In spite of several decades of sustained growth, Pakistan remains in the company of “failed” states on account of its quality of governance. This paper presents an institutional framework for improving the quality of governance in Pakistan. This framework suggests that a major challenge facing the public sector in Pakistan is to harmonise its authorising environment and operational capacity with its mission and values. It provides a broad outline of how such a difficult task can be accomplished. The paper provides an analysis of the fiscal federalism dimensions of the authorising environment and presents directions for reform. The paper recognises various political, bureaucratic and institutional impediments that stand in the way of such reform. Finally, the paper distils lessons on institutional reform of relevance to Pakistan and other non-industrialised countries. .