Why Pakistan's economy can't be fixed by the free market

Political economy: the discipline that refuses to separate politics from economics

The episode opens with Muzamil framing the conversation around a term most Pakistanis hear but rarely examine: political economy. He introduces Dr. Taimur Rahman — professor of political science at LUMS, Secretary-General of the Mazdoor Kisan Party, and author of a PhD-turned-Oxford-University-Press book on Pakistan’s class structure — as someone whose work sits precisely at that intersection.

Dr. Rahman’s first move is definitional. Economics as a standalone discipline, he explains, is actually quite recent — it only crystallised as a separate subject in the nineteen twenties. Before that, everyone from Adam Smith to David Ricardo to Karl Marx called themselves political economists. “Karl Marx ने جو کتاب لکھی اس میں بھی اس نے لکھا critique of political economy” (Karl Marx titled his own book a critique of political economy). The split happened when the discipline narrowed its focus to market behaviour — demand, supply, price — and stopped asking questions about the state. Political economy refuses that narrowing. It examines how the economic structure of a society shapes its political structure, and vice versa. That is why, Dr. Rahman notes, any serious conversation about Pakistan’s economy inevitably slides into politics: the two cannot be pulled apart.

How a Marxist is made in Lahore and Grinnell, Iowa

Before the history lesson begins, Muzamil asks Dr. Rahman about his own intellectual formation. The answer is disarmingly personal. Dr. Rahman was born in Lahore, completed his early schooling at Aitchison College, then left for Grinnell College in the United States for a double major in political science and economics with a minor in philosophy and music. His father is a Marxist; his mother is a feminist. He grew up surrounded by left-wing ideas without consciously registering them.

It was only at college, when classmates started calling him “that Pakistani Marxist on campus,” that he actually picked up Marx. “One summer I said, yaar, beta, read the guy — because everybody is calling me a Marxist, toh agar maine padha bhi nahin toh phir log kya kahenge?” He read the Communist Manifesto and described it as a light bulb going off. He then did an independent study on Das Kapital, chapter by chapter, with a professor named Brad Bateman — “one of the best experiences ever.”

He returned to Pakistan, taught economics at the Lahore School of Economics, completed a master’s in international relations at the University of Sussex, joined LUMS as a teaching fellow, and eventually did his PhD at the School of Oriental and African Studies, University of London. His dissertation — on the class structure of Pakistan — was later published by Oxford University Press and won an award.

Land, caste, and the Asiatic mode of production: before the British arrived

The historical excavation begins with a claim that surprises Muzamil: Marx did not believe feudalism ever existed in the Indian subcontinent. Instead, Marx used the category of the “Asiatic mode of production” to describe China, India, Persia, and the Ottoman Empire — a system fundamentally different from European feudalism.

The key difference was land. In pre-British India, agricultural land was not private property. A zamindar held land as a grant from the emperor, not as a heritable private asset. “Agar badshah ka mood hua toh woh utha ke keh sakta tha — bas, ab yahan se nahi, ab yahan se le lo.” The village economy was managed through the biradari system — a caste-based order that controlled both production and consumption. Half the agricultural surplus stayed in the village and was distributed according to caste; a portion went to the zamindar; a portion went upward to the state treasury. Money and markets existed, but only in cities and only for elites. The silk route traded in silks and spices for jagirdars, not for peasants.

This system, Dr. Rahman argues, was not feudalism. It was also not capitalism. It was something else entirely — and it had been stagnating for centuries before the British arrived.

Colonial capitalism: the hybrid that couldn’t grow

When the British came, they did not simply replace the old system. They fused it with capitalism in a way that served their own statecraft. In 1793, the Permanent Settlement Act introduced private property in agricultural land for the first time — first in Bengal, then a century later in Punjab. The entire landed class structure that Pakistanis today treat as natural and ancient was, Dr. Rahman argues, a British creation.

The result was what he calls “colonial capitalism” — a khichdi, a hybrid of the Asiatic mode of production and capitalism that had no internal capacity for growth. The evidence is in the numbers: India’s share of global GDP fell from roughly 25 percent before British rule to under one percent by the time of independence. “33% of the global GDP se suddenly aap 0.3 par nikalte hain.” Growth only resumed after independence, when India began hitting three percent and Pakistan six percent.

