A little known fact about Hafiz Pasha is that, in the early 1970s, he served as what he calls a "minor speech-writer" for Zulfikar Ali Bhutto. A product of the febrile student politics and radical atmosphere of the late 1960s, he and many of his contemporaries who were educated abroad saw their return to Pakistan at the time as part of a mission to try and make a difference where they felt it was needed the most.

Pasha's time with Bhutto marked the start of a long career in public service — in 1990, he became the prime minister's advisor on finance and economic affairs and served as the federal caretaker minister for commerce in 1993. He also worked as deputy chairman the Planning Comission in the 1990s. His latest official assignment was the chairperson of the Prime Minister's Economic Advisory Council between 2010 and 2013. He has also worked as an assistant secretary general at the United Nations between 2001 and 2007.

Pasha's primary passion, however, was – and is – teaching. After the completion of his doctorate, he rejected offers from the top universities in the United States and helped set up the Applied Economics Research Centre (AERC) at Karachi University (KU), of which he later became the vice chancellor. He also taught at the Lahore School of Economics (LSE) and the Beaconhouse National University (BNU).

His wife, Ayesha Ghaus Pasha, is Punjab's finance minister, but he himself spends his time teaching and working as an independent economist, producing a constant stream of research and commentary on a number of issues ranging from the relationship between multilateral donors and Pakistan, to taxation and governance. In this interview, he reflects on his career in government and academia, his personal political journey and his views on the challenges facing Pakistan.

Hassan Javid. What was the culture of scholarship like in the 1970s? What were your experiences at KU at the time?

Hafiz Pasha. It was a golden period. The AERC at its peak had over a dozen PhD faculty members. There are numerous examples of people who studied and did research there and have done well in life —including the current finance secretary [Waqar Masood], Hafeez Sheikh, the former finance minister, and Riaz Riazzuddin, the deputy secretary of the State Bank of Pakistan. Unfortunately, as is the case with most public sector institutions, there has been a decline, a process of decay that later seeped in. I have recently gone back to the AERC and we have started an MPhil/PhD programme there but the faculty is nowhere near what it used to be.

Javid. What do you attribute this process of decay to?

Pasha. There are a number of reasons. For one, Karachi is in a special situation because the city itself has become hazardous, forcing people who had some market value to leave and go elsewhere. The other problem was the mushroom growth of private universities under [Pervez] Musharraf. A lot of people were drawn to these [private] universities, especially since salaries in public sector universities were not market-driven. This weakened faculties in public sector universities.

Javid. Do you feel that private sector universities are doing better in terms of research and scholarship?

Pasha. These [private universities] have become like factories. They generally have to deal with financial pressures and have to somehow or the other break even. There are two extremes [in higher education in Pakistan]. Public sector universities are funded by grants – which leads them to become soft and flabby – and the private sector model leads to universities becoming very efficient at the production [of graduates] with little incentive to pursue public good through research.

The good thing about the public university model in the 1970s and the 1980s – which is why I stayed in it and which is why I would like to return to it – was that it provided social mobility. Take the case of a man like Dr Waqar Masood. He did not pay much attention to his studies. I was urged by his family to mentor him, so I took him under my wing and found that he was very bright. He went through the two-year MPhil programme at KU and he topped [the exams]. He came from a middle-class family. There were students from even humbler backgrounds with similar stories.

This is in contrast with BNU, which I joined at the urging of my former cabinet colleague Sartaj Aziz. When I walked into BNU for my first lecture, there was nobody in the classroom. There is definitely a sense of entitlement among students who come from relatively upper-middle-class sections of our society.

The good thing about the public university model in the 1970s and the 1980s – which is why I stayed in it and which is why I would like to return to it – was that it provided social mobility.

Javid. ls there still potential for social mobility in Pakistan?

Pasha. One of my students has just done her MPhil on precisely this question. The evidence seems to be that there was an emergence of a middle class in the mid-2000s. After that, it has been contracting and the contraction is quite sizeable — 10 per cent to 15 per cent.

Javid. That is interesting because the narrative around middle class in Pakistan seems to be quite different ...

