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Old Tuesday, March 20, 2007
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Talking Problems of Pakistan and their solution


In February 1997, Nawaz Sharif became Prime Minister of Pakistan. He made improving the economy his top priority, emphasizing liberalization and privatization of the economy. During his previous term in office (1990-93), Nawaz Sharif began the process by successfully privatizing eighty small- and medium-size factories. But many sectors of the economy were still state controlled in 1997, so economic revival was not an easy task for Sharif's government. Among the biggest challenges faced by the new government was the question of relations with the IMF, which were severely strained under Benazir Bhutto because of corruption and economic misgovernance by her government. Prime Minister Sharif was able to improve relations with the IMF, but they remained cordial only for a short period of time. The second biggest challenge for Sharif's government was to avoid default on its foreign obligations. When Benazir Bhutto's second government was dismissed in November 1996, foreign exchange reserves had sunk to below $630 million, or just enough to finance a little over four week's imports. This was in contrast to debt repayment of just over $600 million due in December 1997. In order to cope with this precarious situation, Sharif made a direct plea to Pakistanis living abroad to make foreign exchange deposits to help tide the country over with its debt obligations. The third challenge for the Sharif government was to control the rising domestic debt, which reached 90 percent of the GDP in 1996-97. The fourth challenge was to control the accelerating trends in poverty, which were on the rise in the 1990s.
Towards the end of 1997, Pakistan again found itself in political crisis. [6] This political instability greatly affected the economy and had an especially great impact on foreign investment. Domestic businessmen put investment decisions on hold. In addition, several necessary, but sensitive, decisions were postponed. The government had done nothing to act on its commitment to reduce the number of federal government employees from 300,000 to 200,000 by the end of November. The government also promised international agencies that it would protect public sector power corporations—such as the Water and Power Development Authority (WAPDA), Karachi Electric Supply Corporation (KESC), and Sui Northern Gas Company—from imminent bankruptcy by raising utility rates from 20 to 50 percent. But Sharif balked at taking such decisions in the politically charged environment that prevailed in the country.
At the beginning of 1998, Nawaz Sharif's government claimed that the country's economic prospects were improving. But in reality, the economic scene remained cheerless, if not bleak, and negatively affected by the deteriorating law and order situation in the country. Several other factors also undermined confidence. The government, despite its electoral mandate, had shied away from taking tough, but necessary, fiscal decisions. In addition the government did little to achieve the macroeconomic targets set out in its loan program with the IMF.
In May 1998, Pakistan conducted nuclear tests, which resulted in economic sanctions from the international community. These sanctions greatly affected the already poor economy. However, the situation changed at the end of the year when the United Sates began to relax the sanctions and encouraged international financial institutions to provide help to Pakistan. In November, the United States lifted some of the economic sanctions on India (which also tested nuclear weapons in 1998) and Pakistan after securing their commitments to practice non-proliferation. However, according to the Economist Intelligence Unit (EIU):
The sanctions imposed on Pakistan by the USA are not significant in terms of potential American assistance to Pakistan; in fact, the US government has not given any economic loans or grants to Pakistan since the USA aid was cut off to Islamabad in 1990 following Pakistan's refusal to freeze its nuclear program. However, they have indirectly affected other resources of assistance: the IMF, World Bank and Asian Development Bank will not resume economic assistance until the US and other G8 countries have signaled that they will not block approval.[ii] [7]
It was again towards the end of 1998 that Pakistan faced another severe political crisis. Sharif enforced his Shariat Bill to impose Islamic law, which prompted widespread opposition from minorities, human rights groups, and even some Islamic groups, who complained that it would undermine rights guaranteed in the 1973 constitution while simply serving to distract from more important issues.[iii] [8] Civil strife increased in Karachi and the Mutthida Quami Movement (MQM) ended its coalition with the Pakistan Muslim League Nawaz (PML-N) party. Subsequently, Sharif dismissed the government in Sindh and imposed central government rule in the province. Furthermore, the army chief resigned amid rumors about an imminent military coup in the country, which was followed by an intensification of the political crisis in October 1999, when the military took over the reins of government. All these factors adversely affected the economy as political uncertainty led to the evaporation of foreign investors' confidence.
Reflecting on the results of Nawaz Sharif's second government, now an attempt will be made to analyze the performance of Pakistan's economy based on analysis of its macroeconomic indicators.

The most common way to measure poverty is based on income or consumption levels. A person is considered poor if his or her consumption or income level falls below a minimum level necessary to meet basic needs. This minimum level is usually called the poverty line. The World Bank uses reference lines set at $1 and $2 per day in the 1999 Purchasing Power Parity (PPP) terms (where PPPs measure relative purchasing power by comparison to other countries). It was estimated that in 1999, 2.2 billion people worldwide had consumption levels below $1 a day—23 percent of the population of the developing world, with an additional 2.8 billion living on less than $2 a day.[iv] [9] In Pakistan, 31 percent of the population lives on less than $1 a day, while 85 percent lives on less than $2 a day.[v] [10] Furthermore, Pakistan has a per capita income of $420 a year. Recently the World Bank began including many other factors besides income levels to measure poverty. These non-income indicators include health, education, and access to basic services.[vi] [11] In these terms, Pakistan has, for example, an adult literacy rate of 42 percent for males and 71 percent for females.[vii] [12] In the health sector, nearly one in ten children die before reaching the age of five.[viii] [13]
The government of Pakistan uses a different yardstick for measuring the poverty in the country and sets its own poverty line. Instead of applying the universal formula of one dollar a day of earnings per capita to count the absolute poor, it now considers a monthly income of PRs 748, enough to afford 2,350 calories a day, or almost PRs 1,000 less, as being poor. Those having less than that income are held as too poor now. What that means is that, instead of an income of PRs 1,710 a month on the basis of PRs 57 for a dollar for 30 days, one has to get PRs 25 per day or PRs 748 in a month not to be regarded as poor.[ix] [14]
The incidence of poverty increased in Pakistan during the 1990s.[x] [15] A report from the Asian Development Bank, "Country Strategy and Program 2002-2006, Pakistan," outlines the economic reversal that occurred in the 1990s. Poverty increased from 26.6 percent in 1992 to 32.2 percent in 1999, with the total number of poor increasing by more than 12 million people. Poverty is most intense in rural areas, where about three-fourths of the poor live. The failure of economic growth to keep up with a burgeoning workforce (growing at an average rate of 2.4 percent a year) exacerbated these trends. Structural causes of economic failure, such as an expanding foreign debt and economic mismanagement, were joined by a failure to invest in growth in human development, in areas like education, health care, and other basic social services. Private investment faltered also, driven by political uncertainty.[xi] [16] According to some studies, caloric-based poverty in effect doubled from 17.4 percent in 1987-88 to 32.6 percent in 1998-99.[xii] [17] As a result, Pakistan became less competitive as economic globalization expanded in the 1990s.
The government of General Pervez Musharraf made poverty alleviation its top priority, a platform it supported by the allocation of more resources for poverty reduction.[xiii] [18] The first pillar of this strategy is macroeconomic stabilization and resumption of economic growth. In the past, Pakistan has struggled to achieve macroeconomic stability. The country faced a debt payment crisis in 1998, investor confidence was at the lowest ebb, links with the international community were disrupted, and financial reserves were so low that the country was at the brink of default. By 1999, the public debt of Pakistan became unsustainable, with debt servicing pre-empting more than half of revenues, and external and domestic debt exceeding the country's GDP. The government of General Musharraf rectified this worsening economic situation in the next three years and, as a result, in 2002 inflation had fallen to less than 4 percent, the fiscal deficit was brought down to 5 percent, external debt indicators improved, public debt servicing declined, the exchange rate stabilized, and exports were growing at the rate of 16 percent. Foreign currency reserves reached $10 billion. This improvement in all the macroeconomic indicators enhanced the image of the country internationally.
The second pillar of Musharraf's poverty alleviation strategy is improved governance. Governance has improved due to reform of the public sector. The government especially emphasized accountability, transparency, and predictability in decision-making. The government introduced a political devolution plan whereby administrative, functional, and financial responsibilities for the delivery of social services are delegated to district governments. Discretionary powers of government officials have been reduced and placed under the administrative control of the elected representatives of the people.
Structural reforms constitute the third pillar of the poverty alleviation strategy. Broad based reforms in tax administration, trade liberalization, and the financial sector form the core. In tax administration, the Central Board of Revenue is being restructured, while the tax base has been widened. Trade liberalization has resulted in tariff rationalization, removal of various restrictions on exports and imports, and deregulation. Financial sector reforms have already resulted in a sound and healthy banking system, a buoyant stock market, a growing corporate debt market, and the strengthening of regulation and supervision.
The fourth pillar of the strategy is poverty-targeted interventions. Prominent among these are education sector reforms, healthcare for all, population planning, Zakat, the Khushali program for employment generation through public works, a food support program, and the Khushali bank.[xiv] [19] The Zakat system has been revamped to provide financial grants to the beneficiaries to start small enterprise or other income generating activities. The food support program subsidizes wheat flour for those below a certain threshold of monthly income. Khushali program funds are allocated to local governments to create and improve the physical infrastructure, while creating employment. The Khushali bank is a micro-finance institution, which provides small loans to the poor under supervised group guarantee schemes.[xv] [20]

