Review

Structural and External Barriers to Pakistan’s Economic Growth:

Pathways to Sustainable Development
Naveed Ali 1, *, Olivier Karl Butzbach 1, *, Habib Ali Katohar 2 and Hassan Imran Afridi 3

1 Department of Political Science, University of Campania ‘L. Vanvitelli’, 81100 Caserta, Italy
2 Department of Basic Sciences and Related Studies (BSRS), Mehran University of Engineering and Technology,
Shaheed Zulfiqar Ali Bhutto Campus, Khairpur Mirs 66020, Pakistan; habibalibaloch@muetkhp.edu.pk
3 Centre of Excellence in Analytical Chemistry, University of Sindh, Jamshoro 76080, Pakistan;
hassan.afridi@usindh.edu.pk
* Correspondence: naveed.ali@unicampania.it (N.A.); olivierkarl.butzbach@unicampania.it (O.K.B.)

Abstract: Pakistan’s economic growth has been hindered by various internal and external factors since
its independence in 1947. This study aims to identify the root causes of these issues and provide a
comprehensive understanding of the country’s economic situation. Internally, inefficient bureaucracy,
corruption, inadequate support for small and medium enterprises (SMEs), labor market rigidity, tax
evasion, and regional inequalities have impeded development. External factors such as political
instability, terrorism, weak governance, foreign policy challenges, and insufficient infrastructure
have discouraged investment and disrupted economic activities. Pakistan’s reliance on low-tech
exports has also led to a loss of competitiveness in international trade. To revitalize the economy, the
study suggests reforms in governance, bureaucracy, and infrastructure, with a focus on supporting
SMEs, reducing corruption, and attracting investment. The adoption of circular economy (CE)
practices, particularly through the use of recycled materials, is proposed as a viable pathway to
enhance economic resilience and environmental sustainability. The study highlights the potential for
integrating CE strategies, drawing from successful global practices, to address Pakistan’s economic
and environmental challenges. However, the reliance on historical data and linear econometric models
may not fully capture the evolving economic dynamics, necessitating further research incorporating
real-time data and sector-specific approaches. Despite these limitations, the study provides actionable
Citation: Ali, N.; Butzbach, O.K.; insights for policymakers, offering a framework for Pakistan and other developing economies to
Katohar, H.A.; Afridi, H.I. Structural achieve sustainable growth.
and External Barriers to Pakistan’s
Economic Growth: Pathways to Keywords: economic growth; structural problems; foreign direct investment; macroeconomic
Sustainable Development. World 2024, stability; political instability
5, 1120–1129. https://doi.org/
10.3390/world5040056

Academic Editor: Jungho Baek

1. Introduction
Received: 22 August 2024
Pakistan’s economy has faced numerous challenges in recent years, including fiscal im-
Revised: 1 November 2024
balances, rising inflation, and external sector vulnerabilities. Internally, issues such as ethnic
Accepted: 4 November 2024
Published: 7 November 2024
conflicts, religious militancy, and poor governance have worsened economic instability, and the
agricultural sector, which is crucial to Pakistan’s economy, has been hampered by limited water
resources, poor management, natural disasters, and ineffective policies. Externally, factors such
as the global financial crisis and the war on terror have reduced exports and foreign direct
Copyright: © 2024 by the authors. investment (FDI). For example, FDI fell from USD 2.56 billion in 2020 to USD 2.06 billion in 2021,
Licensee MDPI, Basel, Switzerland. continuing a long-term decline since 2008 [1].
This article is an open access article The economy has seen a period of both growth and recession, but events like the
distributed under the terms and 2010 floods, which caused USD 43 billion in damage [2], pushed it further into difficulty.
conditions of the Creative Commons While there has been significant research into Pakistan’s economic problems, most studies
Attribution (CC BY) license (https://
tend to focus on specific isolated issues like trade deficits or fiscal policies. These studies
creativecommons.org/licenses/by/
4.0/).

World 2024, 5, 1120–1129. https://doi.org/10.3390/world5040056 https://www.mdpi.com/journal/world

World 2024, 5 1121

often overlook broader and interconnected factors like urbanization, human capital devel-
opment, governance, and regional trade [3]. Additionally, many uses outdated models that
fail to reflect the complexity of the current economic situation.
One promising solution lies in the circular economy (CE) framework, which is gaining
global recognition as a way to reduce waste, recycle materials, and promote more sustain-
able resource use [4]. CE has been successful in other regions; for instance, Europe saw a
12% reduction in material extraction and a 9% decrease in greenhouse gas emissions from
2010 to 2018 by adopting these principles [5]. For Pakistan, adopting similar strategies
could help decrease its reliance on raw materials, reduce environmental harm, and build
a more resilient economy. A key element of the circular economy is the use of recycled
materials, which can significantly reduce energy use and the environmental impact. For
example, producing aluminum from recycled sources uses 95% less energy compared to
using raw materials [6]. Embracing such practices could help Pakistan not only address re-
source challenges but also foster sustainable economic development. This research explores
how applying circular economy principles, especially through the use of recycled materials,
can help tackle Pakistan’s economic and environmental challenges. By using advanced
econometric analysis, it provides insights and recommendations that aim to inform both
policymakers and the academic community on pathways toward sustainable growth.