Pasha. Serious research based on Household Integrated Economic Survey data shows the middle class has stopped growing and is now declining. There are two or three key indicators that need to be considered. In dynamic countries, like China, skill premium is one of the main explanations as to why the middle class has prospered. [Skill premium] means returns on education. [In China], these returns are very high.

Over here, they are not. You will be surprised to hear that unemployment rate among the illiterate is lower than the unemployment rate among those who are literate in Pakistan. The highest unemployment rate is among graduates — at about 12 per cent as compared to the national unemployment rate of 6 per cent. During Musharraf's era, skill premium did increase. In the past five years, because of a lack of growth and other factors, it has shrunk back.

Javid. Is this because there is no demand for the skills that graduates have? Or is it that they do not possess the skills the market requires?

Pasha. I do not think it is an issue of compatibility. It is rather a lack of demand. While I was dean at the Institute of Business Administration (IBA), I was having a snack at a McDonald's in Karachi one day. A waiter there looked familiar to me and I asked him if I knew him He responded by telling me he was a 1997 IBA graduate. I asked him what the hell he was doing at McDonald's and he told me he couldn't get any other job.

Javid. This reminds me of another IBA graduate, Saad Aziz [accused of killing human rights activist Sabeen Mahmud] ...

Pasha. Yes, the one who went berserk out of frustration. The Arab Spring was also a middle class phenomenon. Here we are [dealing] with a middle class that is not growing and is, in fact, contracting. The silver lining we have is the rural middle class, because it is receiving a lot of remittances.

You would be surprised to learn that Khyber Pakhtunkhwa has the highest growth rate among the four provinces in Pakistan, over the past many years. It accounts for 30 per cent of all the remittances received in Pakistan even when its population is only about 17 per cent [of the national total]. If you add those remittances into the domestic incomes of people in Khyber Pakhtunkhwa, they have a higher per capita income than that in Punjab.

I have not really shared this finding with anyone because I would automatically be associated with Imran Khan and his party Pakistan Tehreek-e-Insaf (PTI). I am not political in that sense. In any case, the data I am referring to is for the time period before 2014. These developments, therefore, had already taken place [before PTI came into power in the province].

People in Khyber Pakhtunkhwa are not receiving just foreign remittances; they also receive domestic remittances from places like Karachi. If you add those up, the total amount comes to about two-thirds of Pakistan's remittances. Altogether, the flow of remittances into Khyber Pakhtunkhwa is about 10 billion us dollars.

Another interesting thing about Pakistan's demographics – which, again, has not been documented – is that the migratory patterns in the country have fundamentally altered. Historically, there has been a big link between Khyber Pakhhmkhwa and urban Sindh. This is still true, but in the past few years, things have changed. Now there are also big population flows from Khyber Pakhtunkhwa to Punjab —particularly to big cities. There are population flows from upper Sindh to Punjab, which is something I cannot really explain. About 250,000 people a year [are moving from Sindh to Punjab].

Javid. ls migration from Khyber Pakhtunkhwa to Punjab because of instability?

Pasha. Khyber Pakhtunkhwa is a consumption driven and service-oriented economy which is not generating jobs. There is hardly any industry in Khyber Pakhtunkhwa. So, I don't think the migration is linked to the war on terror. The bigger reason is the weakness of the province's own economy.

Javid. Does that imply that Punjab is doing well economically?

Pasha. In the Musharraf period, Sindh experienced the fastest growth. More recently, it has been Punjab. The unfortunate reality is – and this is based on years of research by two of my PhD students – that the economy in Balochistan is falling apart. Per capita income in Balochistan has been systematically falling over the past 15 years. No wonder you have an insurgency there. There is no development there, even though money was allocated for it by the National Finance Commission and Aghaz-e-Huqooq-e-Balochistan package. There is no trickle down [of this money]. This is entirely because of tribal chieftains. Money for development is siphoned off. The local power structure in Balochistan is part of the problem.

The other part of the country that really worries me in terms of development is interior Sindh. On some indicators, it is beginning to look as bad as Balochistan. This is because of the feudal system still prevalent in many areas there and, with all due respect, due to corruption and misgovenance of the ruling Pakistan Peoples Party (PPP) there.

