LAHORE: By embracing trade openness and AI-enabled productivity, Pakistan can move millions from subsistence livelihoods to middle-income stability. The examples already exist — in its textile mills, IT firms and agritech startups.
Pakistan, like rest of South Asia, is home to two parallel economies: one traditional and the other modern; and Pakistan illustrates this divide vividly. The traditional economy, employing the majority of Pakistanis, revolves around low-productivity farming, small-scale trading and informal enterprises. The modern economy, though smaller, is technology-driven, globally connected and far more productive. The challenge — and the opportunity — lies in bridging the two.
The recent World Bank South Asia Development Update: ‘Jobs, AI and Trade’ highlights how unlocking the economic potential of countries like Pakistan depends on shifting people, skills, and capital from the traditional to the modern sectors. For Pakistan, this transformation is not only about creating better jobs but also about ensuring sustained growth in a world where technology and trade define competitiveness.
Protectionist tariffs, which were once meant to safeguard local industries, have often had the opposite effect. Now the same manufacturing sectors face tariffs on intermediate goods that are twice as high as those in comparable developing economies. This has made Pakistani industries like engineering goods, electronics and automotive parts less competitive regionally. High tariffs on imported components discourage local value addition, while smuggling and under-invoicing flourish as unintended byproducts.
The experience of Pakistan’s textile and IT sectors shows how trade openness can transform industries. In the IT services sector, which operates in a relatively low-tariff environment, has become Pakistan’s most dynamic modern industry. In just five years, annual IT exports have more than doubled, crossing $3 billion in FY2024. Thousands of young software engineers and freelancers are now part of the global digital economy, earning incomes far higher than traditional sectors could offer. This demonstrates that sectors facing lower tariff barriers and operating in open markets generate faster job growth and higher wages.
For Pakistan, a carefully sequenced tariff reform could catalyse similar progress in manufacturing. Reducing tariffs on imported machinery and intermediate goods — while gradually lowering protection for inefficient domestic producers — would attract investment and spur job creation
Artificial intelligence (AI) represents the second pillar of transformation. While the traditional economy may not directly benefit from AI, Pakistan’s emerging digital and industrial sectors can. The World Bank notes that AI can boost productivity for the 15 percent of South Asian workers already in the modern economy — those who are skilled, educated, and globally connected.
Pakistan has begun this journey. The country’s National AI Policy (2023) envisions AI adoption in manufacturing, agriculture, health, and public administration. Pilot projects in precision farming, for example, are already improving yields through drone surveillance and predictive analytics. In industry, local auto-parts manufacturers are using AI-driven quality control and process optimization systems supplied through joint ventures with Chinese firms. Even small fintech startups in Karachi and Lahore are using AI to assess credit risk and automate lending — helping bring thousands of small traders into the formal economy.
However, realising AI’s full potential requires massive investment in human capital and digital infrastructure. Reliable electricity, faster internet connectivity and vocational training in data analytics and coding are indispensable. Without these, AI risks widening the gap between modern and traditional Pakistan — rather than bridging it.
Public and private investment in transport corridors, energy reliability, and high-speed internet will be key. When combined with reforms that promote labour mobility — such as housing near industrial zones, retraining programmes and improved urban infrastructure — Pakistan can unlock the resources trapped in its traditional economy.
Each year, nearly 2.5 million young Pakistanis enter the job market, but only a fraction find stable, formal employment. The answer is not just more jobs — it is better jobs in more competitive sectors.