2. Literature Review
Since gaining independence in 1947, Pakistan has faced significant economic chal-
lenges, shaped by a complex mix of political instability, inadequate infrastructure, and
inconsistent economic policies. Early on, the country inherited several British administra-
tive institutions, which contributed to its initial development. However, Pakistan’s nascent
democratic process and evolving institutions struggled to foster sustained growth. In the
1960s, despite limited natural resources and political instability, Pakistan’s economy grew
at an average GDP rate of 6.8%, outpacing India’s growth. Analysts attribute this success to
strict government-led planning strategies [7]. However, this growth occurred alongside the
establishment of an authoritarian streak in Pakistan’s economic management, a feature that
persisted until 1971. The shift toward democracy thereafter led to inconsistent economic
management, undermining the long-term stability [7].
From the 1990s onward, Pakistan implemented various liberalization policies, including
privatization, deregulation, and trade reforms, to stimulate internal and external growth [8].
Although these reforms aimed to strengthen the economy, they failed to fully protect it from
international and domestic shocks. Pakistan demonstrated resilience during the Asian finan-
cial crisis (1998–2002), but its economic momentum was slowed by inflation, rising external
debt, and unfavorable terms of trade [8]. Additionally, structural weaknesses in key sectors
like agriculture further hindered sustainable growth. The agricultural sector, once a dominant
contributor to GDP, suffered from water scarcity, poor management, and climatic changes,
which exacerbated the fiscal deficits and reduced the sector’s contribution to the GDP [9].
Various theoretical perspectives have explored the relationship between political regimes
and economic development, often yielding conflicting conclusions. Table 1 summarizes
key arguments from the literature on the impact of democracy versus authoritarianism on
economic growth and applies these findings to the context of Pakistan. This comparison
highlights how the political environment has influenced Pakistan’s economic trajectory and
institutional development.

Table 1. Theoretical perspectives on the impact of political regimes on economic development and
their application to Pakistan.

Main Argument Key Findings Application to Pakistan Reference

Southeast Asia’s growth is attributed to Pakistan’s early economic growth under
Authoritarian regimes can
state-led development under authoritarian military rule benefited from centralized
foster strong developmental [10]
regimes, emphasizing industrial policies and planning and state-led strategies, similar to
states in Southeast Asia.
export-driven growth. Southeast Asia’s development model.
World 2024, 5 1122

Table 1. Cont.

Main Argument Key Findings Application to Pakistan Reference

Pakistan’s authoritarian past limited secure
Democracy secures individual Democracies foster long-term growth by
property rights and hindered the
rights, including property securing property rights, creating stable [11]
development of long-term capitalist
rights, essential for growth. environments for capitalistic development.
institutions, impacting growth.
Pakistan’s political instability and weak
Democracy’s complexity can Democracy complicates decision making but
democratic institutions led to fragmented
hinder collective action but is is necessary for maintaining accountability [12]
governance, impeding effective long-term
essential for legitimacy. and decentralization in development.
economic planning.
Economic growth is Pakistan’s struggle with political instability
Human capital, rule of law, and openness
influenced by human capital, and weak governance has limited human
drive growth, while high fertility rates and [13]
rule of law, and international capital development and the rule of law,
high government consumption impede it.
openness. affecting sustainable growth.
Pakistan’s democratic practices are Pakistan’s “grey zone” between democracy
Pakistan is a hybrid regime,
undermined by military intervention in and authoritarianism restricts true
with democracy constrained [14,15]
political and economic decisions, limiting democratic accountability and stifles
by military influence.
full democratic functioning. long-term economic reforms.
Frequent military coups in Pakistan, in Political instability, including military
Pakistan’s political instability
contrast to India’s stable democracy, have interventions, delayed Pakistan’s democratic
contrasts with India’s [16]
contributed to economic instability and consolidation, contributing to its slower
democratic consolidation.
delayed constitution making. economic growth compared to India.
Economic liberalization in the late 1990s and Pakistan’s vulnerability to external shocks
Pakistan’s economy faced
early 2000s helped to stabilize growth, highlights the need for diversified growth
shocks but showed resilience [17]
despite regional crises such as sanctions and and stronger institutions to sustain
during key periods.
the global recession. economic progress in the long term.