Literacy rate in the whole of Pakistan has fallen in 2013-2014 from 60 per cent to 58 per cent, according to last year's Pakistan Social and Living Standards Measurement. Can you imagine a country where the literacy rate is falling? In Sindh, the fall has been the steepest — four per cent.

Javid. You have recently stated that the International Monetary Fund (IMF) has been too optimistic in its assessment of Pakistan's economy.

Pasha. The IMF has an interest in showing good performance by a party that has borrowed from it. This is for two reasons: firstly, it shows performance by the IMF staff so they have a personal motivation [in highlighting positive trends} and, secondly, the IMF does not want Pakistan to default. Pakistan was once considered perilously close to default so now they have an interest in pumping a lot of money in to avoid a default.

I was quoted in the Financial Times as saying I had never before seen as much fudging of official statistics as is happening now. I have spent my life working with these statistics and have known the data since the 1970s. The growth rate figures are manipulated, the investment figures are manipulated, the employment figures are manipulated, the inflation rate is manipulated.

Look at how blatant the manipulation is. In 2011-2012, our economy perked up a bit and grew by 4.4 per cent. Two years later, this government revised the figure downwards to 3.8 per cent in order to show that its own economic performance has been better [than the performance of the previous government].

The IMF is knowingly accepting these figures and this is what bothers me and other independent economists. The fudging distorts history for future generations. It is important to document economic history [with correct data].

Javid. A narrative has emerged in the last two years that this government is pro-business and is best suited to steer the economy forward. Do you think this is correct?

Pasha. That may have been true for the first and second Nawaz Sharif governments, but the current one is different. It has huge problems. Just look at the groups that are agitating against it. You have traders agitating against withholding tax, which is a very strange levy, and then you have the most powerful lobby in Pakistan, after the landlords, which is the All Pakistan Textile Mills Association. They could walk into my office unannounced when I was a minister and I simply had to accept that. They are agitating against the government because its policies are not pro-export. Then, you have a number of other professionals who are protesting — doctors, nurses, lady health workers. The list is endless.

Javid. Is it just that the government is incompetent?

Pasha. It is partly incompetence, but there is more. I had the pleasure of working with Sharif and not many people know that his economic instincts are good. Instinctively, he is a reformer who believes in big moves. This time round, Sharif is isolated and the government is effectively being run by the finance minister. What we are seeing is lack of vision and lack of leadership which [was not the case in} Sharif's first two tenures.

Benazir Bhutto was a watered-down socialist and Sharif was to the right of the centre —but at least we had democracy under them.

The first time around, he liberalised the economy before India and without the IMF's help. Unfortunately, he then insisted on picking a fight with the president. Had we sustained our momentum then, and not had such problematic politics, we would have matched India in terms of growth. [Former Indian prime minister] Manmohan Singh once told me that [India] had followed our reforms and succeeded because it had political stability and continuity while we had chaos and governments changing every two years. Investment will not take place in such an environment.

Javid. I believe investment is still very low.

Pasha. At the moment it is next to nothing, and has sunk to 0.3 per cent of the GDP. Under Musharraf – not that I am an apologist for him, but facts are facts – it had reached 3.3 per cent of the GDP. Unfortunately, Pakistan is no longer in the mainstream of international capital flows.

Javid. Is this because we continue to expect reform from a state that is fundamentally incapable of delivering it?

Pasha. That is probably true to a large extent. You need to have a clear diagnosis of the problem and identification of the reforms required. The problem comes when you get to implementation which becomes impossible for two reasons. One, there is no such implementation capacity in purely technical terms. The civil service is an embarrassment. Two, political considerations take over and frustrate your moves. The problem with the state is that its writ has become limited due to the presence of very powerful lobbies and vested interests.

I'll give you one small example. I have always had a tilt towards agriculture because I felt Pakistan's comparative advantage, particularly in Punjab, lay in agriculture. In the early 1990s, we used to have an export duty of 30 per cent on cotton so that its domestic price was 30 per cent lower than the global price. When I looked at this as an adviser to Sharif, I said to him this was wrong. Firstly, it was penalising the farmers by giving them a price 30 per cent less than the world price — in those days, we used to export a lot of cotton though now we have a deficit even for domestic consumption.