Good governance is an important element of economic stability and growth. It provides a system in which people have access to justice and the writ of the law is enforced. Along with other factors, poor governance breeds corruption and hinders economic development. It would be pertinent to mention at this juncture one definition of good governance. According to the World Bank, governance is "the exercise of authority, control, management, power of government."[xvi] [21]
The World Bank emphasizes that good governance is central to creating and sustaining an environment that fosters strong and equitable development, and is an essential component of sound economic policies. Government plays a critical role in the provision of public goods and services. It establishes the rules that make markets work efficiently and, more problematically, it corrects for market failures. In order to play this role, governments need revenues to produce public goods and services. This in turn requires the system of accountability, adequate and reliable information, and efficiency in resource management and the delivery of public services.[xvii] [22]
Pakistan failed in all of the areas associated with good governance since 1947, in general, and in the 1990s, in particular. The civilian governments played havoc with the governance indicators. Weak governance has been an important source of macroeconomic difficulties, particularly in the 1990s. It contributed to slowing Pakistan's economic growth; reduced the effectiveness of public expenditures; weakened the overall macroeconomic management; undermined investor's confidence; encouraged tax evasion, loan defaults, and non-payment of utility bills; and fostered corruption. Furthermore, key governance problems included poor fiscal performance, mismanagement of domestic and external debt; social exclusion of the poor, women, and minorities from access to basic services; poor public sector performance; inefficient and ineffective intergovernmental relations between the federal government and the provinces; marginalization of local governments; and a loss of trust by the common citizenry in public institutions, especially in the administration of justice and police.
Corruption and poor governance have deeply affected the economy of Pakistan. Past civilian governments were corrupt and made money through illegal means, thereby increasing instability in the country. In 1997, under the caretaker government of Meraj Khalid, a team was formed to provide estimates of economic loss to Pakistan during the regime of Benazir Bhutto (1993-96). The team headed by Shahid Javed Burki and assisted by Hafiz Pasha "estimated the cost to the country of political corruption and inefficiency at 20 to 25 percent of its 1996-97 GDP. Translated into monetary terms, this was equivalent to some $15 billion."[xviii] [23] This cost was estimated on the basis of the losses incurred by the most important sectors of the economy, such as banking and public sector corporations like WAPDA and KESC.
When General Pervez Musharraf took over in October 1999, there was a dire need to take measures to improve governance and introduce structural reform in the basic governance infrastructure. These governance reforms were also long desired by the international financial institutions. In order to improve governance in the country, General Musharraf implemented a wide range of structural reforms, including:
  • Restructuring and right-sizing of the civil services
  • Rationalization of pay and pensions finalized
  • Increased autonomy granted to Federal Public Service Commission (FPSC)
  • Strong focus on training and improved procedures for performance assessment
  • Devolution of political power to the grassroots level
  • Judicial reforms
  • Police reforms
  • National anti-corruption strategy
  • Freedom of information act promulgated
  • Pakistan Public Procurement Authority established[xix] [24]
As a result of reforms in governance, Transparency International (a German-based organization) in its recent report on government corruption clearly stated, "corruption at the top levels of government has very significantly declined."[xx] [25] The World Bank also supports reforms initiated by the Government to improve its effectiveness at federal, provincial, and district levels. The ongoing Project to Improve Financial Reporting and Auditing (PIFRA) has enabled the government to develop a new accounting model, which consists of revised forms, principles, and methods of accounting and financial reporting to establish an integrated financial management system in Pakistan. The PIFRA project also provides for the introduction of a double entry computerized General Ledger System for all government financial transactions in a phased manner. The basic purpose of this system is to make government bookkeeping more effective and efficient, reducing opportunities for corruption. It will make the financial business of the government more transparent and timely.
Governance reforms have been opposed by a powerful status quo of vested interests and severe fiscal constraints that put additional restraints on the reform agenda. However, the government's record of implementing reform commitments made in 1999—in particular providing a legal basis for devolution and police reforms, ensuring the complete separation of judicial and executive powers, and completing the local government elections on schedule—suggests readiness to confront issues that have plagued the country since independence.
Debt Burden

The debt burden has long been a very serious problem for Pakistan, but was especially so in the 1990s.[xxi] [26] The civilian governments not only amassed large amounts of foreign debt, but also used this debt for meeting the current expenditures of government. In 1998, Pakistan was hovering on the brink of default. Its foreign exchange reserves, which were $1.3 billion on the eve of the May nuclear tests, fell to $400 million by mid November 1998. A confidential report prepared by State Bank of Pakistan outlined the precariousness of the debt profile. According to the report, "in 1998-99 (fiscal year ending June 30th), Pakistan's external debt repayments total $7.9 billion, including $5.6 billion in debt amortization and $2.2 billion in interest payments; of this amount, $1.6 billion was payable to non-Muslim countries, $1.1 billion to IMF and World Bank and the rest was paying for short term borrowing."[xxii] [27] The report also noted the precarious position of reserves at $930 million at the end of June, meaning the country would have to default on international debt, if the allied Muslim countries were unable to inject cash resources to keep Pakistan afloat until the sanctions were lifted.
Pakistan's debt situation reached an unsustainable level by 1999 because of the persistence of the current account and fiscal deficits during the 1990s. These twin deficits resulted in explosive accumulation of both domestic and external debt.[xxiii] [28]
Domestic debt was growing at an annual average rate of 16 percent during the period 1990-99, reaching almost 52 percent of GDP by 1999-2000, up from 44.1 percent in 1990-91. In other words, the domestic debt grew by fourfold—rising from PRs 488 billion to PRs 1,642 billion in one decade. Pakistan's total debt and external liabilities grew by an average rate of 6.4 percent per annum during 1990-99. It stood at $23 billion in 1990-91 and reached almost $38 billion by 1998-99. This sharp increase in the total debt resulted in the increase of debt servicing liabilities in the 1990s. In 1990-91, almost 40 percent of revenues were consumed by debt servicing, while in 1998-99 debt servicing was consuming 63.5 percent of the national budget, leaving 36.5 percent to be spent on defense, civil administration, and development works.[xxiv] [29]
The main reasons for this accumulated debt can be described as follows:
  • The rising trends in the non-development expenditures (debt servicing and defense) have been the cause of rising debt. The major chunk of the budget is consumed by these elements.
  • The persistence of the low growth rate of the economy also compelled the successive governments to resort to external debt. Throughout the decade of 1990s, Pakistan's growth rate remained under 5 percent.
  • Economic mismanagement and corruption by the civilian governments resulted in the loss of public exchequer. In order to fulfill their agendas, the civilian governments resorted to external debt.
  • Corruption by successive governments in Pakistan also compelled the country to opt for foreign borrowing to meet the current expenditures of the government.

Table 1.1: Trends in External Debt and Foreign Exchange Liabilities (US$ billion)
Total External Debt
Foreign Exchange Liabilities
Total External Debt and Foreign Exchange Liabilities
Source: Ashfaque Hasan Khan, "Economic Performance during 1999-2002," Ministry of Finance, Government of Pakistan,

Table 1.2: Debt Servicing

As % of GDP
As % of Current Expenditure
As % of Total Revenue
Source: Ashfaque Hasan Khan, "Economic Performance during 1999-2002," Ministry of Finance, Government of Pakistan,
As shown by Tables 1.1 and 1.2, the rising trend in both domestic and external debt resulted in a serious problem for Pakistan in a number of ways.
First, it crowds out public finances by pre-empting 56 percent of budgetary revenues, necessitating cut backs on essential public expenditures for promoting growth and poverty reduction. Second, it forces the economic managers to continue borrowing for meeting even the non-development and recurrent expenditures to run the state. Third, the annual external debt service payments falling due every year amount to $6-7 billion, which consume more than two-thirds of export earnings. This burden is totally disproportionate to the capacity of any developing country in the world, since Pakistan will pay most of its earnings to its creditors and will have very little left for imports of goods and services.[xxv] [30]
For the reasons mentioned above, the government of Pakistan must find a solution to its debt problem.
When General Musharraf came to power in October 1999, external debt and foreign exchange liabilities stood at $38 billion. It should be pointed out that the Musharraf government has done well on the debt management side. It has not only slowed down the pace of acquiring new or additional debt, but also brought down the level of debt servicing, thereby increasing foreign exchange reserves. The military government formulated a debt management strategy, which had the following features:
  • Seeking debt relief from lenders and using the savings solely for poverty reduction programs
  • Reserving privatization proceeds exclusively for retirement of public debt
  • Reducing the cost of borrowing through lowering of the interest rates on government schemes
  • Gradually eliminating all borrowings for non-development expenditures
  • Privatizing public sector corporations in the oil and gas sector to achieve greater efficiency, provide for investment resources, and generate funds for debt retirement
  • Constituting a high level debt management committee, under the chairmanship of an expert, with the governor of the State Bank and other senior government officials as members, to suggest measures for establishment of an efficient debt management system and for reducing the debt servicing burden
  • Increasing the flow of remittances through official channels
  • Relying on non-debt creating inflows (e.g., grants and foreign direct investment)[xxvi] [31]
As a result of this debt management strategy, domestic debt declined from 51.7 percent of the GDP in 1999-2000 to 47.0 percent in 2001-02, a reduction of 4.7 percentage points of the GDP. The external debt and foreign exchange liabilities now stand at $36.5 billion, down from approximately $38 billion in 1998-99—a reduction of $1.5 billion or from 62.3 percent of the GDP to 58.8 percent. Debt servicing as a percentage of total revenue, which stood at 63.5 percent in 1998-99, declined to 49.7 percent in 2001.[xxvii] [32]
Gross Domestic Product (GDP) Growth Rate

Although it lagged behind East Asian countries (the so-called "tigers") and China during the last two decades, Pakistan's growth rate remained high in comparison with the other countries of South Asia until the 1980s. Pakistan's growth rate also exceeded many African and Latin American countries.[xxviii] [33] However, Pakistan's GDP growth rate became sluggish during the 1990s.[xxix] [34] As against an average growth rate of 6.1 percent in the 1980s, it slowed down to 5.1 percent and then to 4 percent during the first and second half of the 1990s, respectively. On the other hand, the population growth rate remained high, leading to a decline in the per capita income of the country.
In part, the variability in the GDP growth rate is because Pakistan's economy still has a large agriculture component. Although this sector only contributes about 25 percent of the GDP, it employs half of the workforce. Pakistan's major exports (textiles, finished fabric goods, and yarn) are dependent on the outcome of the cotton crop. Weather variability, pests, disease, and other natural calamities contribute to volatility in agriculture production levels. Wide variations in policies for government support to agriculture, compounded by economic difficulties that restrict availability of key inputs like seeds and pesticides, exacerbate nature's obstacles to crop production. With agriculture such a significant part of the economy, agricultural production is highly correlated to Pakistan's overall economic performance.[xxx] [35] When the agricultural sector has performed well, the GDP has been high. Agriculture is extremely important not only for its contribution to the GDP, but also because of its importance for the manufacturing sector.
In addition to agricultural factors, other principle causes of the slow-down in the growth rate were the continued low rates of savings and investments; governance problems hindering the effective use of public resources; structural problems in large-scale manufacturing; and considerable financial and political instability. Macroeconomic policies failed to halt the growing imbalances in the budget and external accounts, and policymakers did not realize the economic dangers of growing financial vulnerability.[xxxi] [36] Recent growth rate trends in the GDP are given on the next page in tabular form.
Table 1.3: GDP Growth Rate Trends