Bruns and Ioannidis (2020) have emphasized the importance of demography, trade
openness, education, and investment as critical factors in promoting economic growth,
aligning with Pakistan’s economic reforms during this period. However, the benefits of
such reforms were uneven [18]. Pegkas et al. (2020) explored how human capital and trade
openness are essential for long-term economic growth, findings that also apply to Pakistan,
where these factors have been underutilized [19]. The decline in total factor productivity
(TFP) across sectors, noted by Siddique (2023), points to inefficiencies in labor and capital
utilization, contributing to slower economic growth [20]. While these studies provide
valuable insights into individual aspects of Pakistan’s economy, they often analyze issues
in isolation. A more comprehensive approach is required to understand the interplay of
macroeconomic and sectoral factors. Barro (2003) highlighted governance, international
openness, and human capital as key drivers of economic growth, while pointing out that
high government consumption and fertility rates could impede progress [13]. Building
on this, the current study applies advanced econometric models to examine the relation-
ships between key macroeconomic variables such as FDI, energy consumption, and trade
openness, while also considering governance issues, political instability, and sectoral pro-
ductivity. Another emerging area of interest for promoting sustainable growth in Pakistan
is the circular economy (CE) framework, which has gained global traction as a model
for reducing waste, reusing materials, and promoting recycling. Ghisellini et al. (2016)
documented the success of CE strategies in reducing resource extraction and environmental
degradation, particularly in developed regions like Europe [4]. For example, CE initiatives
in Europe led to a 12% reduction in material extraction and a 9% decrease in greenhouse
gas emissions from 2010 to 2018 [5]. Recycling has played a critical role in these initiatives,
reducing the demand for raw materials and energy consumption. Stahel (2016) notes that
recycling metals and plastics can significantly lower energy use and emissions, contribut-
ing to both environmental sustainability and economic growth [21]. Despite the global
momentum, Pakistan has been slow to adopt CE strategies. Most studies on Pakistan’s
economy still focus on traditional growth models and fail to address the potential benefits
of integrating sustainability into economic development [20]. There is a growing need to
explore how CE principles, particularly recycling, can be tailored to Pakistan’s context to
World 2024, 5 1123

address issues like resource depletion, waste management, and economic resilience. The
Ellen MacArthur Foundation (2017) emphasizes that using recycled materials in industrial
processes not only reduces environmental harm but also promotes economic efficiency by
decreasing reliance on resource extraction [22]. In developed economies, the adoption of
CE has generated new opportunities in industries such as recycling and waste manage-
ment. Mazzanti and Zoboli (2008) demonstrated how Germany’s adoption of CE principles
has fostered both economic growth and environmental sustainability by encouraging the
use of recycled materials in construction and manufacturing [23]. The potential for such
practices in Pakistan remains largely untapped, though their application could contribute
significantly to sustainable development. This study builds upon the existing CE literature
by analyzing how Pakistan can incorporate these practices to promote long-term economic
resilience. By applying advanced econometric models, this research explores the potential
for integrating recycled materials into Pakistan’s industrial sectors, providing new insights
into the role of CE in developing economies.

3. Data and Methodology

The relationships between Pakistan’s key economic indicators—such as GDP, foreign
direct investment, trade openness and energy consumption—are examined in this study using
sophisticated econometric techniques. Pakistan’s economic growth is assessed using data
from reliable sources including the World Bank, the Pakistan Bureau of Statistics, and global
resources such as Google Scholar, ResearchGate, Web of Science, and Scopus. Johansen co-
integration tests are used to identify cointegrative relationships, augmented Dickey–Fuller unit
root tests are used to check stationarity, and a vector error correction model (VECM) is used to
examine both the short and long-term dynamics. Breusch–Godfrey and Ramsey RESET are
two diagnostic tests that can validate the results by confirming the stability and reliability of
the model. Supplementary Table S1 provides a comprehensive breakdown of the data sources
and methods.

4. Trends and Shocks in Pakistan’s Economic Growth

Pakistan has been one of the Asia’s fastest-growing economies in recent years, with
economic growth rates rising from 1.8% in 2000/01 to an average of 6–7% annually over the
last five years. These rates, while notable, are a reversion to the country’s long-term average;
over a 60-year period, Pakistan’s annual GDP growth rate has averaged 5.2%. During this
period, the manufacturing sector experienced growth exceeding 15%, exports doubled in US
dollar terms in 5 years, and an open trade regime has allowed imports to triple. Tax revenues
increased by 14%/year, reducing the fiscal deficit from an average of 7% in the 1990s to 4%.
Pakistan’s external debt burden was halved from 52% of GDP to 26%, and its debt servicing
ratio dropped from 60% to 28%, reflecting improved fiscal sustainability [24].
The country also experienced significant reductions in poverty, with official estimates
showing a decline from 34% to 24%, while World Bank estimates place it at 29%, Unemploy-
ment fell from 8.4% to 6.5%, reflecting an overall improvement in economic conditions [17].
Historically, Pakistan’s growth benefitted from trade with East Pakistan and substantial foreign
aid, particularly from the U.S. and oil-rich Middle Eastern nations. Between 1961 and 1980,
Pakistan’s annual growth averaged 6%, compared to India’s 4% during the same period [25].
Despite limited natural resources and a fragile political foundation, the country
achieved notable growth in the 1960s and early 2000s, demonstrating the impact of
government-led planning strategies [26].
Pakistan’s GDP growth rate has fluctuated significantly over the years. In 2004, the
economy achieved its highest growth rate of 7.83%, following successful policy reforms and
the country’s regained economic sovereignty from the IMF. However, the global pandemic
in 2020 caused a sharp contraction in GDP. These fluctuations are visually represented in
Figure 1, which illustrates the country’s GDP growth rate from 2000 to 2022, based on data
from the World Bank.
 Pakistan’s GDP growth rate has fluctuated significantly over the years. In 2004, the
economy achieved its highest growth rate of 7.83%, following successful policy reforms
and the country’s regained economic sovereignty from the IMF. However, the global
pandemic in 2020 caused a sharp contraction in GDP. These fluctuations are visually
World 2024, 5
represented in Figure 1, which illustrates the country’s GDP growth rate from 20001124 to
2022, based on data from the World Bank.

