ELITE capture is a much-used term to describe Pakistan’s economic malaise. We have some estimates of the resources captured by the elite and the inequality it spawns. There is, however, little discussion of the mechanisms of elite capture and what to do about them.

A few years back, in a design meeting to bring universal safe drinking water to Punjab, a wise elderly gentleman heading a successful water NGO, argued strongly for pricing the water as opposed to rationing it. His argument was that any regulatory mechanism for rationing water will be captured by the local elite. They will wash their cars in this water while the poor will go unserved, he said.

Elite capture thus is regulatory capture that diverts resources to the elite instead of to their best use for maximising social welfare. Addressing elite capture requires dismantling/ rejigging regulatory frameworks that facilitate this.

The best use of our resources is job creation — productive utilisation of the young workforce eager to improve their lives. Many countries in our neighbourhood have demonstrated that this is best done via exports. Global demand for what a country can produce is much larger than domestic demand and exposure to competition improves productivity.

East Asian elites (and recently Turkish), used the privileged position to open their distressed economies to international competition thereby becoming more efficient. This allowed them to export and enjoy profits in the much larger global market. They became global players, creating a growing number of productive, well-paying jobs in their countries.

Fixing elite capture demands regulatory reform.

Our industrial elite did the reverse by capturing tariffs to shut off competition. As a result, industry is profitable in the local market but has lost efficiency gains that come from competition. This has lowered their ability to export and contribute to productive job creation. In its most recent trade policy, the government has committed itself to deep tariff reform thereby choking off a major avenue of regulatory capture. We need to stay the course, while addressing the high energy cost and high taxes that put our industry at a disadvantage.

A pernicious form of elite capture is over-valuation of the exchange rate. This enables the elite to import cheaply luxury goods for their own consumption and also set up shopping malls to sell them to families benefiting from remittances. Importantly, it facilitates the transfer out of wealth from Pakistan.

The elite make good while creating jobs abroad and stunting job creation in Pakistan. Interference in the market mechanism to over-value the exchange rate thus is a glaring case of regulatory capture that the IMF helped address. We need to be watchful that we don’t go astray.

Elite capture also shows up in industrial regulation. A good example is the sugar industry, one of Pakistan’s largest. Our sugar industry could have invested in better quality cane to make profits, which would have benefited farmers and created more jobs by scaling up to meet world demand for sugar. Instead, the sugar elite chose the regulatory capture route. Sugar import is curbed when global sugar supply is plenty and price is low, and export of gur/ molasses is restricted when international demand and price are high. The regulatory capture thus allows the elite to enjoy profits either at the expense of consumers or farmers. The government is working on deep regulatory reform of sugar to address this source of elite capture. We need to be vigilant that sugar deregulation goes through.

State-owned ent­er­prises represent an­­other form of elite ca­­pture. Rents in this case are ski­m­med off in the shape of disproportionately large ser­­-vices enjoyed by well-connected citizens or, more importantly, by elite employees. Rent siphoning in PIA, Railways and Discos is well documented. This form of elite capture is best addressed by privatising SOEs with a clear understanding on post-privatisation service standards and coverage.

A highly egregious form of elite capture shows up as high taxation of the productive sectors of the economy (labour income, manufacturing) to protect the elite’s chosen sectors. Light taxation of real estate and retail/ wholesale trade is well known. The distortionary tax code makes investment in real estate and wholesale/ retail trade much more attractive than in manufacturing, especially exports that face even higher tax. The elite captured distortionary tax regime is thus designed for poor job creation. The fiscally tight IMF programme is an opportunity to reform the elite captured tax code — and put ourselves on the path to exiting donor dependency.

The writer is executive director CDPR, country director IGC and former dean and professor of economics, Lums.

Published in Dawn, November 5th, 2025