and by 38.9% in Vietnam. Preferential subsidies and tax breaks for agriculture in Pakistan have effectively chained the economy to its least productive sector, holding back economic progress and further widening the gap with neighboring countries.

But these policy missteps have consequences far beyond trade and industry; they have stalled the very building blocks of a modern economy: health and education. Pakistan’s spending on education trails far behind its peers, resulting in one of the lowest adult literacy rates and trained-teacher ratios in the region. In healthcare, the situation is equally dire. With high rates of infant mortality and childhood stunting, Pakistan’s health outcomes reveal the cost of underinvestment. World Bank estimates indicate that aligning Pakistan’s human capital investment with that of its peers could increase per capita GDP by around 15% by 2047 — a powerful reminder of the cost of inaction.

To exacerbate these issues, Pakistan’s policies favor domestic markets over exports, disincentivizing firms from expanding globally. Tariffs on final goods remain high, reducing competition and discouraging efficiency gains. Despite minor reductions in tariff rates over time, Pakistan is one of the most protected economies in the region, preventing it from entering into global value chains.  The minimal reductions in headline tariffs have been more than offset by the imposition of Additional Custom Duties and Regulatory Duties, causing average tariffs to increase from less than 15 % in FY15 to 20% in FY21 (World Bank, 2021). Reversing the anti-export bias and realigning the exchange rate would be pivotal steps toward revitalizing Pakistan’s competitiveness.

The path forward requires a clean break from protectionist and distortionary policies. In the right environment, sectors closely related to its existing export base—such as chemicals, industrial fabrics, and rubber products—could thrive. However, to cultivate these industries, the government must focus on facilitating market access rather than selecting industry "winners," allowing the private sector to lead. Furthermore, Pakistan must rethink its approach to public investment. Increased investment in human capital would address some of the country’s fundamental growth bottlenecks.

Transforming Pakistan’s economy will demand more than rhetoric; it requires deep, targeted reforms to remove policy-induced barriers and foster a competitive, innovation-driven environment. Without these changes, Pakistan’s dream of achieving regional economic parity will remain just that — a dream.

– Javed Hassan has worked in senior executive positions both in the profit and non-profit sector in Pakistan and internationally. He’s an investment banker by training.