10

-2

Figure
Figure 1.
1. GDP
GDP growth
growth rate
rate of
of Pakistan
Pakistan from 2000 to
from 2000 to 2022.
2022. The
The left y-axis represents
left y-axis represents aa percentage
percentage
scale ranging from −2.00% to 8.00%. Growth rates, percentage changes, or other similar data that
scale ranging from −2.00% to 8.00%. Growth rates, percentage changes, or other similar data that can
can fluctuate over time can be measured on this scale. Based on the specific values on the y-axis and
fluctuate over time can be measured on this scale. Based on the specific values on the y-axis and the
the plotted data points, the magnitude of the percentage change is likely indicated on the x-axis.
plotted
Source: data
Worldpoints,
Bankthe magnitude of(accessed
(worldbank.org the percentage
on 11 change is likely indicated on the x-axis. Source:
June 2024).
World Bank (worldbank.org (accessed on 11 June 2024)).
5.
5. Internal
Internal and
and External
External Challenges
Challenges to to Pakistan’s Economic Growth
Pakistan’s Economic Growth
Pakistan’s
Pakistan’s economic
economic growth
growth isis shaped
shaped byby aa mix
mix of
of internal
internal and
and external
external challenges,
challenges,
each
each affecting the country’s progress in different ways. Internally, factors such
affecting the country’s progress in different ways. Internally, factors such as small
as small
and
and medium
medium enterprises
enterprises (SMEs),
(SMEs), labor
labor market
market rigidity,
rigidity, tax
tax evasion,
evasion, regional
regional inequalities,
inequalities,
and
and bureaucracy have a strong influence on growth. SMEs play a key role
bureaucracy have a strong influence on growth. SMEs play a key role in
inthe
theeconomy,
economy,
contributing
contributing more
more than
than 30%
30% to
to GDP
GDP andand 25%
25% to
to exports,
exports, but
but they
they face
face significant
significant hurdles,
hurdles,
especially
especially in securing funding
in securing funding and
and dealing
dealing with
with complicated
complicated regulations
regulations (Table
(Table2).2).

Table 2. Internal factors affecting economic growth in Pakistan.

Factor Description Corrective Measures References

SMEs significantly contribute to Pakistan’s GDP
Enhance SME financing options, simplify
Small and Medium and employment but face challenges such as
regulatory processes, improve infrastructure, [27,28]
Enterprises (SMEs) limited access to finance, complex regulations,
and support SMEs in international markets.
poor infrastructure, and limited market access.
Rigid labor laws, high costs of hiring and firing,
Reform labor laws to increase flexibility,
and skill mismatches hinder labor market
Labor Market Rigidity invest in skill development programs, and [29,30]
efficiency. Unions also affect productivity
improve employer–worker collaboration.
through shutdowns and disputes.
Widespread tax evasion due to a complex tax
Simplify the tax system, strengthen tax
system and corruption, depriving the
Tax Evasion enforcement, and reduce corruption in tax [7,31]
government of revenue for public services and
administration.
infrastructure.
Significant disparities between urban and rural
areas, with urban centers receiving better Increase investment in rural infrastructure,
Regional Inequalities infrastructure, education, and healthcare, while education, and healthcare, and ensure [32,33]
rural areas, particularly Balochistan and Khyber equitable resource allocation across regions.
Pakhtunkhwa, lag behind.
Bureaucratic inefficiencies and widespread
Streamline bureaucratic procedures, enforce
Bureaucracy and corruption slow down business processes,
anti-corruption measures, and create [29,34]
Corruption discourage foreign investment, and create an
transparent business environments.
unfavorable business environment.

On the external side, political instability and terrorism have harmed Pakistan’s ability
to attract foreign direct investment (FDI), which dropped from USD 8 billion in 2007 to
USD 3.5 billion in 2022 (Figure 2, Table 3). While SMEs struggle with internal barriers, the
 and limit Pakistan’s ability to attract foreign issues, and create
Improve a stable geopolitical
the investment climate,
There are limited
direct FDI inflows
investment due to security
(FDI). environment.
Foreign Direct stabilize the political environment,
concerns, political instability, and inadequate Improve the robust
investment climate, to [7,31]
Investment (FDI) There are limited FDI inflows due to security and develop infrastructure
Foreign Direct infrastructure. stabilize the political environment,
concerns, political instability, and inadequate attract FDI. [7,31]
Investment
World 2024, 5 (FDI) and develop robust infrastructure to 1125
infrastructure.
attract FDI.
Additionally, the labor market rigidity within Pakistan makes it hard for businesses
to respond to changes in demand. The unemployment rate increased slightly from 6.34%
Additionally, the labor
country’s market rigidity within Pakistanconcerns,
makes it making
hard for it
businesses
in 2021 to international
6.42% in 2022image
(Figureis2),
undermined by security
showing ongoing challenges in the difficult
labor market to
(Table
to respond
attract to
foreign changes in
investors. demand. The unemployment rate increased slightly from 6.34%
2).
in 2021 to 6.42% in 2022 (Figure 2), showing ongoing challenges in the labor market (Table
2).