Real GDP
Major Crops
Large Scale
Services Sector
Source: Various issues of Economic Survey of Pakistan (Islamabad: Ministry of Finance, Government of Pakistan).
Foreign Investment

In recent years, developing countries—such as China, India, Hong Kong, Malaysia, Indonesia, and Thailand—have attracted a lot of foreign direct investment (FDI). The inflow of FDI to Pakistan has, however, remained far from encouraging despite numerous incentives offered to foreign investors, particularly after the initiation in 1992 of the liberalization program. In the early 1990s, the country began to attract a respectable amount of foreign capital, a significant amount of it for the development of the power sector. Taking note of the large size of the Pakistani population, transnational corporations came in to develop markets for beverages and fast food. Today, the most important areas of FDI in Pakistan are energy, chemicals, foods and beverages, machinery, construction, textiles, and the power sector. Attractive incentives apart, Pakistan's population of about 149 million offers vast potential for the marketing of both consumer and durable goods. At the same time Pakistan's geographic contiguity with Central Asian republics also has the potential to serve as a gateway to foreign investors for extending their marketing activities into the countries of that region.
Despite all of these factors, FDI in Pakistan has been on the decline. These declining trends in FDI have resulted from public policy and the changing geo-strategic environment of Pakistan. According to the Economist Intelligence Unit's 2001 report on Pakistan:
Among the major reasons for the poor position with regard to foreign investment is the generally negative perception of Pakistan in international business circles. Images of gun-toting, anti-western Islamic fundamentalists, sectarian warfare and rumors of war with India are common enough. Nor does it help to know that there is an unaccountable military regime in office, while the judiciary appears incapable of delivering independent judgments in the event of clash of interests between the foreign or the domestic investors on the one hand and the government on the other. Finally, the significant exodus of indigenous capital and entrepreneurs to Canada, the US, and elsewhere in the last few weeks is hardly encouraging for potential foreign investors.[xxxii] [37]
Furthermore, the war in Afghanistan and Pakistan's status as a frontline state against terrorism create fears of instability among foreign investors. Other important factors for the declining trends in Pakistan's FDI include: the East Asian financial crisis of 1997; economic sanctions and the freezing of foreign currency accounts after the May 1998 nuclear tests; crises with the independent power producers (IPPs),[xxxiii] [38] particularly the way these issues were handled by the Sharif government; the low level of foreign exchange reserves and threat of default on external payment obligations; and disarrayed and unstable relations with international financial institutions.[xxxiv] [39]
On November 24, 1997, the Sharif government launched a new investment policy. It was aimed at improving the business environment and opening up new sectors to foreign investment. Until then, only the manufacturing sector, which accounts for 20 percent of the GDP, was open for foreign investment. However, the new policy opened up for foreign investment in other sectors like infrastructure, housing and real estate, agriculture, health and education, and wholesale and retail trading.[xxxv] [40] Furthermore, the government extended tax and tariff concessions to foreign investors in these areas. In addition, foreign investors were granted immunity from disclosing the sources of their capital and all the local and foreign investors were granted exemptions from customs duties and sales tax on imports of machinery not manufactured in Pakistan. The new policy divided the industry into four categories—value-added or export industry, high technology, priority, and agriculture-based.[xxxvi] [41] The government hoped to attract at least $5 billion in private foreign investment in the following three years as a result of this policy. However, political instability and perceptions of rising violence remained as deterrents to investors, as do lackluster macroeconomic conditions. Moreover, the investment policy violated the terms of the agreement signed with the IMF, under which no tax holidays or exemptions were to be granted.
The total foreign investment during the 1996-97 fiscal year was $950 million, a 27.3 percent decrease from the previous year's level. Of this, FDI accounted for only $682 million, compared with $1.1 billion in the previous year.[xxxvii] [42] Despite the efforts of the Sharif government, foreign investors did not respond to the government incentive program designed to appeal to them. The then US ambassador to Islamabad, Thomas Simon, highlighted impediments to capital flow, citing "frequent reviews of power generation policies of the government, frequent changes in the policy planning, a bad law and order situation, and uncertainties at the macro-economic level."[xxxviii] [43]
The most important event regarding foreign investment during the Sharif regime was the prime minister's attack on the independent power producers (IPPs). The government's main charge was that IPPs were offered high power supply rates and profit margins because Benazir Bhutto and her husband Asif Ali Zardari took commission and kickbacks from the companies involved. As a result, Sharif claimed that Water and Power Development Authority (WAPDA)—which is obligated to buy power from IPPs—is facing bankruptcy because it cannot afford to buy private power at the prohibitive rates negotiated with them.
A second event that had a major impact on foreign investment in Pakistan was the nuclear tests of May 1998. Following the tests, the Sharif government announced the freezing of all domestic and foreign exchange accounts. These accounts were worth around $11 billion, of which $7 billion belonged to resident Pakistanis, $2.5 billion to non-resident Pakistanis, and $1.5 billion were institutional swap funds with private sector banks.[xxxix] [44] Sharif argued that with external reserves of only $1.3 billion, he could ill-afford a potential run on foreign currency deposits following a loss of confidence caused by the sanctions. However, this decision of the government backfired and had two repercussions. First, the decision pushed the rupee/dollar exchange rate from PRs 46:$1 to PRs 49:$1. Second, foreign exchange remittances by expatriate Pakistanis plunged from an average of about $4 million a day to under $1 million a day, leading to a rapid decline in reserves.
Furthermore, foreign investment was also affected by the "Kargil crisis" between India and Pakistan in 1999. The crisis created an environment of instability in the South Asian region due to the imminent threat of war between India and Pakistan. Foreign investors were particularly concerned with the situation, putting their investment decisions on hold. This is evident from the fact that during fiscal year 1998-99, foreign direct investment in Pakistan totaled just $296 million, compared with $436 million in the previous fiscal year. Thus, the major factors for decline in foreign investment in Pakistan during fiscal 1998-99 were the IPPs dispute, the nuclear tests, and the Kargil crisis. Furthermore, the imposition of certain foreign exchange controls and delays in processing foreign exchange demands also caused problems for foreign companies invested in Pakistan.
Faced with these crises, the government of General Musharraf successfully tackled the issue of improving the atmosphere for foreign investment in the country. It resolved issues with the IPPs, negotiated a softening of economic sanctions with the United States, and improved Pakistan's credibility with the IFIs. On December 15, 1999, Shaukat Aziz, Pakistan's finance minister, announced specific measures to restore business confidence. The salient features were:
  • All existing tax exemptions were to be withdrawn in the June 2000 budget.
  • The tax was to be simplified in the June budget by stressing transparent and voluntary self-assessment schemes.
  • A retail General Sales Tax (GST) and agriculture income tax were to be imposed in the June budget.
  • Foreign exchange remittances of profit, dividends, and royalties were once again to be allowed without prior permission of the State Bank of Pakistan.
  • Central excise duty was withdrawn on credit card and other business transactions.
  • Only foreigners were to be allowed to open foreign exchange deposit accounts in local banks in an effort to assist the dollarization of the economy.
  • Foreign exchange bearer certificates were discontinued and income tax immunities available to government bondholders were withdrawn in order to stop money laundering.
  • Tax rates on government securities and bonds were cut.
  • Pakistan's Euro-bond debt was successfully rescheduled.[xl] [45]
In early 2001, the government successfully resolved its dispute with Hub Power Company (HUBCO). This was a welcome step, and since then the flow of foreign investment into the country has increased. This improvement was particularly encouraging given that it is an accepted fact that raising foreign investment from a low and declining path to a higher and sustainable path is a daunting task. The flow of foreign investment does not increase overnight. Foreign investment stood at $475 million in 2001-02, higher then the $403 million figure of 1998-99. Details of Pakistan's foreign investment performance are presented graphically in Table 1.4 below.

Table 1.4: Foreign Investment

Foreign Investment (US$ million)
Source: Ashfaque Hasan Khan, "Economic Performance during 1999-2002," Ministry of Finance, Government of Pakistan,

Ten main factors—which might be called the ten checkpoints or "Ten Commandments"—govern a country's ability to attract foreign investment. In the case of Pakistan during the 1990s, all these factors were lacking or were weak in some way. These factors are:
1)Political stability
2)The law and order situation
3)Economic strength
4)Government economic policies
5)Government bureaucracy
6)A positive local business climate
7)Physical infrastructure
8)Quality of labor force
9)Quality of life
10)Welcoming attitude[xli] [46]
Substantial improvement in the above-mentioned factors occurred during the government of General Musharraf. The military government pursued sound economic policies, which restored macroeconomic stability in the country. This led to improvement in the country's credibility among international donors and restored foreign investor confidence. Consequently, foreign investment increased in Pakistan. But, in order to compete with the other developing countries in the areas of foreign investment, Pakistan must continue improvement in each of these areas.
Foreign Trade

