ABOUT two weeks ago, the head of the Special Investment Facilitation Council declared that Pakistan has a ‘failed’ economic model. As an economist, though, I was not surprised because the failure of our ‘economic model’ (whatever that is) has been known for long. Importantly, though, how did we end up with a ‘failed’ model? And, what does a ‘successful’ economic model look like?
I’ll address the second query first, partly owing to the recent award of the Nobel Prize in Economics to three economists (Joel Mokyr, Philippe Aghion and Peter Howitt) and also because it will give us a fair idea of the first query.
The recorded history of mankind’s economic activities shows that real income growth followed a pretty flat trajectory, but saw a remarkable uptick in the 19th century as the Industrial Revolution picked up pace (the ‘hockey stick’ phenomenon). What factors underlay this stupendous transformation? The work of the three winners addresses this very question.
The two most famous long-term growth theories are that of Robert Solow and Paul Romer (both Nobel Prize winners). Solow identified population growth, savings, and technological change as the factors that drive economic growth. Of this, technology is the most important component since by itself, population and savings alone can drive growth to a certain level, but beyond that, as depreciation catches up, the economy reaches a ‘steady state’ beyond which returns of these two factors keep falling. It was persistent technological change that would keep the economy above its steady state level. However, for Solow, technological change was ‘exogenous’ (the ‘black box’) — determined outside the system.
The staggering number of talented individuals leaving Pakistan would trouble any serious policymaker.
Romer came up with his theory in his paper ‘Endogenous Technological Change’ (1990). He agreed with Solow’s contention that technological change is the most critical input in long-term growth. Where he differed was that it was determined within the system by the ‘intentional’ actions of innovators who had incentives to innovate in order to earn more than average earnings. One of his contentions, which he called the ‘most fundamental premise of his theory’, was that the process of technological innovation has a fixed cost, meaning that an innovator can build upon that knowledge with zero marginal expense. At the heart of his theory were two variables — high-quality human capital, and the endless possibility of profits with the expansion of the size of the market, which would mainly come courtesy of international trade.
Aghion and Howitt wrote their seminal paper ‘A Model of Economic Growth through Creative Destruction’ around the same time (1992) as Romer. They based their work on the idea of ‘creative destruction’, a term coined by Austrian economist Joseph Schumpeter (1883-1950) who hypothesised that the workings of capitalism are underpinned by “gales of creative destruction”; the most creative would survive but the less creative would not be so lucky.
If creativity also carries a destructive tendency, how did industrialised countries end up with steadily increasing real income growth? They answer this by pointing out that there are thousands of sectors functioning in an economy; creative destruction in one is usually balanced out by creative growth in another. There are countless examples: BlackBerry replaced by iPhones and Netscape replaced by Google. Or take stock of the fact that Google or Amazon were merely blips on the vast canvas of the New York Stock Exchange at the start of the 21st century (few had heard of Elon Musk). Now, these three are some of the largest companies on the planet.
Many companies and businesses vanished, but new were born, thus balancing out the destructive tendencies. This process critically depends upon innovators who take risks, and also an enabling environment.
Mokyr’s work is the most phenomenal in terms of the broad sweep of technological history. One of the most interesting queries he propounds, amongst countless others, is why England (and Europe in general) took the lead during the Industrial Revolution. His answer, for the most part, rests on the importance of traits like curiosity, knowledge diffusion and exchange, a tolerant environment and persistent push by curious innovators. The price incentive, so important in Romer, Howitt and Aghion’s work, is relatively subdued in his hypothesis. Gautier, the inventor of the hot air balloon in the 1870s, did so out of curiosity. Bacon and Newton helped foster a culture of ideas and exchange, carried out by various scientific ‘societies’ founded in England, without any price or profit incentive. It was a cultural revolution (the ‘Enlightenment’) from whose bosom sprang the Industrial Revolution.
In his writings, we again find the critical role of high-quality human capital (‘upper tail human capital’) as in Romer’s, Howitt’s and Aghion’s theories and why it is so important for long-term economic growth.
Although what I stated above does not do justification to the vast expanse of research of these three, it does give us a fair idea of the factors that constitute a ‘successful’ economic model. Now contemplate which of these factors are historically at play in Pakistan? None. For example, what of Pakistan’s ‘upper tail’ human capital? The staggering number of highly skilled individuals leaving this country for decades would deeply trouble any serious policymaker, except for those who revel in the prospect of more remittances.
And what of the tremendous opportunities afforded by the global economy, where the trade in goods and services stands at a staggering $23 trillion? What’s our share? Not even $100 billion. Can there be any bigger reflection of our calamitous failure?
But why take risks, for example, when it’s easy to make gazillions from export permits for commodities like sugar, create a shortage and then import the same at triple the price? Why incentivise upper tail human capital to contribute at home when pushing them out of the country would mean more remittances?
Suffice to say, economic growth does not rest upon accounting and PR gimmickry. Above all, any serious attempt at ‘successful’ long-term economic growth in Pakistan should begin with those in the state machinery sticking to their job requirements.
The writer is an economist. His current research focuses on long-term analysis of various issues plaguing Pakistan’s economy, economic reforms and history of economic thought.
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Published in Dawn, December 27th, 2025
Camellia Geddes
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