Figure 2.2. Foreign

Figure Foreign direct
directinvestment,
investment, net
netinflows
inflows(% (%ofofGDP)—Pakistan
GDP)—Pakistan2000–2022.
2000–2022. Source:
Source: World
World
Bank
Figure(worldbank.org
2. Foreign (accessed
direct on
investment,1 April
net 2024).
inflows The
(% ofFDI ratio is
GDP)—Pakistanrepresented on
2000–2022.the y-axis
Source:
Bank (worldbank.org (accessed on 1 April 2024)). The FDI ratio is represented on the y-axis in Figure 3.in Figure
World
3. From
Bank 2000 to 2022, (accessed
(worldbank.org the valuesonranged
1 April from 0 The
to 3.5,
FDIreflecting the FDI valuethe
of y-axis
the netininflows of
From 2000 to 2022, the values ranged from2024). ratio the
0 to 3.5, reflecting is represented
FDI value on
of the net inflowsFigure
of the
the GDP (Gross Domestic Product).
3. From 2000 to 2022, the values ranged from 0 to 3.5, reflecting the FDI value of the net inflows of
GDP (Gross Domestic Product).
the GDP (Gross Domestic Product).

Figure 3. Unemployment rate in Pakistan (2000–2022) Source: World Bank (worldbank.org

Figure3.3. Unemployment
Unemployment rate
rate in Pakistan (2000–2022) Source: World Bank (worldbank.org
Figure
(accessed on 05 May 2023). in Pakistan (2000–2022) Source: World Bank (worldbank.org (accessed
(accessed on 05 May 2023).
on 5 May 2023)).
Figure 2 shows the unemployment rate on the y-axis. Each value indicates the
Figure 2 shows the unemployment rate on the y-axis. Each value indicates the
percentage
Table of the
3. External workforce
factors affectingthat is unemployed
economic growth ineach year from 2000 to 2022, ranging from
Pakistan.
percentage of the workforce that is unemployed each year from 2000 to 2022, ranging from
0.00 to 7.00.
Factor 0.00 to 7.00.
Description Corrective Measures References
This
This is worsened
is worsenedby byoutdated
outdatedlaborlaborlaws
lawsand and a amismatch
mismatch between
between thethe skills
skills available
available
Frequent government changes, coups, and policy
Political Instability inconsistenciesin
in the workforce
the foreign
hinder workforce and
and what
and domestic
what employers
employers need.
investment,
need.
Strengthen On
On and the
democratic other
theensure
otherpolicyhand,
institutions,
hand, promoteexternal
political factors like weak
external factors like weak
[35,36]
stability, continuity.
governance
leading to economic affect
governance affect the country’s
uncertainty.
the country’sability
abilitytotomanage
manageeconomic economicpolicies policies effectively,
effectively, which
which
Terrorism andhurts
internal the overall business
business environment
environment (Table 3).3).So,So,while
while internal factors affectjobjob
violence, influenced by regional
conflicts, createhurts theandoverall (Table internal factors affect
Enhance national security measures, promote cross-border
Terrorism and insecurity discourage both domestic
Violence creation and business operations, external
cooperation,
creation and business operations, external governance
and foreign investment, especially in large projects such governance
and address regionalissues
conflictsmake
issues make it hard for Pakistan to to
it
to create ahard
stable for Pakistan
[37,38]
environment for investment.
maintain as CPEC.
stability and growth in the long term.
maintain stability and growth in the long term.
Corruption and inefficient governance structures hinder
Strengthen governance, improve transparency, and ensure
the implementation of policies and regulations,
Weak Governance effective regulatory frameworks to promote good [30,39,40]
exacerbating economic challenges such as inflation, low
governance.
growth, and balance of payments issues.
Strained relations with neighboring countries, particularly Foster diplomatic relations with neighboring countries,
Foreign Policy
India and Afghanistan, affect trade and limit Pakistan’s resolve trade issues, and create a stable geopolitical [41]
Challenges
ability to attract foreign direct investment (FDI). environment.
Improve the investment climate, stabilize the political
Foreign Direct There are limited FDI inflows due to security concerns,
environment, and develop robust infrastructure to attract [7,31]
Investment (FDI) political instability, and inadequate infrastructure.
FDI.
World 2024, 5 1126

