World Bank’s ‘magical discovery’

BARELY had the dust settled on the IMF’s insipid report on governance than the World Bank launched, with much fanfare, its latest prescription — this time on fiscal federalism. The bank’s report presents itself as a fresh diagnosis of Pakistan’s malfunctioning intergovernmental system, when actually there is little that is either new or thought-provoking about it.

In fact, the report comes across as an overwhelmingly technocratic exercise. It catalogues institutional weaknesses, distils lessons from selected federations and decentralised systems, and recommends clearer expenditure assignments, stronger provincial revenue mobilisation, NFC Award reforms, more transparent fiscal transfers, effective intergovernmental coordination and empowered local governments (LG). In principle, few would disagree. The problem is that the report treats the recommendations as technical solutions to what are essentially political problems, thus displaying only a superficial appreciation of Pakistan’s political economy, the constitutional agreement underpinning federal-provincial ties and the political bargaining that has shaped the country’s fiscal architecture. Its framework assumes that improved technical arrangements can create the political conditions necessary for their success. In reality, these conditions are prerequisites, not outcomes, of institutional reform. Political incentives shape institutions, not vice-versa.

The report rightly criticises Islamabad’s lavish spending on devolved subjects, resulting in wasteful duplication, blurred accountability and widening fiscal imbalances. Yet it hardly examines the incentives that extend this encroachment into provincial domains. The answer lies not in administrative confusion but in the political economy: preserving patronage networks, protecting bureaucratic empires and career paths, federal accommodation of donor-funded projects to support the balance of payments, and keeping influence over sectors assigned to other tiers of government.

The provinces aren’t blameless either. They have shown little enthusiasm for empowering LGs and are unwilling to undertake politically costly taxation of their own bases because their annual fiscal surpluses have to be transferred to finance federal deficits. These are deliberate political incentives and not technical oversights. Yet incentives receive only passing attention because they do not easily fit into the technocratic narrative.

For decades, the World Bank championed decentralisation. Now that narrative has changed.

The World Bank’s own intellectual journey is revealing. For decades, it championed decentralisation as the pathway to greater accountability, stronger provincial ownership and better public services. It welcomed the 18th Amendment and made available resources to assist the provinces to manage their expanded mandate. Now that Pakistan faces acute fiscal stress, the narrative has changed; decentralisation is being portrayed as a source of fragmentation, duplication and macroeconomic instability. Both propositions contain some elements of truth. What the report never explains is how an arrangement once celebrated as a democratic and developmental breakthrough has become a principal source of fiscal dysfunction. Nor does it ask the uncomfortable question: whether the bank’s own advice had underestimated the institutional and political prerequisites necessary for successful decentralisation.

For decades, the World Bank has been among the most active actors in Pakistan’s development landscape. It has poured billions of dollars through structural adjustment programmes, the Social Action Programme, governance reforms, public expenditure reviews, tax administration projects, institutional strengthening initiatives and countless technical assistance missions, advising, financing, monitoring and evaluating virtually every major sector of the economy. Few institutions can claim to have exercised comparable influence over Pakistan’s public policy. Yet throughout this prolonged engagement the bank rarely confronted the constitutional contradictions and structural flaws in Pakistan’s fiscal architecture as binding constraints on the effectiveness of the very programmes it financed — the success of which depended upon institutional arrangements whose weaknesses it now presents as startling discoveries.

It appears to have stumbled on to the weaknesses in expenditure assignments, revenue authority and intergovernmental fiscal transfers, presenting them as though they were newly emerging threats. But these weaknesses were never consistently elevated as central policy concerns during decades of intensive engagement. They did not emerge overnight. They were embedded in the system all along.

So, when the report cites poor learning outcomes, weak health indicators, inefficient public spending and deteriorating service delivery as evidence that fiscal federalism requires urgent correction, it is inadvertently delivering an indictment of a development model in which the World Bank itself was a central participant. Nor are these revelations path-breaking to anyone familiar with Pakistan’s policy debates. Domestic economists, constitutional experts, numerous policy commissions and successive NFC deliberations have highlighted the tension between expenditure decentralisation and revenue centralisation. None of this was hidden. None of it emerged suddenly.

Development is undeniably difficult. External institutions cannot engineer political settlements or constitutional consensus. A federation is not a corporation whose success can be measured solely through efficiency indicators and fiscal ratios. Pakistan’s federal structure emerged from a political compact intended to address long-standing provincial grievances and perceptions of excessive centralisation. Any assessment that emphasises administrative and fiscal efficiency while relegating political considerations to the margins will produce an incomplete diagnosis.

To be fair, the report occasionally acknowledges these political dimensions. Yet they remain peripheral. The implicit message remains that better formulas, stronger coordination bodies and mechanisms, and improved fiscal rules will somehow overcome problems rooted in political power, constitutional history and distrust between governments. The report’s technical observations are generally sound. Pakistan does need clearer expenditure responsibilities, stronger provincial revenue effort, transparent fiscal transfers, effective LGs and more coherent intergovernmental coordination. But none of these reforms will survive unless they alter the incentives that have frustrated every previous reform attempt.

This is where the report falls short. It implicitly presents its diagnosis as a novel discovery while avoiding any serious self-reflection. A credible assessment would have included a chapter titled, ‘What we got wrong’. After decades of advising governments, financing reforms, evaluating institutions and shaping public policy, the World Bank should ask itself how an institution so deeply involved in the country’s development arrived so late to a conclusion that Pakistanis had identified all along.

The writer is a former governor of the State Bank.

Published in Dawn, July 13th, 2026