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Governance—the process through which the state and non-state actors interact to design and implement policies, within a given set of formal and informal rules that shape and are shaped by power is now accepted as an important growth accelerator
Countries with a weak governance environment also tend to be those with weak prospects for the economic development necessary to foster structural transformation
The interactions among citizens, the state, and firms are mediated by institutions—the rules of the game—that determine how these relationships are manifested. Weak institutions undermine growth and strong institutions support growth.

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Institutions represent the formal structures and laws, informal values, and norms that shape and govern the behavior and expectations of different actors in each setting
Strong institutions constrain the actions of the political elite and public officials, while also creating the incentives for private investment
Weak institutions create incentives for the elite to entrench the politics of kinship and patronage
Pakistan’s growth shows how poor governance has undermined Pakistan’s�development��

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While well-known challenges—for example, unstable policy�environment, energy crises, and security challenges—have affected growth, several other aspects related to public-sector governance have also contributed
A weak institutional apparatus for producing high-quality and skilled manpower; slow and costly judicial procedures (contract enforcement); and political risk, have all constrained the space for transformational growth
These governance deficiencies have undermined the private�sector, reduced market efficiency, and hampered the overall macroeconomic environment�

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The global ranking of Pakistan on key indicators of institutional quality is low compared with its peers
Pakistan carries a heavy and growing fiscal burden, and requires improvements and greater transparency in the management of public finances
Pakistan has routinely endured high fiscal deficits. This calls for improving the management of public finance, both at the policy and operational levels �

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A stronger commitment to efficiency in the use of resources and an effective tax-collection system, both at the federal and provincial levels, are critical
Pakistan needs to provide more citizen-centric service delivery to meet the increased demands of a growing population
The population of Pakistan has grown rapidly, and currently�stands at 217 million resulting in a large youth bulge, growing urbanization, and an expansion of the middle class
The youth bulge and increasing urbanization are already placing�significant pressure on social services
Persistent water shortages and access to health and sanitation suggest that�the number of users now far exceeds supply�

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Pakistan needs to address the lingering regional inequalities and gaps between urban and rural regions
Strengthening governance could also help Pakistan deal with this phenomenon.
Reforming how provincial governments target the poor and the formula for intergovernmental fiscal transfers are critical in improving the availability of the Government to reach the poor
While the 18th Constitutional Amendment has provided opportunities for devolved governance, coordination problems still undermine the national government’s ability to develop strong systems for monitoring�the provinces’ performance in the delivery of national development priorities. �

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Why are things bad in Pakistan?�

Elite Capture
Institutional reforms in countries with an unequal distribution of power may be hindered by the elite, who benefit from the existing economic and political institutions
Much elites oppose institutional reforms that threaten their political power.
In this way, low-quality economic and political institutions can persist
Key institutional reforms that could have been undertaken, such as those involving tax reform, civil service reforms, or land reforms, are largely derailed or scrapped altogether if they go against perceived interests
Important changes that could introduce the much-needed efficiency and new�skills into the bureaucracy are undermined for fear that they could disrupt the existing order �

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Regime Switches and Political Instability
Pakistan has been a sustained democracy for the past 12 years
With three democratic governments in succession, Pakistan is witnessing a full electoral terms of 5 years for two times in the country’s 70-year history.
Two overarching factors have characterized Pakistan’s political�system. The first is regime instability, in terms of the switches in power from democratic to military governments and back, and the uncertainty that accompanies these switches. The second is political�instability during democratic regimes. �

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Some reforms were considered illegitimate by elected governments, having been introduced during military governments. For example, the Local Government Ordinance (LGO) 2001, although it was�seen as an important reform for deepening decentralization and providing a greater role for local authorities, was deemed illegitimate. As a result, it was scrapped in 2013 and replaced by the Local�Government Act (LGA) 2013 �

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Vested interests of the bureaucracy have, on occasion, led to weak commitment to reforms that have directly threatened the interests of the bureaucracy.
The entire reform effort has been loosely structured and its primary focus has been the higher civil service (the Central�Superior Services) and, in particular, one cadre—the Civil Service of Pakistan (later the District Management Group, and today the Pakistan Administrative Service). Obviously, this cadre has resisted the reforms. �

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There are three main pillars of governance challenges that undermine the effectiveness of the state
These obstacles reinforce each other and will continue to confront Pakistan’s policymakers over the next 30 years in the country’s quest toward achieving high-income country status
The first is an inefficient public administration system, the second is incomplete devolution, and the third is the dominance of the state in the market �

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Inefficient Public Administration �

Pakistan’s public sector is an extension of colonial-era bureaucratic structures
The Pakistani public sector was designed during the British colonial era to enforce compliance with state policies and encouraged little public participation.
The public sector is plagued with both political and technical problems
The political problems have created structural weaknesses that can only be resolved through a political process. These include the design of the public administration, and the relationship between the various categories�and hierarchies in the various parts of the civil service
The technical problems, on the other hand, have created functional weaknesses that could be addressed through technocratic responses.