Additionally, the labor market rigidity within Pakistan makes it hard for businesses to
respond to changes in demand. The unemployment rate increased slightly from 6.34% in 2021
to 6.42% in 2022 (Figure 2), showing ongoing challenges in the labor market (Table 2).
Figure 2 shows the unemployment rate on the y-axis. Each value indicates the per-
centage of the workforce that is unemployed each year from 2000 to 2022, ranging from
0.00 to 7.00.
This is worsened by outdated labor laws and a mismatch between the skills available
in the workforce and what employers need. On the other hand, external factors like weak
governance affect the country’s ability to manage economic policies effectively, which hurts
the overall business environment (Table 3). So, while internal factors affect job creation
and business operations, external governance issues make it hard for Pakistan to maintain
stability and growth in the long term.
Tax evasion is another serious internal problem, with about half of the potential tax
base going uncollected. This leads to a shortage in government revenue, which affects pub-
lic services and infrastructure development (Table 2). Meanwhile, strained relations with
neighboring countries, particularly India and Afghanistan, further complicate Pakistan’s
economic outlook by limiting trade and foreign investment (Table 3). Although tax evasion
hurts Pakistan domestically by reducing the available funds for development, foreign
policy challenges limit the country’s access to international markets and opportunities
for growth.
Regional inequalities within Pakistan also remain a pressing internal issue. Cities
like Karachi and Lahore benefit from better infrastructure, healthcare, and education,
while rural areas, especially in Balochistan, lag behind (Table 2). These inequalities create
barriers to equal opportunity across the country. On the external side, terrorism and
political instability affect both urban and rural areas by creating insecurity, which further
discourages investment and hinders development (Table 3). While regional disparities
mainly affect parts of the country, external security issues impact the entire nation, making
it harder to achieve consistent growth.
Lastly, bureaucracy and corruption are deeply rooted in internal challenges. Compli-
cated administrative processes and corrupt practices slow down business activities and
make Pakistan less attractive for investment (Table 2). At the same time, weak governance
structures on the external front create similar difficulties in implementing effective poli-
cies and reforms, which are essential for sustainable growth (Table 4). Both bureaucracy
and poor governance, whether internal or external, make it harder for Pakistan to make
meaningful progress.

Table 4. Growth obstacles and corrective measures.

Obstacle Description Corrective Measure References

Lack of energy and transportation Invest in renewable energy sources and upgrade
Infrastructure Deficit [42,43]
infrastructure limits productivity. transportation systems.
High Macroeconomic Fiscal instability and inflation reduce investor Implement sound fiscal policies to stabilize the
[8]
Risks confidence. economy.
Low Foreign Direct High country risk and lack of international Enhance political stability and improve the
[15,18]
Investment (FDI) finance limit FDI inflows. investment climate.
Poor Access to Finance Expand microfinance and improve banking
Limited access to credit restricts SME growth. [27,28]
for SMEs services for SMEs.
Complex tax systems lead to lower revenue Simplify the tax system and enhance collection
Taxation Inefficiency [44,45]
collection. efficiency.
Corruption and inefficient governance hinder Strengthen governance structures, reduce red
Governance Issues [30,32,33]
economic growth. tape, and enforce anti-corruption measures.
Promote innovation and support diversification
Slow Economic
Over-reliance on a few sectors limits resilience. in technology, services, and manufacturing [46,47]
Diversification
sectors.
World 2024, 5 1127

Pakistan’s economic development is beset with serious obstacles from both external
and internal sources. The domestic economy is primarily impacted by internal problems
that restrict growth prospects, such as labor market inefficiencies, regional disparities, and
the challenges faced by SMEs. A wider range of external factors impact Pakistan’s capacity
to draw investment and engage in the global economy, including political instability, terror-
ism, and inadequate governance. Achieving sustainable economic growth will depend on
addressing both of these sets of issues, as shown in Tables 1–3.

6. Conclusions
This study identifies key internal and external factors hindering Pakistan’s economic
growth since independence. Internally, problems include inefficient bureaucracy, cor-
ruption, labor market rigidity, tax evasion, inadequate support for SMEs, and regional
inequalities. Externally, political instability, weak governance, foreign policy challenges,
and inadequate infrastructure discourage investment and disrupt economic activity. In ad-
dition, reliance on low-technology exports such as cotton textiles reduces competitiveness
in global markets and makes the economy vulnerable to external shocks. Addressing these
challenges requires reforms in governance, bureaucracy, and infrastructure, with a focus on
supporting SMEs, reducing corruption, and attracting investment. Macroeconomic stability
is critical to restoring investor confidence. Adopting circular economy (CE) practices, such
as using recycled materials, could improve economic resilience and sustainability. The
study is limited by its reliance on historical data and linear econometric models, which may
not fully capture current economic dynamics. Regional differences between provinces and
sectors may also impact the generalizability of the results. Further research using real-time
data and industry-specific approaches would provide more detailed insights. The adoption
of CE practices faces challenges including inadequate waste management infrastructure,
regulatory barriers, and SME readiness. Political instability and political discontinuity
could hinder long-term economic reforms. External factors such as global market changes
and fluctuations in foreign investment could also impact the effectiveness of the proposed
strategies. The study recognizes these limitations and emphasizes the need for further
research and policy development to ensure sustainable economic growth for Pakistan.

