F Fareed. Malik
ECONOMIC development is not a sole product of capital accumulation or technological advancement in a society rather fundamentally driven by the quality of its institutions. As Douglass North and Daron Acemoglu put it, these institutions, encompassing both formal laws & rules and informal norms, are the “rules of the game.” They dictate economic incentives, guide investment behavior, and ultimately determine long-term prosperity. They are intrinsically tethered to their governing legal and regulatory frameworks of a state. In our country, a profound institutional paradox has emerged; despite the aggressive proliferation of a voluminous and frequently excessive legislative corpus, state institutions have devolved from engines of macroeconomic development into instruments of extraction.
One of the defining characteristics of Pakistan’s administrative system is its reliance on legalism-the assumption that socioeconomic problems can be solved through the introduction of increasingly detailed laws, regulations, and administrative controls. While regulation is essential for protecting public welfare and ensuring market stability, excessive regulation without effective oversight, often creates opportunities for abuse. Rather than facilitating entrepreneurship, many regulatory institutions inadvertently increase the transaction costs of doing business. According to an internal review, there are about two hundred and seventy laws requiring enforcement of businesses in Punjab alone coupled with hundreds of subsequent regulations. Every new scenario of is responded in administrative naïve on adding new regulations and addition of specialized agencies to enforce them without analyzing their bearing on economic output as there is no system to analyze such impacts.
This over regulation is particularly damaging for small and medium enterprises (SMEs), which constitute nearly 90 percent of Pakistan’s businesses, employ approximately 80 percent of the non-agricultural labor force, and contribute roughly 40 percent to the country’s gross domestic product. Despite their central role in employment generation and economic diversification, SMEs face disproportionately high compliance costs. Unlike large corporations, smaller firms lack dedicated legal departments or regulatory specialists capable of navigating Pakistan’s complex administrative environment. The consequences even extend well beyond entrepreneurship. Pakistan consistently attracts lower levels of foreign direct investment compared to many regional competitors despite its strategic location and large population.
Administrative bottlenecks surrounding permits, approvals, registrations, customs clearances, and taxation create stifling environment that add to fatigue and frustration of the investors. According to research by the Pakistan Institute of Development Economics, the deadweight cost of excessive regulation and administrative friction amounts to an astonishing 45 percent of Pakistan’s GDP. It is a widely held perception within the business community that, upon establishing a business, entrepreneurs are confronted by a multitude of regulatory authorities, each seeking to assert its jurisdiction and extract informal payments. The pervasive phenomenon of over-regulation is typically result of an entrenched appetite for consolidating power by the state organisations coupled with the lack of knowledge of economic growth drivers. As elucidated by public choice theory and William Niskanen’s model of the budget-maximizing bureaucracy, state institutions inherently prioritize their own expansion over administrative efficiency. Rather than anchoring success to tangible public outcomes, these organizations are structurally incentivized to inflate their budgets, personnel, and regulatory footprints, because sprawling institutions command greater political leverage, prestige, and access to public resources creating a self-reinforcing cycle in which organizational growth becomes an end in itself rather than a means of improving governance. This dynamic shifts the focus of the state from facilitating economic activity to managing an ever-growing regulatory apparatus.
Several countries offer useful lessons for Pakistan. Georgia’s comprehensive regulatory reforms following the early 2000s dramatically reduced business licensing requirements, simplified taxation, digitized public services, and strengthened anti-corruption institutions. As a result, the country rose rapidly in international ease-of-doing-business rankings while attracting significantly higher levels of investment. Similarly, Estonia’s extensive digital governance reforms transformed public administration by reducing bureaucratic discretion through online services, electronic identification systems, and transparent administrative procedures. UAE has slashed hundreds of regulations and simplified and digitized the compliance regime to attract foreign investors. Singapore’s long-standing emphasis on regulatory efficiency, meritocratic public administration, and institutional accountability has likewise demonstrated how capable governance can facilitate sustainable economic growth despite limited natural resources.
Pakistan has initiated several promising reforms, including the establishment of the many “Single Windows” to simplify international trade documentation, digital company registration and increasing adoption of e-governance initiatives. Nevertheless, these efforts remain constrained by fragmented technological interventions that are aimed at automation of existing processes without system re-engineering and user friendly interfaces.
A meaningful reform agenda should focus on transforming the state’s role from regulator of economic activity to facilitator of productive enterprise; when the economic decisions are not made through administrative mindsets of bureaucrats. The country would also benefit from implementing a systematic regulatory guillotine that periodically reviews and eliminates outdated, redundant, or economically harmful regulations. Equally important is the decentralization of fiscal autonomy and political accountability so that local governments possess both the authority and responsibility to respond effectively to local economic needs. Only by redefining the state as an enabler of opportunity rather than a gatekeeper of economic activity can Pakistan realize its considerable economic potential in an increasingly competitive global economy.
—The writer is an experienced economic development practitioner, graduated from London School of Economics.