There exist strong relationships between export growth and overall economic growth, in general, and manufactured export growth and overall economic growth, in particular. Those countries that have been most successful in expanding their manufactured exports have not only achieved higher economic growth, but also succeeded in alleviating poverty. This has indeed been the case in East Asia. Pakistan's exports fluctuated widely during the last fifty years. Exports received little or no attention during the 1950s, registering an average decline of 5.7 percent per annum. Exports recovered in the 1960s and grew at an average rate of 10.7 percent per annum. The 1970s witnessed acceleration in export growth, to an average rate of 22.3 percent.[xlii] [47] The 1980s and the 1990s then saw a decline in export rates in comparison with the 1970s.
When viewed against the experiences of many successful developing countries, Pakistan's export performance during the 1990s has been lackluster.[xliii] [48] The main reason for this is that, unlike many East Asian countries, Pakistan has not adopted an effective trade liberalization regime. Another reason for the fluctuating export rate has been the variation in agricultural production, which is largely dependent upon weather conditions. The decline in agricultural production not only affected exports, but also had a great bearing upon the manufacturing sector. Furthermore, changing geo-strategic conditions after the September 11 terrorist attacks greatly affected exports. For example, the war on terrorism in Afghanistan made Pakistani exports vulnerable, and the continuous tension and threat of war with India has similar effects. For these reasons, Pakistan's trade deficit has remained and continues to be among the most important areas of concern for successive governments.
When Sharif became prime minister in 1997, he introduced tariff reforms. These reforms were aimed at the liberalization of the economy. Furthermore, these reforms provided for tariff cuts on imports, reducing the top rates for customs duties from 65 percent to 45 percent. Automobiles were the only exception where the previous rates remained in force. Duties on imported machinery for industry were also fixed at standard 10 percent. These tariff reforms were aimed at achieving three objectives:
1)To discourage smuggling, estimated to cost the Pakistani economy at least PRs 100 billion (~$2.5 billion) annually
2)To force industry to become more competitive
3)To meet part of the requirements put forward by the IMF for gaining new loans[xliv] [49]
On July 17, 1997, the then commerce minister, Ishaq Dar, unveiled an ambitious new trade policy to increase exports from $8.26 billion in 1996-97 to $9.58 billion in 1997-98, and to reduce the merchandise trade gap from $3.4 billion in 1996-97 to $2.3 billion in 1997-98.[xlv] [50] The new trade policy also reduced the interest rate for exporters, whereby 50 percent of the admissible duty drawbacks to exporters will be paid within three days of presentation of the documents; and import duties on a host of raw materials for export of finished goods were reduced or eliminated altogether. The import of a few items like chilies and pharmaceuticals were allowed from India. Furthermore, the new trade policy removed the restrictions on importation of gold and silver. Sales tax exemptions were granted to imported raw materials and components to be used by the export suppliers against international tenders.
According to Ishaq Dar, as a result of this trade policy, exports rose by 5 percent in dollar terms in the first seven months of fiscal year 1997-98, while imports contracted by 8 percent. Consequently, the merchandise trade gap narrowed by about $780 million in the first seven months of 1997-98.[xlvi] [51] However, the narrowing trade gap was not all good news. Falling machinery imports suggest that industrial growth remained lackluster, while the contraction in the petroleum bill reflected a softening in international oil market prices.
On June 15, 1998, the government introduced its trade policy for fiscal year 1998-99. The main purpose of the policy was to reduce the trade deficit by increasing exports and reducing imports. In the new policy, the export target was set at $10 billion, up by 17.6 percent compared with an estimated $8.5 billion in the last financial year. The imports for 1998-99 were projected to remain at approximately the same level as the prior year, i.e. $10.05 billion, thereby eliminating the merchandise trade deficit in 1998-99. The government claimed that it would achieve its export goals by "improving and modernizing export incentives" and "strengthening institutional export mechanisms" for its export regime. Among the export incentives offered were:
  • Exporter refund claims were to be settled within thirty days.
  • The State Bank of Pakistan (SBP) at 8 percent interest instead of the existing 11 percent interest rate made export refinance funds for at least PRs 25 billion ($570 million) available.
  • Companies classed as export processing units (those exporting 70 percent of their production) were allowed to import inputs without payment of customs duties.
  • A ban on exports of fifteen particular items was lifted.[xlvii] [52]
  • The private sector was allowed to export coke, rock salt, and caustic soda which were previously exportable by the public sector only.
  • Restrictions on export quotas were lifted on maize, grains, soda ash, breeding camels, native birds, and cement.[xlviii] [53]
The trade policy also introduced certain measures for rationalizing the import regime. The main features of these measures have been given below:
  • Import duties on gold were to be reduced by 40 percent.
  • Import of scrap plastic was banned.
  • Import of diagnostic/testing/analytical equipment was allowed to non-resident Pakistanis paying in foreign exchange.
  • Import of second-hand machinery, except computers, was banned.
  • Maximum import duties on many items were reduced from 45 percent to 35 percent.[xlix] [54]
According to the Federal Bureau of Statistics (FBS), exports fell by 10.5 percent in the fiscal year 1998 to $7.72 billion from $8.63 billion in 1997. Meanwhile, imports contracted by 8.2 percent, from $10.12 billion to $9.29 billion, causing the trade deficit to widen slightly by $79 million to $1.57 billion.[l] [55]
According to the IMF's "International Financial Statistics" report, merchandise exports rose by 6 percent in the first half of 1999, from PRs 190 billion to PRs 202 billion. Imports, however, rose by nearly 23 percent from PRs 206 billion to PRs 252 billion. In dollar terms, exports fell by 0.7 percent, year to year, while imports rose by almost 15 percent.[li] [56] Petroleum products and machinery dominated imports, while the main exports remained cotton fabric and rice.
In 2001, the military government of General Musharraf took two important measures in the area of foreign trade. These measures were to explore different markets and diversify trade and, secondly, to reduce imports. In the area of trade diversification, Pakistan improved its trade ties with different countries. Some results, even if small, were evident: Pakistan's exports to China went up by 75 percent; to the United Arab Emirates (UAE) and Saudi Arabia by 25 percent each; to Bangladesh by 20 percent; to Indonesia by 161 percent; and to Korea and Australia by 9 percent each.[lii] [57] Other than the UAE and Saudi Arabia, all other countries are referred to as non-traditional markets in the context of Pakistan's previous export patterns. Furthermore, efforts were made to improve trade relations with Kenya, Nigeria, and Syria. In addition, the military government provided the following incentives to exporters:
  • Exporters who posted at least a ten percent growth over the prior year's exports were allowed to retain 50 percent of the additional exports in their local foreign currency account. They could use this amount for the purchase of machinery, equipment, raw materials, and payment of commissions and promotional expenses.
  • Export development charges were waived on additional exports.
  • Exporters who demonstrated better performance were given monetary rewards. An "incentive scheme" that sought to reward three categories of exporters (large, medium, and small) for increases in overall exports, entering new markets, value addition, etc., was devised. An amount of PRs 2 billion was allocated for this project.[liii] [58]
With regard to trade liberalization, on June 30, 2002, the maximum trade tariffs were reduced from 30 percent to 25 percent.[liv] [59] The government established three tariff categories with duty rates of 25 percent, 15 percent, and 5 percent. However, Pakistan's trade policy in 2002 continued to ban thirty items, mostly on religious, environmental, security, and health grounds. Automobiles continued to face high duties ranging between 80 percent and 200 percent. But there remains a great need to continue efforts for trade liberalization and diversification of exports for the economy's improvement. As a result of these measures introduced by the government, Pakistan's exports reached $9 billion in 2000-01 for the first time ever. Imports remained stable at $10 billion in the same period, thereby reducing the trade deficit. Details of Pakistan's imports and exports since 1990 are given below in Table 1.5.
Table 1.5: Foreign Trade (US$ million)
Trade Deficit
Trade deficit as % of GDP
Source: Ashfaque Hasan Khan, "Economic Performance during 1999-2002," Ministry of Finance, Government of Pakistan, also State Bank of Pakistan, Economic Data,
Summary of Pakistan's Macroeconomic Performance

In recent years, Pakistan has made considerable progress in achieving macroeconomic stability. There has been a considerable improvement in all the macroeconomic indicators. It is evident from the primary budgetary surplus; reduction of quasi-fiscal deficits; turnaround in the current account deficit to a surplus; improvement in tax collection; renewed export growth rate; lowering of the inflation rate; increase in the GDP growth rate; reasonable amount of foreign exchange reserves; decline in trade deficit; and reduction in external debt of the country. In addition, monetary aggregates have been contained, the exchange rate has been stabilized, and worker remittances have been improved significantly. The risk of default on external debt, which loomed large on the horizon in 1999 and 2000, has been mitigated and the country's capacity to service its restructured debt has improved. However, the economy of Pakistan is still at the take-off stage and faces many daunting challenges. Poverty and unemployment are still high, posing serious challenges to the policy makers in Islamabad. The government of Pakistan has launched a poverty alleviation strategy with the help of the IMF and the World Bank; still, 33 percent of the people live below the poverty line. The rising population and lack of employment opportunities create persistent unemployment problems in the country. In addition to unemployment, underemployment is even higher in the country. There is a need to devise a comprehensive employment strategy to tackle this gigantic problem. For the purpose of brevity, the performance of the major macroeconomic indicators is given below in Table 1.6.
Table 1.6: Changes in Key Macroeconomic Indicators

October 1999
June 2003
Change in the Indicator
GDP Growth Rate
4.2 %
5.1 %
5.7 %
3.3 %
Fiscal Deficit/GDP
-6.1 %
-4.0 %
Current Account/GDP
-3.2 %
+ 7.1 %
Domestic Debt/GDP
52.0 %
43.4 %
External Debt
$37 billion
$35 billion
$88 million per month
$350 million per month
$7.8 billion
$11.1 billion
Tax Revenue
PRs 391 billion
PRs 460 billion
Rupee-Dollar Parity
Foreign Direct Investment
$472 million
$800 million
Foreign Exchange Reserves
$1.6 billion
$9.9 billion
Poverty Incidence
33 %
Data not available but perhaps rising
Poverty Related Expenditure
PRs 133 billion
PRs 161 billion
6 %
8 %
Source: Ishrat Husain, "Economy of Pakistan: Past, Present and Future," a paper presented at the seminar on Pakistan Ideology held by Pakistan Study Center, University of Sindh, at Karachi on August 12, 2003,
Having described the macroeconomic performance of Pakistan during the last six years (1997-2003), in the next part an attempt will be made to analyze the role of the IMF and the World Bank in the economy of Pakistan. The role of the IMF and World Bank has been crucial in the macroeconomic stability of Pakistan from 1997-2003 for a variety of reasons. These institutions provided assistance to Pakistan in carrying out its reform programs. The IMF has helped Pakistan in achieving balance of payments stability and fighting poverty, the two major macroeconomic indicators. Meanwhile, the World Bank has supported the government in restructuring the economy by supporting the structural reforms taken by the military government. In addition, the World Bank has supported the government's good governance reforms and provided material and technical support to carry out financial sector reforms in the country. As a result of the improved relations between the IMF, the World Bank, and Pakistan, the IFIs have increased their assistance to Pakistan.