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Inefficient Public Administration

The absence of strong human resource management (HRM) systems, including a functional HRM planning system, undermines staff allocation and management
Recruitment to the 12 occupational groups of the federal service is through a nationally-held competitive examination
The selection examination does not prioritize technical qualifications. A premium is placed on skills in English language and expertise in subjects of a generalized nature (English essays, English composition, general knowledge, and GSA)
To qualify in these competitive programs, prospective candidates need to excel in�generalized academics rather than specialized or modern aspects of public sector management skills �

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Inefficient Public Administration

Performance management is not designed to nurture responsive and optimally performing institutions
The system prioritizes adherence to rules rather than performance based on objective criteria �

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Inefficient Public Administration

Financial Management
Pakistan does not have an Organic Budget Law.
Instead, the PFM system is regulated by various sets of rules (for example, General Financial Rules, Treasury Rules, and the National Accounting Manual), which contain contradictions and gaps.
Payments are not automated. Instead, spending units need to provide the relevant documentation to the CGA, who then issues the payments�

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Inefficient Public Administration

Pakistan’s tax system is riddled with legal loopholes that facilitate tax evasion
Government prize bonds are both anonymous and tax exempt, so they are the instrument of choice for investing funds of unexplained origin
Likewise, funds brought into the country as remittances are tax exempt and are widely used to repatriate illegally exported capital. �

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Inefficient Public Administration

Poor coordination and collaboration around systems and processes inevitably result in unnecessary ‘turf’ issues, and hamper their effectiveness
There is a national-level anticorruption agency, the National Accountability Bureau (NAB), and four provincial anticorruption�entities, which function under respective laws and rules, and report to respective provincial authorities. In addition, the Federal Investigation Agency (FIA) also investigates certain economic crimes.��

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Incomplete Devolution �

Devolution has been used for political ends
Successive regimes have attempted to shape the nature of local-level governance in Pakistan
Pakistan’s military governments have viewed LGs strategically—they relied on them for legitimacy—and used them as a countervailing�force against provincial- and federal-level politicians who were associated with democratic regimes
Democratic governments, on the other hand, have viewed LG politicians as a threat to the power of their provincial and federal elected officials. �

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Incomplete Devolution

Pakistan’s LG system has been even more unstable than its central regimes
Pakistan is now in its fourth wave of decentralization, yet it is the first time that the LGAs have been passed in quick succession
However, elections were held only after a Supreme Court ruling—in Baluchistan in 2010, and in Punjab, Sindh, and KP in 2013
For this same reason, while the structure for a devolved governance arrangement exists, the implementation of devolution has been sporadic, with the depth of devolution varying from one province to another in the three areas of administrative, fiscal, and political decentralization�

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Incomplete Devolution

The reallocation of functions to the provinces occasioned by the 18th Amendment was�expected to support the further strengthening of administrative decentralization
The reality in Pakistan has been different
In some cases, initially devolved functions have been recentralized to the provincial level.
For example, in Punjab, education and health are now centrally managed at the provincial level through the District Education and Health Authorities
Without the full transfer of fiscal, political, and administrative functions to the lower levels, provinces continue to hold significant implementation powers
Provincial governments still retain powers of appointment of LG�officials, the election of local-level officials along party lines, and the powers to determine district boundaries
For instance, in KP the provincial government has powers to supervise local councils, budget controls, and audits. They may also suspend council officials. �

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Incomplete Devolution

The legal environment for the operation of LGs undermines their proper functioning
All four provinces have adopted the LGAs with little consultation among provinces or direction from the federal government
These Acts tend to subordinate the LGs to the provincial governments, despite�Article 140-A, which requires the provinces to establish LG systems and devolve administrative, fiscal, and political authority
The Chief Ministers of the various provinces can dismiss the LG or the�head of the local council.
The Chief Minister also has appointing powers, thus restricting the�autonomy of LGs. Stronger autonomy for LGs is needed to ensure that they are more accountable to local councils, and only in certain cases to provincial authorities. �

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Incomplete Devolution

Fiscal devolution in Pakistan has been elusive
Without fiscal devolution, LGs remain dependent on higher-tiered governments for budget allocations because they cannot adequately raise their own funds (although LGs charge business registration fees), thus largely limiting the effectiveness of devolution
The 7th National Finance Commission (NFC) and the 18th Amendment form the basis for Pakistan’s fiscal decentralization
Together they significantly increased the overall share of�subnational governments in the country’s revenues and reestablished fiscal autonomy of the provinces in taxing and spending decisions. �

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Incomplete Devolution

The 7th NFC Award also introduced a multifactor formula for horizontal distribution of resources to the provinces, which was amended to include not just the population share but also factors such as poverty, underdevelopment, and inverse population density criteria. �

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Incomplete Devolution

There are some variations across provinces in terms of further decentralization to LGs
In KP, by far the only province where progress has been made, local bodies have greater control
In KP, significant powers have been devolved down to the village council and neighborhood council levels
KP also devolves significant powers of financial management to the local levels, and empowers village and neighborhood councils to supervise officials of the LG in their jurisdiction �

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Incomplete Devolution

Punjab and Sindh have significantly restricted the autonomy of LGs
For example, Punjab can disband the LG before the completion of its term, while in Sindh successive LG elections are not guaranteed
These uncertainties continue to undermine the potential benefits of decentralization
Given the history of reversals and variations in implementation, LGs lose out on opportunities to strengthen local-level structures
For example, in Punjab it took 4 years between the passage of the LGA (2013) and the transfer of the budget to the newly elected LGs, which occurred only on January 1, 2017 �

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Dominance of State in the Market �

The proper role of the state is to provide an enabling environment for the delivery of basic social services and for the efficient functioning of the private sector
This involves strengthening market institutions and the regulatory framework for service delivery to citizens
For Pakistan, the challenge of ensuring a positive environment for the participation of the private sector, including the strong corporate governance of SOEs, is an important element of the growth agenda
Citizens and firms bear the burden when the public sector is unable to deliver quality services on time. �

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