WITH the 2025 Nobel Prize in Economic Sciences being awarded to Philippe Aghion and Peter Howitt “for the theory of sustained growth through creative destruction”, the idea that only a constant process of innovation and disruption can inject dynamism in an economy, a new mantra has gripped Pakistan’s policy elite and commentariat. This follows the official pressing of the panic button on the economy by none other than the incumbent prime minister, in a brutal violation of the narrative spun by the Ministry of Finance.
An elite panel was constituted, and furthering earlier work, it concluded in essence that “creative destruction” will be the silver bullet that will save the economy from its current nosedive. To achieve this will require reform of the import tariff regime, which will ultimately force inefficient firms to either ‘swim or sink’.
The elegant prescription applied to Pakistan, unfortunately, stems from a complete misdiagnosis — and a dangerous one at that. It is yet another example of transplanting ideas without a country-specific context or a nuanced understanding of initial conditions.
At the core of the elite policy recommendations is the implicit assumption that the inefficiency and lack of competitiveness in the economy are all endogenous to firms — that is, internal to the way firms choose to operate, inherent in their business decisions, and independent of external factors. The assumption is that firms have agency over their environment, or that the environment in which they operate is neutral and does not exert any negative influence.
This is obviously a heroic assumption in the case of Pakistan. And completely off the mark. Formal sector firms in the country operate under the following dizzying set of constraints: the most expensive electricity in the region (with frequent interruptions); the highest tax burden (up to 50 per cent plus with the super tax); an over-valued exchange rate; widespread smuggling and under-invoicing that produces a $68 billion supposedly underground (but very much above-ground) parallel economy that undercuts the formal economy; executive overreach and regulatory burden; cost of corruption and bribes; non-availability of a skilled workforce; training costs for an unskilled and semi-skilled labour force, the product of chronic under-investment by the state; paying for water, security, extortion by local criminal gangs, forced hiring of political appointees, and dealing with frequent policy reversals. This set of constraints is not even exhaustive.
The country’s policy elite has discovered the Holy Grail. Too bad they are holding the wrong end.
The net effect is that, according to calculations by the Pakistan Business Forum, the cost of doing business is 34pc more expensive in Pakistan than in regional peers. As a consequence, formal sector firms, including supposedly ‘protected’ ones operating behind high tariff barriers, have been exiting in droves and Pakistan is experiencing a silent economic scarring (or hysteresis), with the real possibility of permanent de-industrialisation.
Many of the missing essential elements are public goods on paper. The complete absence of basic building blocks of a thriving business environment — policy stability, law and order, a healthy and productive labour force, affordable and available electricity, gas and water, protection from executive overreach, including from predatory taxation, arbitrary and discriminatory treatment and risk of appropriation, predictable contract enforcement, copyright protection, recourse to independent courts — is entirely ignored in the policy recommendations. None of the above inefficiencies are endogenous to firms. And each of these is a necessary condition for a successfully functioning market economy.
Virtually all the constraints facing businesses represent a catastrophic system failure, of environment design, not of individual firms. While firm productivity in Pakistan is low by any measure, and does need to improve ultimately through less protection and more competition, the proximate cause of the abysmally low overall national competitiveness is the myriad negative externalities produced by a malfunctioning and extractive political system. Exhibit A in this regard is the political corruption in IPP contracts that has led to the power crisis.
Imposing the costs of failure of the state onto firms is a bad idea and will not bring about the desired results. A simple thought experiment should make this clear. If we assume the process of creative destruction runs its course, and many ‘inefficient’ firms are forced to exit, which new firms will replace them under the existing constraints listed earlier? Is it realistic to imagine new investment from the private sector under conditions of the highest regional electricity tariffs or predatory taxation or policy inconsistency? Instead, we will most likely end up attracting shadowy crypto firms and chasing government-to-government deals with sovereign guaranteed rates of return, while the rest of the industrial base dissolves into non-existence.
An economic system is perforce a product of the political system. The political system is higher in the hierarchy than all the other sub-systems; hence, any malfunction there affects all the constituent sub-systems. The degenerating economic order cannot be viewed in isolation from the political economy. It is a function of the political order, kept in place to support the extraction and rent-seeking. The two go hand in hand. As I have argued previously, for this reason, the economy cannot be fixed without fixing the politics first — and the sequencing is important. Politics first, economy to follow. Any entity, be it an elite institution or an elite panel of experts, talking about “deep” economic reform while ignoring or implicitly ruling out reforming the corrupt and misgoverning political order is fooling itself and us. The bottom line is that economic reform requires political reform.
Genuine fresh investment that brings about innovation and efficiency, and improves the country’s overall competitiveness, will remain a pipe dream until the extractive, rent-seeking political order that shapes and produces the underlying current economic order is cast aside.
Stefan Kanfer writing in Time magazine in the 1980s had a famous paraphrase of a Kafka autobiographical thought: “there is only one illness, and medicine hunts it blindly like a beast through unending forests.” In Kafka’s case, the malady was life itself. In our case, it is our political order and system of mis-governance. Pakistan desperately needs creative destruction — but not just the kind being advocated.
The writer has been a member of several past economic advisory councils under different prime ministers.
Published in Dawn, February 14th, 2026