DURING his recent visit to Washington, Prime Minister Shaukat Aziz spoke repeatedly about the openness of the economy he and his economic team manage. “We are perhaps the developing world’s most open economy,” he told his audiences. “You can come and invest whatever you wish and wherever you wish. You can take 100 per cent or 0 per cent share in the company in which you wish to invest. It is your choice, not the government’s.” In that respect, Pakistan is South Asia’s most open economy, certainly more than that of India. But India is on the move.

A day after Aziz’s final public appearance in the United States’ capital, the cabinet in India took the decision to open that country’s large retail sector to foreign participation. “Consent to permit 51 per cent foreign investment in single brand retail operations was the most striking among a package of measures aimed at signalling the Indian government’s determination to kick start a stalled programme of economic reforms,” wrote the Financial Times about the new Indian initiative.

This was a modest level of opening and it came with several restraints. In announcing the decision by his government, Kamal Nath, the Indian commerce minister said that “companies will be allowed to sell goods sold internationally under a single brand. Retailers of multiple brands, even if they are made by the same company, will not be allowed.”

Constraints notwithstanding, foreign retailers including Wal-Mart, the world’s largest, are lining up to move into India. The new Indian policy, considerably more restricted than the one followed across the country’s northern border — in Pakistan — will still lead to large foreign investment in the sector. Foreign companies, while not totally delighted by the small Indian gesture, are likely to move into the country with billions of dollars of investment. Why are foreigners so eager to go to India but reluctant to come to Pakistan?

One answer is the larger size of the Indian market. In 2005 the size of the Indian retail market was estimated at $258 billion and, according to Technopak, a consulting firm, it is set to grow to $411 billion within five years. The sector is currently dominated by nine million “mom and pop corner stores.” India is admittedly large and becoming larger, but Pakistan is small only by comparison to its neighbour. Otherwise it offers a large and rapidly expanding market. It should also attract foreign interest and investment.

One of the points the prime minister repeatedly underscored in his speeches was the size of the Pakistani middle class. He didn’t offer any numbers but those are not hard to estimate. If by the “middle class” is meant the segment of the population that has the disposable income to spend on the products large retailers would like to sell, then a third of Pakistan’s population of 156 million falls into that category. That means 52 million people with combined incomes of $78 billion and a per capita income of $1,500. If these people spend 20 per cent of their income on goods that large retail shops would be interested in putting on their shelves, this means a market of $16 billion. This is probably increasing at the rate of 10 per cent a year and will, by 2010, amount to $23 billion.

Given the size and openness of the Pakistani economy, why are foreigners not attracted to the country? Why has India become such a flavour of the day and why does Pakistan continue to be shunned by foreign investors? Why aren’t foreign investors attracted by the attributes Prime Minister Aziz kept referring to in his many speeches. I have attempted to answer this question in previous articles. I will go over some new ground today.

A commentator in a letter written to this newspaper in response to some of my earlier writings about India said that I was taken in by Indian propaganda and was ignoring the Indian reality. He couldn’t have been more off-base in his reaction. Let me briefly recount as to what is really happening with respect to foreign investors’ interest in our neighbour by offering some concrete examples.

In the space of a few days in December 2005, three of the biggest companies in the United States — JP Morgan Chase, Intel, and Microsoft — announced plans to create a total of more than 7,500 jobs in high value areas such as research and development and processing complex derivative trades. As a newspaper commentator wrote: “But for those worried about sluggish job creation by the US economy there was a snag. The jobs would all be in India. Worse, they would be jobs that in the past would have been in the US.”

What is even more important and impressive from the Indian perspective is the fact that some of these companies have decided to bet their future on India. Under JP Morgan’s plan, 20 per cent of the global workforce of its investment bank will be in India by the end of 2007. HSBC, one of the world’s largest banks operating out of London, has similar plans with regard to its requirement for financial skills. In an entirely different field — computer sciences and IT services — companies such as Microsoft, IBM, Intel, AMD, plan to locate significant parts of their research operations in India. What attracts them most to India is the quality of human resource available in that country. For foreign companies the attractions of India are not just costs — which industry analysts estimate at about 40 per cent below US levels — but also the quality of staff being produced by Indian universities.

According to Veronique Weill, head of operations at JP Morgan’s investment bank, “the quality of people we hire (in India) is extraordinary and their level of loyalty to the company unbeatable.” One of the many areas in which public policy continues to fail in Pakistan — a subject to which I will return momentarily — is the inability of the educational system to produce in significant numbers the same quality of people graduating from India’s science and technology institutions.

What is most troubling for Pakistan is that it is losing ground not only to India, a country that also has a large and young population. It does not even figure in the “back-up” plans drawn up by foreign corporations for addressing growing shortage of skills in their home countries. According to one knowledgeable analyst, “to avoid being too concentrated in one country, JP Morgan is already looking at other potential off-shoring locations mainly in Eastern Europe, but also China and the Philippines.” How can Pakistan get on the corporate maps of America and Europe? Why has public policy failed in that respect?

The most difficult problem Pakistan faces is the perception about it being the epicentre of Islamic extremism on the verge of an explosion in both political and social areas. Not only that, many influential voices in the United States in particular, are not convinced that Islamabad is doing all that is needed to put down Islamic extremists.

In an editorial the day after Prime Minister Aziz left town, The Washington Post not only advocated unilateral US action against extremists if Islamabad failed to act on its own. It resorted to name calling. Calling President Pervez Musharraf, “a meretricious military ruler,” it advised the administration of President George W. Bush that “if targets can be located, they should be attacked — with or without General Musharraf’s cooperation.”

The newspaper had a long list of complaints against the Pakistani leader. “Gen Musharraf has never directed his forces against the Pushtun militants who use Pakistan as a base to wage war against American and Afghan forces across the border. He has never dismantled the Islamic extremist groups that carry out terrorist attacks against India. He has never cleaned up the Islamic madressahs that serve as breeding grounds for suicide bombers. He has pardoned and protected the greatest criminal proliferators of nuclear weapons technology in history, A.Q. Khan, who aided Libya, North Korea and Iran. And he has broken promises to give up his military office or return Pakistan to democracy.”

If the visit by the prime minister was meant to change some influential minds about the way they view his country, it cannot be counted as a great success. The Post’s editorial could not be seen as a ringing endorsement of a country in which American corporations could do business. This segment of opinion-makers in Washington was not prepared to recognize that by following mindlessly the American dictat, President Musharraf’s regime — in fact any regime in Pakistan — could not expect to stay in power by totally alienating its own people. It was also ironical that even after the occupation of Iraq and the use of lethal force against the insurgency in that country, the US was not able to capture or kill Zarqawi, the Jordanian militant. It expected Pakistan to do that with respect to Osama bin Laden and Ayman al Zawahiri with considerably smaller resources and in much more difficult terrain.

While improving Pakistan’s image with respect to its participation in the struggle against Islamic extremism is not fully in Islamabad’s control, what it could do is to measurably improve the quality of its human resource. Here the public policy continues to fail in spite of the large amounts of new money committed to investment in higher education and skill development. Much of the effort under President Musharraf has been directed towards the use of public funds to open new avenues for advance education for Pakistani students.

Only time will tell whether this initiative will bear fruit. What the government could have done but didn’t do was to establish new institutions or significantly improve those that are already operating in a few areas where Pakistan could carve out a place for itself. An approach that was built on public-private partnership would have been very helpful in this area of human resource development.

Some specific initiatives could still be taken. The government could invite the private sector to establish some institutions of excellence — for instance a health sciences institute in Lahore, an advance engineering and technology institute in Karachi, an urban planning institute at Hyderabad, a small scale engineering institute at Muzaffarabad, a transport institute at Peshawar, a banking and finance institute at Islamabad, and an agricultural sciences institute at Faisalabad.

These are some examples of the kinds of initiatives the state should take to avail itself of the advantage of a large and young population that could bring immense economic benefits to the country. In not developing such a strategy Pakistan is rapidly losing ground to other populous countries. It is still not too late to plan for the future and make a real attempt to move forward.

I AM going to add one more metaphor to the mixed metaphors I have already used as the basis of this series of articles on what should be Pakistan’s approach to the world outside. I believe that Pakistan sits atop a number of faultlines that, left unattended, will periodically shake the state’s edifice.

The most serious of these is various sects and interpretations of Islam that rub against one another in the geographic space that Pakistan currently occupies. Tolerating the rise of extremist Islam will produce a clash between these tectonic plates and create a chaotic situation not in just in Pakistan but in the entire Muslim world.

At the same time Pakistan’s geographic location puts it at the natural crossroads of international commerce. Pakistan could help connect the energy-rich countries in Central Asia and the Middle East with the energy-deficit China, India and Japan — Asia’s three economic giants. This will not be the first time that the space currently occupied by Pakistan connected the East with the West. It was the fabled Silk Road that brought the twain together centuries ago. It could happen once again and to Pakistan’s great advantage.

Finally, I am of the view that the pillars on which Pakistan has rested the structure of its foreign affairs are basically shaky. These were built when the country was young and had many fears that go with growing up in a difficult environment. Pakistan is now nearly sixty years old and it needs an edifice built on more sturdy pillars.

This faultlines-crossroads-pillars mixed metaphor suggests that in designing economic policies and relations with the world outside Pakistan’s policymakers should factor geography into the equation. They should take full cognizance of the fact that the faultlines that exist below the surface pose a series of serious dangers against which the country needs to be protected. At the same time the prospect of turning the country into a hub of international commerce should be fully taken into account in crafting domestic policies.

Unfortunately for several decades Pakistan’s policy makers let history trump geography. Four pillars were constructed over which a structure was built that proved to be particularly fragile. The first of these was persistent hostility towards India, justified on the ground that several generations of Indian leadership had not reconciled themselves to the emergence of Pakistan as an independent state, carved out of the land that Hindu fundamentalists regarded as their god-given domain. Pakistan shivered in anticipatory pain whenever some powerful groups in India talked about Hindutva as the philosophy of the Indian state.

