If you were the head of a billion-rupee conglomerate in Pakistan, why would you ever want to export? The rational answer, despite the government’s constant exhortations, is that you probably wouldn’t. We know that “export-led growth” is the way forward, yet Pakistan’s export performance remains lacklustre, with the lowest export-to-GDP ratio in the region.

High energy costs, high rates of taxation, bureaucratic friction, and political uncertainty are often blamed for our narrow, stagnant export base. While there is some truth in this, we must also examine the institutional incentives that make “staying domestic” the logical choice for our industrial titans.

Most of Pakistan’s large conglomerates originated as family-owned businesses. Pakistan is not unusual in this; the United States had its “Gilded Age” of family dynasties. In our early decades, a small pool of professional managerial talent meant corporate decision-making was concentrated within the family. While this is changing, the growth of these firms was historically limited by the number of eligible family members available to manage them.

Today, these conglomerates possess three main competitive advantages: (i) the ability to attract top talent and build management teams, (ii) preferred access to financial capital and bank loans, and (iii) the inside track to regulators and political and establishment players. Crucially, these advantages do not translate across borders, which is why we have so few true Pakistani multinationals.

Simultaneously, the real or perceived difficulty of doing business in Pakistan constitutes a moat that keeps international competitors out. The result is low levels of foreign direct investment (FDI) despite the strong profitability of local incumbents.

While these advantages don’t work abroad, they translate perfectly across industries. In a nation of 250 million people, changing demographics and consumer preferences constantly create new opportunities. Large Pakistani businesses diversify opportunistically into these beckoning sectors.

As rational actors, businessmen seek the highest return with the least risk. Why slog away in commoditised export markets where you have no pricing power, when you can be a dominant player at home, making more money with less effort selling a host of different goods and services to Pakistanis? Privatisation opportunities offer further incentive; here too, local conglomerates hold a distinct edge over foreign firms through their access to the bureaucracy, politicians and the military brass.

It is for this reason that traditional export incentives have failed to have a lasting effect. Recent measures, such as the Rs4 per unit reduction in industrial electricity tariffs, are necessary but not sufficient. Given the inherent incentive to focus on the domestic market, industrial titans are unlikely to pivot to exports simply because the prime minister urges them to do so.

They may redirect some existing capacity, but are unlikely to invest in the capacity expansions needed to diversify into new export areas. Furthermore, as “price takers” in commodity markets, Pakistani exporters often see their cost savings or devaluation benefits snatched away by global buyers demanding lower prices, leaving them with the same thin margins.

Recognising this dynamic, what are the implications for policymakers? 1. Incentives must be conditional on performance. The experience of nations like South Korea shows that the stick must be wielded alongside the carrot. The “chaebols” became global brand names because the domestic market was relatively small and, more importantly, because government incentives were never unconditional. Support was tied to export audits, sunset clauses, and the looming threat of penalties. We must adopt a similar discipline: incentives like electricity tariff cuts should be strictly contingent on verified export performance.

2. There is a role for industrial policy. Harvard economist Dani Rodrik cites studies that show as countries grow richer, they become more diversified in production rather than more specialised. For Pakistan, growth is about entering a broader, more sophisticated range of activities. While the government should not “pick winners,” it must identify “losers” and the bottlenecks holding them back.

Rodrik suggests that the most important part of industrial policy is a mechanism for the continuous exchange of information between government and business. Industrial policy must facilitate information exchange where the private sector conveys information about bottlenecks in the economy.

We need a National Industrial Commission (NIC) as a permanent, high-capacity institution, the core mandate of which would be to serve as the single mechanism for dialogue and to guarantee long-term policy predictability. This would end the current fragmentation of industrial policy and turn policy uncertainly into institutional certainty. It is a systemic approach to identifying opportunities and bottlenecks, rather than the ad hoc and opaque approach we see too often.

3. The “moat” must be breached. The difficulty of doing business is a barrier that protects local incumbents from foreign competition. We must address poor regulation, regulatory capture, red tape, and administrative inaction. Unless we attract FDI into the manufacturing sector, we will remain an also-ran. When foreign investors can better compete in our landscape, local businesses will be held to the fire of competition and become stronger themselves. The Pakistani consumer will benefit.

4. The government needs a wider range of interlocutors in its dialogue on the economy and specifically on exports. While established conglomerates are essential for capital-intensive projects, the real drive for exports often comes from mid-tier entrepreneurs. In sectors like apparel and IT, scrappy, hands-on competitors are motivated to grow internationally because they must export to survive.

These sectors are labour-intensive rather than energy-intensive – the perfect fit for a country struggling with power infrastructure and needing millions of jobs for a fast-growing young population.

Let us not fool ourselves – there is no magic wand to increase exports. Buyers in global markets have sophisticated sourcing strategies feeding well-oiled supply chains and do not easily switch to new suppliers and geographies, especially when faced with perceptions of geopolitical risk. These aspects need to be addressed with determination but also good sense.

But the first step is recognising that our current failure is partly a result of rational actors following the incentives we have provided. Unless we change the plumbing of our economy, Pakistan will never achieve the standing in global supply chains that the immense potential of our country has promised for so long, and we will never provide the next generation the future they deserve.

The writer is the Vice Chairman of the Saif Group, a diversified industrial and services conglomerate, and served as senator for Islamabad from 2012-2018