Secondly, it had created a perverse incentive structure for the industry in which all you had to do to make money was set up a small spinning factory. This was an implicit subsidy and explained why the textile industry in Pakistan had never gone beyond the spinning stage. It had been persisting for 20 years but I wanted to get rid of it.

It was very tough but, full credit to Sharif, he went ahead and did it despite external pressures. These kinds of problems are routine. The mafias are a problem. With all due respect, the biggest mafia today is the tax collector mafia. It is unbelievable how much corruption there was at the Federal Board of Revenue even at the time when I was a minister. It is much worse now.

Javid. Maybe it is because the same rent-seeking elites are generally in power?

Pasha. Absolutely right, and this is borne out by the work you are doing on dynastic politics. I remember that a former British High Commissioner, Nicolas Barrington (1989-1994), traced Pakistan's political dynasties in an article in the Herald. He found that 80 per cent of them were connected to land.

Javid. The work I am doing with my colleagues suggests there are about 400 dynastic families that have been dominating politics in Punjab since the 1970s.

Pasha. And a lot of them are linked to land. Land is a source of wealth and power.

Javid. This is interesting because more often than not, people will tell you that the power landed elite has declined due to land fragmentation. capitalist development, etc.

Pasha. A student of mine did research on land distribution in agriculture and found that there are 13.000 families in agriculture that own more than 150 acres of land each. It appears unbelievable but they own 10 per cent of Pakistan's total farm land. This is how skewed the landowning structure is.

Javid. In my own work I have found that the traditional category of the self-sufficient "middle peasant", owning between 12.5 to 50 acres, has virtually disappeared in Pakistan.

Pasha. Contrary to what is said about intergenerational transfers of land, what has actually happened is that farmers with large landholdings have become more competitive now that they have tube wells, tractors and other agricultural implements. They now rent land; their operational landholdings are thus increasing.

Beyond a certain point, they simply acquire the land they were earlier renting. This is the effect of what we call interlocking markets — once your position improves in one market, you also become stronger in another. The large farmer is becoming larger, not smaller. The so-called fragmentation has not taken place.

Javid. If it has taken place, it is at the lower end of the spectrum.

Pasha. That is right, Those who had two acres of land are forced to sell and now have one. There is no fragmentation at the top. The average landholding size of these 13.000 families is close to 400 acres of prime land and the most important factor in their favour, which explains why they have a comparative advantage, is access to irrigation water. With the increasing shortage of water, you will find land distribution in Pakistan even more skewed because [large scale farmers] pre-empt water supply to others completely.

Javid. Have things gotten worse since you were in government?

Pasha. Yes. They have gotten significantly worse for a number of reasons. Firstly, the quality of the bureaucracy has fallen. When I was asked to look after the Economic Advisory Council, I compared the officers in 2008-2009 with the ones who had worked with me 10 years ago and there was no comparison. They are scared. They are not willing to talk. They are not willing to highlight issues. They are not willing to take up a position. They simply wait for orders. They have a passive mindset.

The second issue is this whole rent-seeking thing. Compared to the 1970s or the 1980s, it is unambiguously worse. Now it has become part of the culture. A student of mine once came to my house and asked me why, if I had been a minister four times, I lived in such a small house and why I had an eight-year-old car. Why wasn't I driving around in a Land Cruiser like all the others? I told him I had stuck to my values which were given to me by my father who was chairman of the railway board and a very powerful officer but who made no money.

When I returned to Pakistan [in the 1970s], my father's position and my master's degree from Cambridge meant I could get all kinds of offers. I told my father that I did not want to work in a multinational corporation and that I wanted to teach in a public university. He was, of course, very unhappy because he was a part of the power structure [and rould have got me any prized job]. When I started teaching at KU in the early 1970s, my salary was only 1,200 rupees. Yet those were the happiest days of my life. I taught so many students from underprivileged backgrounds and the sense of satisfaction I had was huge.