The second pillar was erected to correct the mischief done by the departing British rulers of India as they partitioned their empire on religious grounds. The British used their well-tested divide-and-rule formula for governing other people while assigning Muslim and non-Muslim areas to Pakistan and India respectively. There is no reason why they should have left the choice of joining one of the two successor countries to the princes that ruled hundreds of states that were an integral part of their Indian empire.

After all London had never permitted the princes such discretion when it was in charge itself. The British decision was aimed at sowing the seeds of conflict in the area they had once governed so that they could retain some influence, perhaps as arbitrators. This was the genesis of the problem of Kashmir that has engaged Pakistan and India for close to sixty years and sapped so much energy out of Pakistan.

The third pillar was erected to take care of the felt need to define a Muslim identity for the country that was created in the name of religion. While there is no doubt that Mohammad Ali Jinnah, Pakistan’s founding father, did not wish to create an Islamic state, he nevertheless wanted to give the country a Muslim identity. This would have involved close relations with the Muslim world. It was never clear — and it is not clear to this day — how Pakistan should anchor its “Muslimness” in a world in which individual nation states seek to maximize their own interests rather than promote those of some abstract identity such as an Islamic Ummah.

Several other Muslim states — in particular those that were carved out of the Ottoman Empire — also struggled to answer the same question. Some of them sought to do it in terms of Pan-Arabism as advocated by leaders such as Egypt’s Gamal Nasser. Some other tried to create a loosely defined arrangement within the context of Pan-Islamism. None of these attempts really succeeded. As the French Islamic scholar Olivier Roy has observed in his book, Globalized Islam, while most Muslim states moved away from this preoccupation with finding a supra-national identity, this quest was never fully abandoned by Pakistan.

Islamic parties in Pakistan continued to weigh in with the demand that the state should even sacrifice its own interests in order to pursue a Pan-Islamic agenda. These parties are prepared to call out their supporters to agitate violently on the streets whenever there is a hint that the country may be about to define its foreign strategy only to take care of its own narrow interests.

The fourth pillar of state policy was constructed on the ground that supported the third pillar. This was to oppose Israel, the only other country besides Pakistan to have been created with religion as the defining concept. Given the circumstances of their birth there should have been greater empathy and understanding between the two countries. Instead Pakistan chose to oppose the Jewish state. For a long time Pakistani passports informed their holders that the documents they carried were valid for all countries of the world but the state of Israel.

Pakistan’s opposition to the Jewish state was based on what its leaders viewed as a conflict between Islam and Judaism. That was not the reason why most of the Arab states withheld recognition from Israel. I remember a conversation at Harvard University in 1967 with a Palestinian student who asked with some puzzlement as to why the Pakistanis were prepared to shed blood in their support. His question came following rioting in the streets of Lahore demanding active participation by the Pakistani state in the 1967 Arab-Israeli war. “We are fighting the Jews not because of religion but because they have expelled our people from our land and occupied it. This is a war over land; it is not a religious war,” he told me. But Pakistan never understood the difference; it doesn’t even today, a point to which I will return in a moment.

It was on these four pillars that Pakistan over time built a shaky structure. This structure was costly to maintain and would have come crashing down unless some new pillars were erected to support it. This is what the government headed by President Pervez Musharraf seems to be doing at this time. The only problem with the new strategy is that it is undertaking a massive shift in policy by using stealth as the instrument for demolishing an old structure before building a new one. President Musharraf should state openly and boldly that this is now the time to bring about a massive change in the way we look at the world outside.

It is wise on his part to begin to define Pakistan’s foreign policy in terms of the country’s long-term strategic interests and not on the basis of correcting the wrongs done in the distant past or on the basis of some romantic notions about creating a multi-state Ummah. But bringing about this long-needed shift in policy stance by stealth will consume time whereas the need for change is urgent. Also I don’t believe that it is prudent to explain this shift in policy in terms of old cliches rather than one based on realism and pragmatism.

The Istanbul meeting on September 1 between the foreign ministers of Pakistan and Israel was extensively reported in the mainstream American press. “Pakistan believes that by engaging Israel diplomatically, it can help resolve the Middle East crisis,” Khurshid Mahmud Kasuri, Pakistan’s Foreign Minister, explained to the press in a telephone interview from Istanbul. The minister said Pakistan had no immediate plans to formally recognize Israel, a step he said would come only “following progress toward the solution of the Palestinian problem”. This is precisely the wrong position to take.

There is no reason that Pakistan should carry on its shoulders the weight of the problems that confront the Middle East in defining its relations with an important country and an important community. Pakistan’s relations with Israel and the Jewish community should evolve on the basis of its own interests rather than on the basis of the interests of a vaguely defined Islamic Ummah.

Unfortunately, the Jewish community is also casting the evolution of its relations with Pakistan in light of Israel’s approach to the Muslim world. On September 17, President Musharraf is speaking at a dinner hosted by the Council for World Jewry. Some people of Pakistani origin have been invited to attend the dinner. The letter of invitation from Jack Rosen, Chairman of the Council, mentions a visit to Islamabad by him and Phil Baum and David Twersky which was undertaken “to find authentic political and religious leaders in the Muslim world with whom we can engage in a serious dialogue.”

The address by the Pakistani president is described as a historic opportunity “which will be carefully scrutinized in many parts of the world. It will have consequences.” It is an important event since President Musharraf is the “head of a large and devout constituency”. He has “repeatedly spoken out against extremism in the Muslim world. His doctrine of ‘enlightened moderation’ encourages Muslims to embrace pluralism, openness and tolerance”.

In sum, the reason why Pakistan should evolve a working relationship with the Jewish state and the Jewish diaspora is not because of the large size of its Muslim population. It should not even try to serve as a bridge between the Muslim populations around the globe and the Jewish people. This is a heavy burden to carry for a country such as Pakistan. Instead of spelling out these grandiose objectives, Pakistan should develop relations with Israel and the Jewish community in the United States and Europe since that would bring it many rewards. It is in Pakistan’s interest to steer itself in the extremely turbulent international waters of today, focusing only on its own goals and minding its own interests.

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Table 1.1: Trends in External Debt and Foreign Exchange Liabilities (US$ billion)

Year Total External Foreign Exchange Total External Debt and
Debt Liabilities Foreign Exchange Liabilities

1989-90 19.2 2.7 21.9
1990-91 20.0 3.2 23.2
1991-92 21.9 4.5 26.4
1992-93 23.9 5.7 29.6
1993-94 26.9 7.1 34.0
1994-95 28.7 7.3 36.0
1995-96 29.8 9.1 38.9
1996-97 29.5 11.0 40.5
1997-98 30.3 12.4 42.7
1998-99 33.5 4.1 37.6
99-00 32.2 5.7 37.9
2000-01 32.1 5.0 37.1
2001-02 33.4 3.1 36.5
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Economic Problems

EVER since its birth almost 60 years ago, Pakistan’s economy has been on a roller-coaster. It does well when foreign capital flows become available to the country. This happened in the first seven years of President Ayub Khan’s tenure when America poured in economic and military assistance into the country. The consequence was a pick up in growth with the rate of increase in GDP improving to more than 6.5 per cent a year.

In the first post-independence decade, the GDP had increased by only 2.7 per cent a year. The American flow of money was in return for Pakistan’s participation in the defence pacts sponsored by the US to contain the spread of communism to Asia. America’s help stopped after Pakistan went to war with India. It resumed again but at a much reduced level.

In the 1970s, Pakistan isolated itself from the West first by initiating military action against the secessionist forces in East Pakistan and then by opting for an independent foreign policy. Under Prime Minister Zulfikar Ali Bhutto, Pakistan built strong relations with China, a country that was out of favour with the United States.

Accordingly, Bhutto’s Pakistan was not a favoured destination for foreign assistance. His socialist policies which led to the nationalisation of large scale industries and commercial banks were not popular with such development institutions as the World Bank and Asian Development Bank. They also reduced the amount of assistance provided to the country. There were other reasons for the economy’s poor performance during the Bhutto period, but fall in foreign flows played an important role. The rate of growth in GDP declined to only 3.9 per cent in 1971-77.

Pakistan did not immediately return to favour following the demise of Bhutto’s regime. That happened in 1980 following the invasion of Afghanistan by the Soviet Union. Once Pakistan signed on as a very active partner in the American effort to force Moscow out of Afghanistan, foreign flows started in large quantities once again. That led to a pick-up in GDP growth; it increased to 6.5 per cent a year. But the flow of American money began to dry up again once Pakistan’s job was done and the Soviet Union vacated Afghanistan. In 1989, President George H.W. Bush failed to certify that Pakistan was not engaged in developing a nuclear bomb. That certificate was a condition of continuous American support. In its absence, US aid stopped flowing.

In terms of foreign capital flows, the 1990s were a difficult period. The decision by the government of Prime Minister Nawaz Sharif to follow India and carry out nuclear tests in May 1998 resulted in western sanctions being imposed on both countries. Once again, there were other reasons for the slowdown in economic growth but a decline in the availability of foreign capital was an important contributing factor. The rate of GDP increase declined to 4.7 per cent a year in 1988-99.

The military government that took office in October 1999 had to wait for two years before Pakistan gained favour once again with the West, in particular with the United States. That happened immediately after the terrorist attacks of September 11, 2001, on the United States. Large amounts of foreign assistance began to flow into the country after General Pervez Musharraf pledged his full support for the American war against terrorism.The economy benefited from the opening up of the aid tap. America also helped by easing Pakistan’s debt burden. The rate of GDP increase began to pick up in 2003. For the 1999-2006 period, I estimate GDP growth at 5.7 per cent a year. The conclusion from this quick overview of the performance of the economy over the last 60 years is obvious: there is a direct relationship between Pakistan’s economic performance and its foreign policy.

Pakistan is about to hit a rough spot again. What happened in 1965 when the country fought a sharp and brief war with India and what happened again in 1989 when Pakistan, working with the United States, was able to force the Soviet Union out of Afghanistan, is going to occur again. History will repeat itself, perhaps not this year, perhaps not also in 2008, but most likely in 2009 when the reins of the American government will change hands in Washington.

