Smaller pie, firmer grip

In 19th-century Europe, the Habsburg rulers recognized the economic potential of industrialization but resisted it. Friedrich von Gentz, Metternich's advisor, explained that they did not want the masses to become prosperous and independent, as this could weaken their rule. This historical episode sheds light on a perplexing issue in Pakistan: why do those in power often choose policies that hinder economic growth, even when they could benefit from better alternatives?

The answer may lie in the difference between economic and political returns. Elites do not always seek arrangements that maximize national income or their immediate economic gains. They also consider how a change might affect their ability to retain power and capture future returns. Technological and institutional changes can create new centers of political power, and incumbents may resist changes that threaten their political dominance.

Pakistan's recent history presents three examples of institutional and technological choices that illustrate this phenomenon. First, local government. The Constitution requires provinces to devolve authority to elected local representatives, but successive governments have either delayed local elections or weakened these institutions.

This may seem economically questionable because empowered local governments can better address local needs, improve services, and enhance accountability. However, these governments can also become political competitors, eroding the influence of existing legislators.

Second, fiscal federalism. After the seventh NFC award granted provinces a larger share of the divisible pool, the federal government has established a parallel fiscal system that undermines federal principles. By imposing taxes and requesting surplus generation from provinces, the federal government has preserved fiscal discretion at the center, even though provinces have constitutional protection against reductions in their share of the divisible pool.

Lastly, rooftop solar technology. With high electricity tariffs, the public began investing in their own power generation. However, policy changes have discouraged solar adoption by imposing taxes on solar panels and replacing net metering with net billing. This move not only reduces compensation for surplus electricity but also weakens the established system of economic resources, contracts, subsidies, and regulatory discretion.

In each of these cases, the economic benefits of reform are undermined by the political risk of relinquishing control. Elites may prefer a smaller pie with secure political power over a larger pie with uncertain future distribution.