Why Pakistan Cannot Borrow Its Way to Prosperity, and What It Could Build Instead

By Barbara Wright

The Wage Is the Engine: What Zanesville Knew and Pakistan Forgot

When a developing economy runs short of foreign currency, the script is familiar. Officials travel to meet lenders, negotiate another restructuring, and explain at home that the trouble began abroad: inflation in the West, weak consumer demand in Europe and America, shifts in global trade. Pakistan has performed this routine so many times that it has the feel of a seasonal ritual. The explanation is not entirely false, since a country that borrows to cover its consumption is exposed to every tremor in foreign markets. But it conceals the more uncomfortable fact that the exposure was designed at home. Pakistan is not failing because it is connected to the world. It is failing because of how it treats the people who do its work.

The numbers show the shape of the problem. By the figures of the World Bank and the government’s own economic surveys, household consumption accounts for more than four-fifths of national output. Meanwhile the Pakistan Bureau of Statistics’ labour force survey finds that roughly eighty percent of the employed work in the informal sector, without written contracts, wages tied to prices, or any statutory protection. Put the two together and a contradiction appears. The economy depends overwhelmingly on household spending, yet most households are paid too little, too irregularly and with too little security to spend it. The engine is starved of fuel while the nation wonders why it stalls.

The consequences feed on each other. Suppressed wages mean thin purchasing power and a narrow base of taxpayers. Narrow tax revenue means chronic deficits, and the state fills the gap by borrowing abroad and paying for imported necessities in scarce foreign currency. The loans arrive with conditions: higher indirect taxes, removed subsidies, and rising food prices, all of which land hardest on the people whose wages were lowest to begin with. Their purchasing power falls further and the cycle begins again. Alongside it grows a political economy of rent-seeking, in which fortunes are made in speculative real estate, commodity hoarding and cartels protected by connection, rather than in building things people can use.

To see that this arrangement is a choice and not a law of nature, it helps to look at a place that made the opposite choice, and then paid for abandoning it. I have ties to the clay country of southeastern Ohio, where the Muskingum River runs past Zanesville, Roseville and Crooksville. For much of the last century those towns made stoneware and pottery that found its way into kitchens across America. The economics of the place were simple and, for a time, remarkably durable. The factories drew on local clay and local fuel. They paid wages high enough that a kiln worker could feed a family and also afford the very crocks and dripware he had fired that week. Those wages did not leave town. They went to the grocer, the homebuilder, the dentist and the church, and each of them paid taxes that kept the schools and roads in repair, without anyone needing a distant benefactor to do it. The money circled through the community many times before any of it escaped, and the community grew rich on the circling.

Henry Ford understood the principle at industrial scale. When he announced a wage of five dollars a day in 1914, the business press called it reckless. Ford had his own reasons, including a punishing rate of worker turnover, but the logic that made the policy endure was the one he stated himself: a company that pays its workers less than the price of its products is shrinking its own market. A worker who can buy what he builds is not a cost to the system. He is its customer.

A skeptic will say that comparing the pottery towns of Ohio with Pakistan is comparing apples with oranges, that the continents, scales and centuries are all different. That is fair as far as it goes, and I do not claim the two places are alike in their institutions, their politics or their histories. The claim is narrower and, I think, harder to dismiss: in both places, a wage that exceeds mere survival becomes demand, demand becomes local commerce, and local commerce becomes a tax base, while a wage held below survival does the reverse. The mechanism does not care about geography, though whether it is allowed to operate depends entirely on law and enforcement, which is precisely where the two countries differ.

The Ohio story also holds a lesson that critics tend to misread. They point to the collapse of the pottery towns as proof that local economic loops are fragile. But the loop was not broken by its own high wages. It was broken from outside, in the later decades of the twentieth century, when national retail chains such as Kmart arrived and filled the shelves with cheap imported ceramics. Local factories could not match the prices, the plants closed one by one, and the circulation of money that had sustained the towns was cut at the root. The model did not fail. It was overwhelmed by a distribution system that owed nothing to the place it was selling into.

This is where Pakistan’s situation becomes interesting, because its structure of everyday commerce is, in important respects, the opposite of the one that undid Zanesville. Basic goods here still move largely through networks that are local, decentralized and deeply embedded in community life. Grain, pulses, vegetables, livestock and fruit travel from the surrounding countryside into the district mandis, the wholesale markets where much of the nation’s food is first priced and sold. From the mandis they flow out into the mohalla, the neighborhood, where independent kiryana shops, tandoor bakeries, butchers and artisans serve customers they know by name. No single corporation owns this chain, and none can easily replace it. The things people buy in it, such as wheat, lentils, milk, bricks and everyday clothing, are necessities, so the demand for them is steady and largely indifferent to what happens to consumer sentiment in Frankfurt or Chicago. This arrangement is changing, as supermarkets and online platforms gain ground in the larger cities, and anyone who wants to protect the bazaar economy would be wise to remember what happened to Ohio. But for now, the retail end of Pakistan’s economy has an architecture that many countries have lost and would like to have back.

The leak is higher up the chain. Between the farmer who grows the crop and the family that eats it stands a layer of commission agents and cartels, the arthias and their larger counterparts, who buy at harvest when farmers are desperate and prices are at their lowest, store grain and sugar in private warehouses until shortages appear, and sell into the cities at the price scarcity allows. Value that should stay with the producer, and circulate through the village and the district market, is siphoned off into a few hands, many of them politically connected. Farmers and laborers, who spend nearly all of any additional income on tools, repairs, medicine, clothing and household improvements within their own regions, never receive it. If farmgate prices were transparent and enforceable, hoarding were punished, and farmers had real access to the market, the money that stayed in the countryside would circulate through the mandis and the mohalla almost at once.

The brick kilns show the pattern most starkly. Pakistan’s kilns produce the material of its construction boom, the bricks that become housing, offices and shopping plazas. Yet the people who mold and fire them are often bound by peshgi, an advance against future labor that grows with interest and with every illness, wedding and bad season, until a family’s debt is effectively inherited. Paid by the piece, below any level that could be called a living wage, they cannot afford the housing they make and live instead in informal settlements at the edge of the formal economy. This persists despite a law abolishing bonded labor that has been on the books since 1992, and despite minimum wage notifications that exist on paper in every province. The law is not missing. Enforcement is. If wages in the kilns were paid and protected, workers in a single industry would become a large new market for modest housing, cement, roofing, timber, cloth and food, all of which are produced domestically. The wage is not a charity to the worker. It is the first link in a chain that ends in the local economy’s growth.

That is the diagnosis, and it is a hopeful one, because a problem of design can be redesigned. Pakistan already has the markets, the laws and the labor. What it has lacked is the machinery that turns a wage on paper into a wage in a worker’s hand, and the question of what that machinery would look like, and why no government has built it, is the subject of the second part of this inquiry.