What I am referring to is the likelihood of the withdrawal of American assistance to Pakistan. This will happen as the situation worsens both in Iraq and Afghanistan and Washington, under a new set of leaders, begins the process of pulling out of these two countries.

Two, not so subtle changes are afoot in Washington. The first is a growing belief that it was wrong for America to attack Iraq and, once having attacked that country, not plan properly to occupy it. For the moment, the critics of the Iraq war — and they are growing by the day as the number of American casualties mount and the Sunni-Shia conflict takes on a sharper edge — are of the view that instead of spending more human and financial resources in that losing endeavour, Washington should concentrate on Afghanistan.

The American invasion of Afghanistan and the defeat of the Taliban are generally considered to be justified moves. It troubles many people that by going into Iraq, Washington allowed itself to be distracted from what should have been its main aim: to destroy for good the bases from which terrorists could attack America and its interests, and to create an environment that would not produce movements such as Al Qaeda.

The second change in thinking is equally important. For instance a recently published book by a highly respected scholar, John Mueller, presents a case to the American public that it did not adopt the right set of policies after the terrorist attacks on its territory. Titled Overblown, the book argues that the United States’ response to 9/11 — not just the war in Iraq but the entire war on terror — was an overreaction. The response was overblown.

In his words: “Which is the greater threat: terrorism, or our reaction against it? . . . A threat that is real but likely to prove to be of limited scope has been massively, perhaps even fancifully, inflated to produce widespread and unjustified anxiety. This process has then led to wasteful expenditures and policy overreactions.”

The stage, therefore, is being set for America to pull back from some of the forward positions it has taken since 9/11. There are many moments in the country’s history when, after a military effort that produced unhappy results, America withdrew into itself, leaving the world to take care of itself. Such a moment arrived more than a century ago when its military involvement in the Philippines became unpopular at home. The result was a period of isolationism broken only by the First World War. America was reluctant to enter the Second World War. It was drawn into it by the successful machinations of Winston Churchill and the ill-advised Japanese attack on Pearl Harbour.

If the successor to President George W. Bush in the White House decides to rewrite American strategy in the world he (or she) is very likely to abandon the pre-emptive strike option that became the Bush doctrine. There is great likelihood that the next US administration will leave the world more or less on its own.

If that happens, what will be the consequences for Pakistan? What I have said above about the possible change in thinking by the American policy elite was by way of a prelude to the suggestion that Pakistan is once again headed towards difficult times. Contrary to what the country’s leaders have repeatedly said — and possibly believe in — Pakistan has not prepared itself for the day when it will have to stand on its own feet.

The economy has done well in the last three years for the simple reason that it has received large amounts of external capital flows to produce savings for investment. These flows have come from five sources: American assistance, assistance provided by other donors, remittances by the members of the Pakistani diaspora, investments by foreigners and foreign entities and capital raised in international financial markets.

Four out of these five sources are likely to reduce the amounts they are prepared to direct towards Pakistan if political instability returns to the country and if Islamic radicals gain further ground. If that were to happen, even the fifth source — the Pakistani diaspora — may have serious misgivings about its continuing involvement.

While the large amount of American assistance to Pakistan since 9/11 was the product of that country’s preoccupation with terrorism, other donors, and foreign investors were putting money into the country out of a conviction that Pakistan needed to be helped or had some attractive opportunities available for making a reasonable amount of profit for the willing investor.

These perceptions have also begun to change. Islamic militants are becoming more assertive in the country lending to the increasing belief that Pakistan is not a safe place to do business in. The western press has also begun to project its belief that Pakistan is getting involved in activities that are deeply resented by its neighbours. On two days, February 19 and 20, 2007, The New York Times published three stories that portrayed Pakistan in an unfavourable light. In one, the paper detailed how North Waziristan had become the new base for Al Qaeda’s operations.

Then there was the accusation by a senior Iranian official according to which a Sunni group was using western Balochistan as a sanctuary and training ground for mounting attacks on the country’s Revolutionary Guards. And, finally, there was a story that militants operating out of Pakistan may be responsible for blowing up a Pakistan bound train north of New Delhi. Nearly 70 people were killed in that incident.

With likely reduction in American assistance, with the shying away of foreign investors and with exports not increasing at the rate at which they can adequately finance critical imports, Pakistan will have to rely almost totally on the amounts sent from abroad by the members of the expatriate community. There are two parts to this particular flow. One part constitutes the money sent in to support families and friends. The other part represents investments made in the homeland by the members of the diaspora. The second part will be in jeopardy if the international community loses confidence in Pakistan’s economic future.

It is unfortunate — and it is a consequence of the failure of public policy — that Pakistan is once again heading towards difficult times. It has made little effort to provide a domestic base for the growth of the economy. Without such an effort in place, Pakistan seems poised to take another plunge down the economic roller-coaster.
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High cost of the conflict

ECONOMIC costs associated with the pestering Kashmir conflict and the resultant slowdown in the rate of economic growth can be estimated by using counterfactual analyses of the type described in a previous article. This can be done by estimating the cost of the conflict and likely benefits that would have resulted had relations between the two countries been more amicable.

We can distinguish among four different costs of the conflict and than estimate the benefits that would have accrued to the economy and to the society had India and Pakistan been on better terms with each other. The four areas of likely benefit include reduced military expenditures; increase in intra-regional trade, in particular trade between India and Pakistan; a larger flow of foreign direct investment; and an investor-friendly domestic environment.

There is no doubt that in the absence of the Kashmir dispute, military expenditure as a proportion of GDP would have been lower in the case of Pakistan than for India. Small countries in the neighbourhood of large states tend to spend less on defence if relations among them are cordial. In 2002, Argentina, for instance, spent only 1.1 per cent of its GDP on defence compared to 1.6 per cent for Brazil. For Canada, the proportion was only 1.1 per cent compared to 3.4 per cent for the United States.

Even Bangladesh, that now has uneasy relations with India, the country’s much larger neighbour, spent only 1.1 per cent on defence. If Pakistan had spent 2.5 per cent on defence — a proportion roughly equivalent to that of India — it could have saved as much as three per cent of GDP a year. Compounded over this period, the amount saved is equivalent to four times the country’s gross domestic product.

What would have been the consequence if this entire amount had been invested in the economy? Assuming that the rate of return would have been the same as that realized from investments in the past, additional capital flows into the economy would have significantly added to the rate of growth of the economy. Put another way, military expenditure maintained at a level of 2.5 per cent a year with savings utilized at an incremental capital ratio of four — which means that investment equal to four per cent of GDP raises the rate of GDP growth by one per cent — would have increased the long-term GDP growth rate by as much as 0.75 per cent a year. This addition to the rate of GDP growth compounded over a period of 55 years would have meant an increase of more than 50 per cent in the size of the gross domestic product.

While a smaller amount committed to military expenditure would have directly contributed to increasing GDP growth, conflict with India also hurt Pakistan by reducing trade as a proportion of its economy. India’s initial antipathy towards Pakistan was not the result of the Kashmir dispute. The first generation of Indian leaders — in particular Jawaharlal Nehru, the country’s prime minister and Sardar Vallahbhai Patel, the powerful interior minister in the first Indian cabinet — were angry at Mohammad Ali Jinnah, and his political associates.

Jinnah and his colleagues stood in the way of the realization of the Hindu leadership’s dream of a united India. The Indian leaders were also convinced that they could get Pakistan to return to the Indian fold by increasing the economic cost of separation. It was this reason and not because of Kashmir that India launched its first trade war against Pakistan. However, Kashmir later worsened relations between the two countries and progressively loosened the strong economic links that had existed between the two parts of British India before they became independent states.

Had the two countries continued to trade at the level of the exchanges that occurred before independence, the rate of increase in international trade in the case of Pakistan would have been of the order of eight to 10 per cent a year, rather than the average six per cent achieved over the last quarter of a century. This, too, would have contributed to increasing the growth in GDP.

The World Bank maintains that growth in trade leads to an increase in GDP by a perceptible amount. It is not an exaggeration to suggest that by maintaining trade with India at the levels of the late 1940s Pakistan would have added another one-third to half a percentage point to its GDP increase. This would have meant an additional one-third increase in the current level of GDP.

The other important outcome of good relations with India would have been greater flow of foreign direct investment into the country. The contribution large FDI flows have made to the development and modernization of the economies of East Asia is now well recognized. South Asia has not benefited from the increased availability of these flows in large part because of the security problems associated with the Kashmir conflict.

There were other reasons as well, among them the less open economic policies followed by the countries in South Asia for nearly four decades. However, even when these policies were abandoned in favour of greater openness — and they were in the early 1990s — foreign capital still did not become an important component of investment for the South Asian region. This was particularly the case for Pakistan. Better relations with India and greater amounts of intra-regional trade would have brought in additional foreign direct investment into the country, adding significantly to the relatively low level of domestic savings and domestic investments. In 2002, Pakistan received $823 million FDI compared to $3 billion for India. Both countries did poorly in that area compared to those in East Asia. For instance, Malaysia received $3.2 billion, Thailand $2.4 billion, South Korea $2.0 billion, and the Philippines $1.1 billion.

Foreign investors stayed away partly because of the less open economies of the region but also because of the virtual absence of intra-regional trade and a deep concern about security. If these concerns were not there, both India and Pakistan would have attracted amounts of capital on the order of perhaps $10 billion for the former and $2 billion a year for the latter. Two billion dollars of foreign flows would be equivalent to three per cent of Pakistan’s GDP.

Pakistan has had a long history of poor domestic savings rates which translate into low rates of investment unless foreign capital is available. In the 1990s while domestic savings increased from 11 to 13 per cent — from 1990 to 2002 — gross capital formation declined by four percentage points, from 19 to 15 per cent of gross domestic product. The eight per cent savings-investment gap was covered by foreign flows in 1990; the decline in foreign flows brought investment closer to domestic savings by 2002.

Had foreign private capital been available in 2002 to the extent suggested above — in the neighbourhood of $2 billion a year — this would have brought investment back to the levels of the late 1980s. Foreign flows amounting to about three per cent of GDP would have added about 0.75 per cent to the rate of economic growth.