Supplementary Materials: The following supporting information can be downloaded at: https://
www.mdpi.com/article/10.3390/world5040056/s1, Table S1: Overview of data sources, variables, and
methods used in this study, including GDP data from the World Bank and sectoral data for recycled
materials usage from the Ellen MacArthur Foundation.
Author Contributions: Conceptualization, N.A.; methodology, H.A.K.; validation, N.A., H.A.K. and
O.K.B.; formal analysis, N.A. and H.A.K.; investigation, O.K.B.; resources, H.I.A.; data curation, N.A.
and H.I.A.; writing—original draft preparation, N.A.; writing—review and editing, N.A. and H.A.K.;
visualization, H.I.A.; supervision, O.K.B. All authors have read and agreed to the published version
of the manuscript.
Funding: This research received no external funding.
Acknowledgments: Naveed Ali was supported by a PhD program in Political Science at the Uni-
versity of Campania “Luigi Vanvitelli”. We also extend our gratitude to Dr. Ahsanullah Unar of the
Department of Precision Medicine at the University of Campania “Luigi Vanvitelli” for his invaluable
assistance in our study.
Conflicts of Interest: The authors declare no conflicts of interest.

References
1. World Bank. Worldwide Governance Indicators, DataBank. 2022. Available online: https://databank.worldbank.org/source/
worldwide-governance-indicators (accessed on 11 June 2024).
2. NDMA. National Disaster Management Authority; National Disaster Management Authority of Pakistan: Islamabad, Pakistan, 2010.
3. Khan, M.K.; Teng, J.-Z.; Khan, M.I.; Khan, M.O. Impact of globalization, economic factors and energy consumption on CO2
emissions in Pakistan. Sci. Total Environ. 2019, 688, 424–436. [CrossRef] [PubMed]
World 2024, 5 1128

4. Ghisellini, P.; Cialani, C.; Ulgiati, S. A review on circular economy: The expected transition to a balanced interplay of environmen-
tal and economic systems. J. Clean. Prod. 2016, 114, 11–32. [CrossRef]
5. European Environment Agency, Greenhouse Gas Emissions Under the Effort Sharing Legislation. 2023. Available online: https:
//www.eea.europa.eu/en/datahub/datahubitem-view/e9ce7eb8-8439-4f2f-96f8-279a36c5fa7a (accessed on 20 October 2024).
6. International Aluminium Institute. International Aluminium Institute. 2024. Available online: https://international-aluminium.
org/ (accessed on 20 October 2024).
7. Khan, A. Role of Institutions and Policies in Economic Growth: Across Country Analysis. Ph.D. Thesis, Federal Urdu University
of Arts, Science and Technology, Islamabad, 2018.
8. Iqbal, Z.; Sattar, A. The Contribution of Worker’s Remittances to Economic Growth in Pakistan; Pakistan Institute of Development
Economics: Islamabad, Pakistan, 2005.
9. Azam, A.; Shafique, M. Agriculture in Pakistan and its Impact on Economy—A Review. IJAST 2017, 103, 47–60. [CrossRef]
10. Wade, G.; Chin, J.K. (Eds.) China and Southeast Asia: Historical Interactions, 1st ed.; Routledge Studies in the Modern History of
Asia; Routledge/Taylor & Francis Group: London, UK; New York, NY, USA; p. 132.
11. Olson, M. Dictatorship, democracy, and development. Am. Polit. Sci. Rev. 1993, 87, 567–576. [CrossRef]
12. Bardhan, P. Economics of development and the development of economics. J. Econ. Perspect. 1993, 7, 129–142. [CrossRef]
13. Barro, R.J. Determinants of economic growth in a panel of countries. Ann. Econ. Financ. 2003, 4, 231–274.
14. Jalal, A. Democracy and Authoritarianism in South Asia: A Comparative and Historical Perspective; Cambridge University Press:
Cambridge, UK, 2009.
15. Talbot, I. Pakistan’s hybrid regime. In Routledge Handbook of Autocratization in South Asia; Routledge: London, UK, 2021; pp. 141–150.
16. Ganguly, S.; Fair, C.C. The structural origins of authoritarianism in Pakistan. Commonw. Comp. Polit. 2013, 51, 122–142. [CrossRef]
17. Hussain, A. Institutions, Economic Growth, and Participatory Development. In Pakistan: Moving the Economy Forward; Amjad, R.,
Burki, S.J., Eds.; Cambridge University Press: Cambridge, UK, 2013.
18. Bruns, S.B.; Ioannidis, J.P.A. Determinants of economic growth: Different time different answer? J. Macroecon. 2020, 63, 103185.
[CrossRef]
19. Pegkas, P.; Staikouras, C.; Tsamadias, C. On the determinants of economic growth: Empirical evidence from the Eurozone
countries. Int. Area Stud. Rev. 2020, 23, 210–229. [CrossRef]
20. Siddique, O. Total Factor Productivity and Economic Growth in Pakistan: A Five-Decade Overview. Pak. Dev. Rev. 2023, 61, 583–602.
[CrossRef]
21. Stahel, W.R. The circular economy. Nature 2016, 531, 435–438. [CrossRef] [PubMed]
22. MacArthur, E. Beyond plastic waste. Science 2017, 358, 843. [CrossRef] [PubMed]
23. Mazzanti, M.; Zoboli, R. Waste generation, waste disposal and policy effectiveness: Evidence on decoupling from the European
Union. Resources 2008, 52, 1221–1234.
24. Husain, I. Pakistan’s economy and regional challenges. Int. Stud. 2018, 55, 253–270. [CrossRef]
25. Sikander, M. A Tale of 2 Economies: India and Pakistan. Business Recorder. Available online: https://www.brecorder.com/
news/40242515 (accessed on 17 May 2023).
26. Sajjad, S. Pakistan as a Political Economy—Macro Pakistani. Available online: https://macropakistani.com/pakistan-as-a-
political-economy/ (accessed on 22 February 2024).
27. Afraz, N.; Hussain, S.T.; Khan, U. Barriers to the growth of small firms in pakistan: A qualitative assessment of selected light
engineering industries. LJE 2014, 19, 135–176. [CrossRef]
28. Ali, S.; Jabeen, M.; Khattak, B. Constraints to the growth of small and medium-sized Enterprises in Khyber Pakhtunkhwa (KP),
Pakistan: A District-Level Survey Analysis. Bus. Econ. Rev. 2021, 13, 1–22. [CrossRef]
29. Ishfaq, A. View of Impact of Corruption on Economic Growth in Pakistan: An Analysis. Available online: https://ojs.jdss.org.pk/
journal/article/view/399/535 (accessed on 13 February 2024).
30. Auerbach, J.U.; Azariadis, C. Property rights, governance, and economic development. Rev. Dev. Econ. 2015, 19, 210–220.
[CrossRef]
31. Attari, I.J.; Kamal, Y.; Attaria, S.N. The causal link between foreign direct investment (FDI) and economic growth in Pakistan
economy. J. Commer. 2011, 3, 61–68.
32. Kugelman, M.; Husain, I. Pakistan’s Institutions: We Know They Matter, but how can They Work Better? 2018. Available online:
https://www.wilsoncenter.org/publication/pakistans-institutions-we-know-they-matter-how-can-they-work-better (accessed
on 25 November 2021).
33. World Bank. Pakistan Overview: Development News, Research, Data World Bank. 2023. Available online: https://www.
worldbank.org/en/country/pakistan/overview (accessed on 6 February 2024).
34. World Bank. The World Bank Annual Report. 2013. Available online: http://en.cairochamber.org.eg/Encyclo/7542189372270007
world%20bank.pdf (accessed on 14 February 2024).
35. Memon, A.P.; Memon, K.S.; Shaikh, S.; Memon, F. Political Instability: A case study of Pakistan. J. Pol. Stud. 2011, 18, 31–43.
36. Haider, A.; ud Din, M.; Ghani, E. Consequences of Political Instability, Governance and Bureaucratic Corruption on Inflation and
Growth: The Case of Pakistan. Pak. Dev. Rev. 2011, 50, 773–807. [CrossRef]
37. Acemoglu, D.; Robinson, J.A. Why Nations Fail: The Origins of Power, Prosperity and Poverty. ASEAN Econ. Bull. 2012, 29, 168.
[CrossRef]
World 2024, 5 1129