Javid. What was your journey like — from being sympathetic to Zulfikar Ali Bhutto and his broadly socialist aspirations to being part of Sharif's governments in the 1990s?

Pasha. There were different socialist groups within Zulfikar Ali Bhutto's government. One was this extreme socialist group led by Mubashir Hasan, the finance minister. I belonged to the J A Rahim group which was socialist but a moderate one. I left [the Bhutto government] when Rahim sahib was removed [from the cabinet].

We belonged to Tariq Ali's generation [which was involved in] protests and politics of the late 1960s. For us, [being a socialist] was a natural transition. The Bhutto period felt like it had the same values that we had at Oxford and Cambridge. My father knew Aziz Ahmed who was a federal secretary at the time. Aziz Ahmed came to see my father and suggested that I help Zulfikar Ali Bhutto. So I became a minor speech-writer for Zulfikar Ali Bhutto who was then prime minister.

Between Zulfikar Ali Bhutto and Sharif and Benazir Bhutto, there was a period under a man named Ziaul Haq. For me, that was the worst period of my life [as it involved] head-on confrontation with the military. We could not write. We were censored. Every single word we wrote had to be approved by the military. One day, in the 1980s, the vice chancellor [of KU] informed me that he had received a call from the military authorities claiming that there were three Marxists in [the AERC] staff. I had a lot of respect for those colleagues. I told the vice chancellor that I did have them but I also had a member of Jamaat-e-Islami and others. He told me that he had been ordered to have the three Marxists sacked. To which I responded by saying hat I would send him four resignations.

The IMF came up with a programme that has essentially suffocated us. What we have done these past two years is that we have raised tax rates

I returned to my office and literally, half an hour later, received a call from the vice chancellor who told me he had decided to send in five resignations. The man stood by me and I tip my hat to him. He understood the importance of academic freedom. The result was that the army could not touch us.

Benazir Bhutto was a watered-down socialist and Sharif was to the right of the centre —but at least we had democracy under them. I could say to Sharif whatever I wanted. He used to get upset sometimes but he would listen to me. We had complete freedom.

There was another reason why I took a more moderate position. The [first] split that took place in the PPP was over nationalisation of the economy. There were two views: one was the Mubashir Hasan view, which was to nationalise everything, right down to the chakkis [micro flour mills] in villages; the other was a more moderate view, which was what India had done, which is that the public sector directs the economy not by nationalisation, but by encouraging new investment — and that at best we nationalise banks so that we have leverage over the private sector [through the provision of credit].

What we were saying was to nationalise the banks and use the additional resources to invest in the upper end technology such as steel, chemicals and cement and infrastructure like Tarbela Dam and Port Qasim, etc. We lost the battle. What resulted was too extreme a move and Pakistan scared off private investment for 20 years.

After all, you need an entrepreneurial class to rehabilitate the economy. The state could not run everything. When Sharif came to power, it was a big signal. This was an opportunity to stage a comeback. It would have worked had it not been for Sharif's battles with Ghulam Ishaq Khan. The end result was that all the policies went down the drain. You need sustainability and you need continuity to be able to succeed with any set of policies.

While working with Sharif, I did many things that were quite semi-socialist in character. I completely reformed income tax and introduced a withholding tax regime, the end result of which was that income tax revenues went up by 3 percentage points of the GDP. We used that revenue for building infrastructure. The kind of inclusive growth you saw in the 1990s hasn't been seen since. The other big reason we had success was that agriculture grew in the 1990s; food security was at its best.

Javid. Where do you think we are going now? The budget deficit is getting worse. The revenues are not going up much. Is it again a question of capacity?

Pasha. It is also a question of strategy. This time round, we are stuck with this backlog of due payments. The IMF came up with a programme that has essentially suffocated us. What we have done these past two years is that we have raised tax rates. We have not really broadened the tax base. There have been dramatic increases [in tax rates J. Do you know what the tax rate on high-speed diesel oil is these days? 47.5 per cent —on a basic requirement for transport.

The government has raised the price of electric power because it wants to cut subsidies. This has suffocated economic growth. The correct strategy is to have a balanced approach whereby you have lower tax rates but also allow the tax base to grow. In my forty years of experience of sometimes managing this economy, we do better when we seek more growth. And for that to happen. we do not raise tax rates; we allow the tax base to grow.

