By Waqar Wadho
Published in Dawn on November 27, 2025
THIS year’s Nobel Prize in Economics was awarded to Philippe Aghion, Peter Howitt, and Joel Mokyr for reshaping how we understand economic growth in the long run. Their core idea is simple but powerful: sustainable economic growth and prosperity is not by luck, it’s achieved through knowledge and innovation. They showed that growth emerges from a constant cycle of creative destruction: new technologies and firms replace the old, driving productivity upward. But innovation does not happen in a vacuum. It depends on the conditions that allow ideas to flow freely, entrepreneurs to compete, and knowledge to accumulate. Their work reminds us that the difference between rich and poor nations essentially lies in the ecosystem that incentivises knowledge creation and diffusion.
For developing and low-income countries like Pakistan, this insight is particularly relevant. Our debates on growth often circle around the same themes: energy shortages, fiscal deficits, or exchange rate management. These are real issues, but they are symptoms, not causes. The deeper problem lies in how our economy generates — and fails to generate — new ideas, new products, and new ways of doing business. What constrains us is the absence of strong innovation capabilities, limited knowledge diffusion across firms, and weak institutional incentives for technological upgrading. Without addressing these structural constraints, macro-fixes will remain temporary, and the economy will continue to operate far below its productive and creative potential.
Over the past decade, my research along with colleagues at the Lahore School of Economics has undertaken a systematic examination of innovation behaviour in Pakistani manufacturing, generating detailed empirical evidence on how firms upgrade, learn and compete. Using firm-level primary data, our research examines how product, process and managerial innovations shape productivity, exports, and employment. The evidence is striking: firms that innovate, ie, those that upgrade technology, introduce new products and designs, or improve their organisational systems, are significantly more productive and also more likely to export. Technological innovation, such as the introduction of new and improved products and cost-reducing technologies or quality improvements, are associated with substantial productivity gains. Organisational innovations, ie, improving workplace management, adopting quality standards or streamlining decision-making, also improve firm performance.
Yet, these findings also reveal an uncomfortable truth — that innovation in the country remains the exception, not the norm. Just a minority of firms engage in systematic innovation, and those who innovate, their innovations are only incremental. Few maintain continuous research and development; fewer still are connected to external knowledge networks. Why do our firms innovate so little? And why not radical innovations? The answer lies in the missing foundations that the Nobel laureates have highlighted in their research over the decades. They include competition, openness and the accumulation of knowledge.
Innovation in the country remains the exception, not the norm.
Competition is essential because it produces the pressure to innovate. Yet many of our industries are either protected by tariffs or dominated by a few large players, who face little incentive to upgrade. This insulation suppresses firm turnover, weakens the discipline of market selection, and ultimately prevents productive new entrants from challenging incumbent technologies and practices. Openness matters because exposure to foreign buyers, suppliers and standards expands the flow of ideas. Our studies show that firms with international certifications or export linkages are not only more productive, they also innovate more.
Finally, the accumulation of knowledge through education, technical training and research remains underfunded and is poorly connected to industry needs. As a result, Pakistan’s industrial base has remained stagnant decade after decade. Industrialisation never really took place, and even low levels are further declining over time. The average productivity of our manufacturing firms lags far behind, even as compared to regional competitors. Recent estimates have shown a rather declining trend in total productivity. Most firms continue to operate with obsolete technology and limited managerial capacity, and shy away from entering competitive markets. In one of our papers, we report that when Pakistani firms face competition from foreign medium- to large-sized manufacturers, they drop their product innovation and quit the market. In such an environment, even the most ambitious innovation policies will struggle to take root.
The Nobel-winning framework offers some important lessons for Pakistan’s growth strategy. First, embrace competition and free entry. Creative destruction requires space for new firms and new ideas. Industrial policy should not protect incumbents but help new entrants scale up, experiment and compete.
Second, invest in innovation capabilities. Incentivise research and knowledge creation both at the firm level and at universities. An industrial strategy should be about supporting industry-academia partnerships focused on knowledge creation and technology upgradation.
Third, target resources to lower fixed knowledge costs, and strengthen absorptive capacity in sectors where upstream-downstream knowledge spillovers amplify returns, thereby triggering Schumpeterian creative destruction across the country’s manufacturing base.
Finally, build trust through standards and enforcement. Our research shows that international quality certifications substantially increase local firms’ performance and innovation. Certification reduces information gaps between Pakistani producers and global buyers, and signals reliability and compliance.
Mokyr reminds us that modern growth began not when societies started inventing more, but when they learned to institutionalise the pursuit of useful knowledge. For Pakistan, the task is not merely to import technologies or replicate policies. It is to create an ecosystem where experimentation is rewarded, where failure is tolerated, and where ideas can move freely between universities, firms, and markets. This year’s Nobel laureates offer a timeless lesson: nations prosper when they allow new ideas to challenge the old. For Pakistan, that means rediscovering the courage to let innovation, and not inertia, drive our future. Remember when ideas stop, economies stall.
The writer is an associate professor of economics at the Lahore School of Economics.