38. Zaidi, S.A. Issues in Pakistan’s economy. In OUP Catalogue; Oxford University Press: Oxford, UK, 2005.
39. Husain, I. Pakistan and Indian Economies Compared; IBA Karachi: Karachi, Pakistan, 2011.
40. Khan, S.; Shamim, S.J. Role of State Institutions in Governance and Public Policy Making in Pakistan: Perspectives from Academia.
2023. Available online: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4579680 (accessed on 20 October 2024).
41. Ahmed, S.S.; Javed, A.; Manzoor, R. Regional trade and investment value chains in South Asia: Perspectives from Pakistani
enterprises. Quest J. Mgt. Soc. Sci. 2019, 1, 165–180. [CrossRef]
42. Majeed & Partners. A Brief Introduction to the Legal Framework Governing Public Private Partnerships in Pakistan—Majeed
& Partners. 2021. Available online: https://www.mplaw.com.pk/2021/04/26/legal-regime-governing-public-private-
partnerships-in-pakistan/ (accessed on 15 July 2024).
43. Khan, A.H.; Kim, Y.H. Foreign direct investment. In Pakistan: Policy Issues and Operational Implications; Asian Development Bank:
Manila, Philippines, 1999.
44. Auerbach, A.J.; Hines, J.R., Jr. Taxation and Economic Efficiency; NBER Working Paper; NBER: Massachusetts, MA, USA, 2001.
[CrossRef]
45. Khalid, M.; Nasir, M. Tax Structure in Pakistan: Fragmented, Exploitative and Anti-growth. Pak. Dev. Rev. 2020, 59, 461–468.
46. Qadir, U. Revitalising Pakistan’s Industrial Sector: A Roadmap for Resilience and Innovation; Pakistan Institute of Development
Economics: Islamabad, Pakistan, 2023.
47. Pakistan Economic Survey. Pakistan Economic Survey 2018–2019. 2018. Available online: https://www.finance.gov.pk/survey/
chapters_19/7-Inflaton.pdf (accessed on 14 June 2024).

Disclaimer/Publisher’s Note: The statements, opinions and data contained in all publications are solely those of the individual
author(s) and contributor(s) and not of MDPI and/or the editor(s). MDPI and/or the editor(s) disclaim responsibility for any injury to
people or property resulting from any ideas, methods, instructions or products referred to in the content.