Javid. But raising tax rates and cutting public spending is what the IMF demands everywhere ...

Pasha. That is one mistake of the IMF. The other thing that is going wrong is that our social indicators are getting worse. Do you realise that Pakistan's Human Development Index [which measures life expectancy, education and per capita income] has remained stagnant since 2008? And who is ahead of us now? Bangladesh, our poor cousin who we use to scorn. If you read Amartya Sen's book, An Uncertain Glory, there is a section where he laments India's lack of inclusive growth. He mentions that India's social indicators are worse than Bangladesh's but then, in brackets, says that at least they are better than Pakistan's.

It is so depressing. What have we achieved in 70 years? Sometimes, I think that my father's generation and mine have failed. It is all very tragic. Look at our debt overhang. If we do the numbers correctly and not fudge them, we owe close to 70 billion US dollars in foreign debt. Our exports are hardly 24 billion US dollars. Our foreign debt is almost three times as much. The corresponding ratio for other South Asian countries is three times less than ours. In Bangladesh, the amount of foreign debt is just 80 per cent of the export earnings; same is the case with India. By the end of this year. our foreign debt will be 300 per cent of our export earnings

Javid. And we keep borrowing more ...

Pasha. We take pride in this. We have a headline saying we have been given 900 million US dollars by the IMF. We celebrate this.

Javid. What can be done?

Pasha. What worries me is the collapse of values among people at large. We don't have a middle class fighting for rights. We have a middle class that wants to join the elite. This is our tragedy. Unless these values change, and there is a premium on freedom and honesty and competence, nothing will happen.

Maybe you can make the argument that Pakistan, like India, will just muddle through its crises but the problem is that each time you have a crisis, something gives within your body and you become weaker. You come back but you do so partially.

Javid. The solution, therefore, cannot be a purely technical or economic one?

Pasha. There has to be a political process. The answer has to come from the grassroots, from the people. You cannot have it transmitted from the top. We tried that once or twice. I remember hearing lectures from military generals – I am at least proud that I never joined a military government –but you cannot have a revolution from the top. Hopefully we'll fumble along for another generation ...

Javid. Perhaps we are too big to fail?

Pasha. Yes. Not only the size but also the fact that we are a nuclear power ensures a kind of international safety net so that Pakistan doesn't implode.

Javid. What about China and the China-Pakistan Economic Corridor (CPEC)? People increasingly seem to believe that our economic situation will all be okay because China will bail us out. That also seems to be the impression coming from the government.

Pasha. I had a seven-year long relationship with the Chinese leadership when I was assistant secretary general at the United Nations. The Chinese have an extraordinarily wise leadership with an extremely long-term vision. They think about the next 20 years, not the next two.

The Chinese are changing gear. From being a shy, inward-looking economic power focusing essentially on efficiency and export, they are now beginning to acquire neocolonial characteristics. The Chinese leadership is convinced that resources in the world are finite and that they will not be able to sustain the high growth rates they have had for decades. They have become very outward looking and are buying up mineral locations in Mongolia, Myanmar, Latin America and Africa.

Their other concern is technology. They need to move to next-generation technologies. You see them buying all these sophisticated companies in Europe and the US.

As it turns out, Pakistan has neither of these two things. The only thing we have is location. The Chinese are worried that, in the event of any conflict in the Malacca Straits, only two American naval carriers will be required to block Chinese commerce. So they want alternative routes — CPEC being one of them.

Interestingly, the other route goes through India and Myanmar. This second one is better for them because it is closer to Shanghai; CPEC connects to Xinjiang. which is a backward province.

The bottom line about the Chinese is that they have a remarkably shrewd sense of self-interest. They are not doing this because they love us. They are doing this because it is strategically important for them.

What works in our favour, as you said, is that we are too big to fail and we also happen to be at the confluence of the Middle East and Central Asia.

This article was originally published in the Herald's December 2015 issue. To read more subscribe to the Herald in print.

The writer is an assistant professor of Political Science at the Lahore University of Management Sciences.