The British did build canals, railways, and schools — but, as Dr. Rahman puts it flatly, “there is no free lunch, specially where empires are concerned.” They built infrastructure for their own extraction, not as a gift. What they did leave behind were new institutions — representative government, a professional army, a bureaucracy — that introduced new ways of organising society, even if the economic foundation they created was incapable of self-sustaining growth.

From 1947 to 1965: the Ayub boom and its abrupt end

Muzamil asks Dr. Rahman to walk through Pakistan’s post-independence political economy decade by decade. The story of the Ayub Khan era is, in Dr. Rahman’s telling, one of genuine growth — not a pump-and-dump scheme, but real industrial and agricultural transformation.

The mechanism was a combination of American Cold War patronage and the Green Revolution package: high-yield seeds, tubewell technology, tractors, pesticides, and the Tarbela Dam funded by the World Bank. Agricultural productivity doubled. The government channelled the surplus into industry through export bonus schemes that gave a handful of industrial families near-monopoly conditions and guaranteed profits. The result was rapid urbanisation, new class formation, and legitimate GDP growth — until 1965.

In 1965, the decision to attempt to take Kashmir by force triggered an American aid cutoff. “65 mein hi band kar di thi.” The growth engine stalled. The resentment that had been building against Ayub’s inequality and authoritarianism exploded in 1968. Dr. Rahman shows Muzamil a graph of American aid to Pakistan across decades — three large peaks corresponding to the Ayub era, the Zia ul-Haq era, and the Musharraf era — and makes the point that where economic aid came, economic development followed; where only military aid came, it did not.

The 1973 OPEC shock and the flight of capital

The seventies brought two simultaneous shocks. First, the separation of East Pakistan removed 55 percent of the population and a significant portion of the economic base. Second, and more consequentially for the global order, the 1973 Arab-Israeli war triggered the OPEC oil embargo.

Dr. Rahman describes the OPEC crisis as the event that broke Keynesian economics worldwide. “OPEC was the straw that broke the camel’s back.” Oil-importing countries — the United Kingdom, the United States — experienced stagflation. Labour governments collapsed. The welfare state came under existential pressure. The monetarist counter-revolution began. And the oil-exporting countries of the Middle East accumulated wealth at a speed that had rarely been seen in history.

For Pakistan, the consequences were structural and lasting. Skilled labour migrated to Gulf construction sites. Higher-skilled workers emigrated to Britain and America. Capital followed. Pakistani industrialists discovered it was safer and comparably profitable to park money in Dubai than to invest in Karachi. “Bahut sara capital hamara jo hai Dubai aur Middle East mein pada hua hai.” The domestic economy was left without the savings, investment, or technological upgrading it needed to compete.

The narrative that Bhutto’s nationalisations destroyed Pakistan’s industrialisation, Dr. Rahman argues, is a retrospective myth. The industries Bhutto nationalised remained nationalised through the Zia years — and yet the eighties saw growth. “Agar nationalization hi sirf masla tha toh phir eighties mein growth kaise ho gayi?” The real damage was done in 1965, not 1971.

Why the market cannot fix Pakistan’s savings problem

By the time Muzamil asks for a policy framework, Dr. Rahman has laid enough groundwork to make his central argument. He shows a second graph: gross capital formation as a percentage of GDP, comparing Pakistan to comparable low-and-middle-income countries. Pakistan’s line sits consistently below the peer group.

The diagnosis is simple: Pakistan’s rate of savings and reinvestment is too low. “Jis bhi mulk ke andar rate of savings high hoga aur rate of investment nataijan bhi high hoga woh mulk badi tezi se grow karega.” The prescription that every economist on every platform offers — make the environment investment-friendly, protect private capital, deregulate — has been tried for forty years. “Pichle chalis saal se hum investment friendly climate bana rahe hain.” Labour unions are weak, taxes are avoided, bribes smooth every obstacle. “Isse zyada investment friendly country kya ho sakti hai bhai jaan? Nahin ho sakti — and still nothing is happening.”

The market, Dr. Rahman concludes, is doing exactly what markets do: rewarding efficiency and punishing inefficiency. Pakistan has not upgraded its technology, its infrastructure, or its agricultural productivity. “Pakistan is the fourth worst agricultural productivity in the world.” The market’s verdict is that Pakistan’s role in the global economy is to produce and export labour. Nothing else.

