Beyond Public Finance: Towards  Constitutional Political Economy of Pakistan—I Why Pakistan Defies Orthodox Economic Theory

Pakistan has never lacked economic advice. Since independence, successive governments have experimented with socialist planning, import substitution, nationalisation, structural adjustment, privatization, fiscal decentralisation, value added taxation, documentation drives, digital governance and, most recently, artificial intelligence in tax administration. 

Almost every reform has been presented as the missing ingredient that would place the country on the path of sustained prosperity. However, Pakistan continues to oscillate between balance-of-payments crises, external dependence, fiscal instability and repeated recourse to the International Monetary Fund (IMF).

This persistent failure raises a more fundamental question. Is Pakistan’s crisis primarily economic, or are economists asking the wrong questions? For decades, the dominant explanation has remained remarkably consistent. Pakistan is said to suffer from a narrow tax base, inadequate domestic resource mobilisation, weak public institutions, poor governance and inconsistent implementation of otherwise sound policies. According to this view, if taxes were broadened, exemptions withdrawn, administration digitalised and markets allowed to function efficiently, sustainable growth would eventually follow.

There is much truth in these observations. They identify many of the symptoms. But they do not fully explain why technically sound reforms repeatedly fail in Pakistan while producing very different outcomes elsewhere. The reason, as suggested in earlier writings, is that Pakistan cannot be understood through the conventional assumptions of public finance alone. Economic policy does not operate in a constitutional vacuum; it reflects the incentives created by the political and legal institutions within which governments function.

Orthodox economics generally assumes a constitutional order within which governments seek, however imperfectly, to maximise public welfare. Fiscal policy, taxation and expenditure are analysed as instruments for correcting market failures, financing public goods and promoting economic growth. Political constraints are acknowledged but usually treated as external distortions rather than integral components of economic analysis.

Pakistan presents a different reality. Here, constitutional arrangements, political incentives, strategic considerations and informal institutions have shaped fiscal outcomes as much as, and often more than, economic policy itself. Taxation has frequently reflected the distribution of political power rather than principles of efficiency or equity. 

Public expenditure has often been determined by strategic imperatives rather than developmental priorities. External assistance has repeatedly substituted for difficult domestic reforms. Elite bargains have preserved privilege while transferring the burden of adjustment to documented businesses, salaried individuals and ordinary consumers. These outcomes cannot be adequately explained by models that assume an impartial state pursuing coherent economic objectives. The analytical framework itself, therefore, requires reconsideration.

This series proceeds from a simple but powerful proposition: before analysing taxes, budgets or debt, one must first understand the constitutional rules that shape political incentives. This is the central insight of Constitutional Political Economy (CPE). 

Unlike conventional public finance, CPE begins not with taxes or budgets but with the constitutional rules, institutional incentives and political structures that determine how economic decisions are actually made. It asks a prior question: Who designs the rules under which economic policy operates, whose interests do those rules serve, and how do they shape incentives for both governments and citizens?

Once that question is asked, many of Pakistan’s recurring puzzles begin to appear less mysterious. Why do technically sound tax reforms repeatedly fail? Why do successive governments rely on indirect taxation while avoiding politically influential sectors? Why has documentation remained elusive despite extraordinary advances in digital technology? Why does every external crisis quickly become a fiscal crisis? Why has debt expanded despite repeated stabilisation programmes?

The answers lie not merely in economics but in the constitutional and political environment within which economics operates.

This series proposes a different approach. Rather than examining taxation, debt or fiscal federalism as isolated subjects, it will analyse them as interconnected manifestations of Pakistan’s constitutional political economy. Future parts will explore how colonial legacies, post-independence constitutional choices, geopolitical dependency, elite capture, federal arrangements, judicial interpretation and administrative incentives have combined to shape Pakistan’s economic trajectory.

The purpose is not to reject orthodox economics. Public finance remains indispensable. Sound taxation, efficient expenditure and macroeconomic stability are essential for any modern state. However, these instruments cannot achieve their intended objectives when the institutional environment within which they operate generates incentives that systematically frustrate reform.

Pakistan’s crisis is not simply a fiscal crisis. Nor is it merely a crisis of governance. It is, more fundamentally, a crisis of constitutional political economy. Unless that deeper reality is understood, technical reforms, however well designed, will continue to produce disappointing results because they address the symptoms rather than the constitutional incentives that generate them.

In the next part, we shall examine why the assumptions of orthodox public finance differ fundamentally from those of constitutional political economy, and why that distinction matters profoundly for understanding Pakistan.

[To be continued]

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Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds an LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.