The solution, he argues, requires the state to actively generate savings and investment — a hybrid model, Chinese in character, where the state invests in the infrastructure that the private sector will not touch because the returns are too long-term or the scale too large.

Profit maximization, output maximization, and growth maximization are three different things

Later in the discussion, Dr. Rahman makes what he considers the central logical error of neoliberal economics. He draws the average cost curve on screen and walks Muzamil through it. Profit maximization occurs at one point on the curve. Output maximization — the point where average cost is at its minimum — occurs at a different, higher output level. A firm can produce more than its profit-maximizing quantity without losing money; it simply earns less profit per unit.

“Profit maximizing is not the same as output maximizing.” And output maximizing is not the same as growth maximizing, because growth depends on what is being produced. A factory maximizing output of hair cream contributes less to economic growth than a factory maximizing output of tractors. “God did not make all commodities equal. Some are more equal than others.” Capital goods — power, transport, engineering tools — generate growth when their production expands. Consumer goods do not, or not to the same degree.

This is why, Dr. Rahman argues, directing investment toward power generation and railway infrastructure is not just a preference but a logical necessity. And it is why the private sector, which maximizes profit rather than output or growth, and which will always prefer Dubai real estate to a Pakistani hydro dam, cannot be the primary driver of that investment.

Railway, hydro power, and the PIA argument

The practical section of the conversation covers three infrastructure cases. On railways: Pakistan shifted investment from rail to roads in the seventies and eighties partly to break the power of the railway workers’ union, the most powerful labour union in the country at the time. The result is that goods now move by road at roughly ten times the cost per tonne-kilometre of rail. Dr. Rahman’s prescription is to invest in rail for goods transport, modernise the network, and allow passenger services to be partially privatised as an add-on.

On power: 65 percent of Pakistan’s electricity is generated by IPPs running on gas and oil, locked into dollar-denominated contracts that guaranteed profits regardless of whether the government could afford to buy the power. The 1992 Independent Power Producers policy, designed to attract private investment, created a situation where the government is now effectively bankrupt paying capacity charges. The solution is public investment in hydro power — not only large dams but small and medium-scale hydro at provincial level — which would simultaneously address the water management crisis exposed by the 2022 floods.

On PIA: Muzamil pushes back on Dr. Rahman’s defence of the airline, arguing that excess staffing is the core problem. Dr. Rahman’s counter is structural. PIA was profitable until Gulf carriers — Emirates, Etihad — entered the market with new aircraft and took over international traffic. The only routes that generate profit are Karachi and Lahore to London, New York, and Dubai. Firing staff does not restore competitiveness on those routes. Procuring five to ten aircraft comparable to Etihad’s fleet would allow PIA to recapture passengers, generate revenue, and self-fund further upgrades. “PIA itself will be able to generate the money with which it can fix itself — if you invest thora sa usmein.”

By the end of the conversation, the two have also sparred over the nature of tax money — whether an individual has a right to say “my money” once it has been paid to the state — and over trade unions, with Dr. Rahman arguing that collective bargaining is a democratic right and that the socialist objective is full employment, not efficiency through firing. “Jo unemployed banda hai woh sabse badi inefficiency hai. Kyunki woh kaam hi nahin kar raha.”

Pakistan 2050: an honest non-answer

Muzamil closes, as he does with all guests, by asking how Dr. Rahman sees Pakistan in 2050. The answer is unusually candid. “No idea, anybody’s guess. I don’t like to speculate either.” Dr. Rahman outlines three genuine possibilities: implosion through religious extremism, reversion to military dictatorship, or fracturing of the state as Sindhi, Baloch, and Pashtun populations conclude the federation no longer serves them. But he also names a fourth path — rethinking the social contract between state and people, breaking the cycle of stagflation and dependency through a hybrid, mixed approach, and finding ground on which the country can come together.

Muzamil agrees that the social contract is the right frame, and adds his own observation: Pakistan currently has neither a collectivist nor an individualist ethic. “Har banda apna soch raha hai” — everyone is thinking only of themselves, unwilling to let go of anything, unwilling to commit to anything collective. It is, he says, a Frankenstein monster of a polity. Dr. Rahman does not disagree.