A serious investment gap emerged between Pakistan and India in the 1990s at the height of the insurgency in Kashmir. According to a study carried out by Ijaz Nabi and his associates at the World Bank, private investment in India and Pakistan was about the same in 1982-1991. However in 1992-2001, private investment in Pakistan was six percentage points lower than in India. A part of this gap — say about 75 per cent — can be attributed to the deterioration of the investment climate in Pakistan caused by the rise of Islamic militancy in the country which in turn was associated with the Kashmir problem.

These factors lowered investment rates in Pakistan by 4.5 percentage points compared to that in India. This implies loss in growth of at least one percentage point of GDP. Stable relations with India would have brought economic and perhaps also economic stability to Pakistan. This would have produced better investment climate in the country and contributed to higher levels of domestic savings and investment. This would have also contributed to increasing the rate of GDP growth.

By aggregating the four positive consequences for the Pakistani economy if the country had not gotten embroiled in the Kashmir dispute, it would appear that the country’s long-term growth rate could have been some two to two and a half percentage points higher than that actually achieved. A higher rate of growth of this magnitude, sustained over a period of half a century, would have increased the gross product by a factor of between 3.4 and 4.4. Pakistan’s gross domestic product could have been three and a half times larger than that in 2003-04 — $330 billion rather than $95 billion — and its income per capita would have been $2200 rather than $630 had the country been at peace with India.

This estimate, of course, is a very rough order of magnitude. It is based on a series of heroic assumptions about the efficient use of resources diverted from military to development expenditure; about a significant increase in trade with India and higher level of trade contributing to economic growth; about Pakistan becoming an attractive area for foreign direct investment; and about domestic savings and investment increasing with the presence of tranquillity in the region. Even if half of the benefits estimated above had been actually realized, they are sizable and they would have changed the economic, political and social complexion of Pakistan.

In sum a good case can be made that Pakistan, in particular, has paid a very heavy economic, social and political cost for continuing to keep the Kashmir case on the front burner. This is a good time to take a very hard look at the cost-benefit calculus of the position the country has adopted in the past over the dispute in Kashmir. The situation has begun to change largely because of the promise of peace between India and Pakistan. New investments have begun to flow into the country in particular from the Arab world; Pakistan’s own private sector has become active; the rate of economic growth has picked up perceptibly; the incidence of poverty has begun to decline; Pakistan now seems ready to join other fast growing Asian economies. It would be a pity if Kashmir is allowed to intervene once again in the form of a dispute that attracts extremist elements in both countries. They will try to derail the process on which India and Pakistan are currently engaged. Both Delhi and Islamabad must resist these attempts.
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Security Implications for Pakistan

A nation's foreign and security policy formulation and execution rests on the quality of its domestic polity. The quality of domestic polity, in turn, is based upon the nature and type of its civil-military relations. Huntington argues, "Nations which develop a properly balanced pattern of civil-military relations have a great advantage in the search for security...[and] nations which fail to develop a balanced pattern of civil-military relations squander their resources and run uncalculated risk." [40]

Having discussed the causes of intervention we now come to the ramifications of the intervention. What are the imperatives of the military regime for Pakistan's security? In the first instance, has security under the military regime improved or been undermined? How is security defined and interpreted under the military, internally or externally? What view of security prevails and remains predominant under the current regime? And more specifically, how does the present, overtly military rule impact Pakistan's foreign security relations, especially vis-à-vis the United States, India, and Afghanistan? Is there any substantial foreign policy shift in relation to these countries?

Today the concept of "security" can primarily be defined along two broad dimensions: internal and external. Traditionally, this distinction was based upon the assumptions that threats to a state's security arise from outside its borders and that these threats are primarily, if not exclusively, military in nature and usually require a military response if the security of the target state is to be preserved. [41] In other words, a state's level of security and insecurity is defined in relation to vulnerabilities—both internal and external—that threaten to have the potential to bring down or weaken state structures, both territorial and institutional, and governing regimes. [42] Therefore, as Caroline Thomas explains, in the context of developing states, "Security does not simply refer to the military dimension, as is often assumed in Western discussions of the concept...[but also to] the search for internal security of the state through nation-building, the search for a secure system of food, health, money and trade, as well as the search for security through nuclear weapons." [43] Thus, to ensure a state's security, a delicate balance must be preserved and reconciled between the military and civil society. The dilemma this relationship poses for a developing country is in the question, "What if the two are mutually exclusive?" Or, "What if there exists an inverse or a trade-off relation between the two?" In the context of developing countries, promoting and strengthening one may weaken the other, since the balance is so delicate and precarious to preserve either by civil or military regimes in developing countries. For military regimes, achieving this balance tends to be more difficult because of the fact that military regimes, more often than not, are favorably disposed towards an economic-military view of national security—which usually translates into forming an alliance relationship with external (super or great) powers. Given this security paradigm, the questions arise as to how military regimes in Pakistan conceive of national security, and how the present regime contemplates the reconciliation between internal and external components of national security?

Internal Security
The regime's primary stated objectives on the eve of the takeover were internal in nature. These objectives included "putting the house in order," so to speak, by creating a basis for economic development, building institutions, restructuring, and establishing accountability. At the same time, the regime had also promised to initiate the process of democratization at the grassroots level, and had given a specific timeframe in which it expected to bring the plan to fruition. As such, the drive for legitimacy was motivated internally. The regime has met with some degree of success, in the eyes of some (this success appears marginal to others) in its movement for accountability and collecting more revenue. It is interesting to observe that, unlike the Ayub and Zia regimes, the present regime has not faced significant political opposition. Rather, the main opposition comes from two other sources. The first is the business class—owing to the government's attempt to impose tax reforms resulting in new taxes. The other set of people who could conceivably defy the military regime are religious groups. Religious political parties rose to the fore in response to the governments' proposed procedural amendments to blasphemy law, which they found unacceptable. As a result of the opposition from the business class and religious parties, the government had to withdraw on both of these accounts. Despite the significant opposition from these quarters, however, the corresponding political parties were unable to take advantage politically on a national scale on the strength of these issues. Rather, the politicians and political parties have responded in an opportunistic way to the idea of local body elections (at the district level), and in a way have politically accepted and facilitated the legitimization of military rule. This also suggests that the military's success in intervening and maintaining its hold in Pakistan owes a great deal to the gross inability of political parties to organize and align themselves.

The Socio-economic View of Security
A cursory glance at the history of democratization in Pakistan reveals the trend that the end of one economically progressive authoritarian regime marked the beginning of an economically regressive civilian regime, and vice versa. For instance, Ayub's era—known as progressive in economic terms—was followed by the secession of East Pakistan (a political failure) and Bhutto's regime, whereby industry received a setback as a result of nationalization policies. Similarly, during the Zia era in the 1980s, Pakistan's economic performance was far better than that of most of the developing countries in the world. This period was followed by the brief regimes of Nawaz Sharif and Benazir in the 1990s, during which time economic activity and performance was at its lowest ebb, despite the opening-up of the economy through measures like trade liberalization, privatization, and deregulation.

Therefore, because of this pattern some economists are of the view that the economic aspect of security improves during the reign of military regimes, while the rule of political-constitutional governments produces economic chaos. According to Shahid Javed Burki, "The type of democracy we had practiced under two of our three constitutions—the constitutions of 1956 and 1973—had not been good for economic development. These two constitutions—unlike the constitution of 1962—were given by civilian rather than military leaders. The first of these two constitutions had produced economic chaos. The second—the Constitution of 1973—was really operative in two periods. During both—1973-77 as well as 1988-99—it had seen a dramatic slowÐdown in the rate of economic growth and a sharp increase in the incidence of poverty." [44]

Nonetheless, what is significant and necessary is to quantify how much of the economic development can be attributed to the good governance and managerial performance of the military regime, and to what extent it is just a function of foreign policy compliance resulting in the easy flow of international capital. Second, economic benefits alone never present the full picture, unless we also calculate the socio-political and economic costs (in the form of the deepening of debt crises for generations to come) associated with the decisions. While the military regimes in Pakistan have been successful in negotiating and achieving foreign policy objectives, their performance in the domestic theater has been abysmal. It is quite obvious that the internal component of security weakens during military regimes. For instance, both Ayub and Zia successfully concluded separate economic and military package deals with the United States and enhanced the economic-military view of security, but had severely negative fall-outs in the area of internal security. The regimes of Ayub and Yahya Khan culminated in the separation of East Pakistan. Zia's ten years of rule saw the rise and upsurge of ethno-linguistic factions, the extreme polarization of society and militarization of religious groups, along with an increase in the spread of guns, drugs, and social violence. The present regime again follows the trend of past regimes in securing aid and loans from abroad, as comprehensive economic packages are reportedly being worked out in Washington, the European Union, and international financial institutions out of its foreign and security policy compliances. [45]

The Impact of the Events of September 11
The events of September 11 have further complicated the issues of military intervention and democratization of society and the polity in Pakistan. First, the aftermath has given the military regime an international legitimacy, as Pakistan's support and participation was critical to the United States in its fight against Afghanistan. This may hamper and delay the process of democratization, owing to the kind of legitimacy and financial support the regime enjoys from international quarters. In other words, these circumstances may prove to be a replay of the sort of situation present under the Ayub and Zia regimes. Second, the serious ramifications of September 11 in terms of Pakistan's military regime are that in drawing attention to its foreign policy-making role, it has also highlighted its sensitivity to internal security policies. Though civilians and military may never differ substantially on foreign policy choices, the military's explicit rule means facing the wrath of the public. As the events following September 11 have shown, the military's popularity and internal legitimacy have been eroded drastically. Therefore, there is a shift in the regime's drive for legitimacy: from internally driven to an externally or internationally oriented one. This may also mean a greater compliance at the international level with the United States and the West at the security policy level, translating into a more repressive regime internally.

Institutional Fall-outs
September 11 carries the most serious policy repercussions for national security related organizations. In early October, General Pervez Musharraf moved swiftly against military commanders who resisted his support for the United States, forcing many to the sidelines or into retirement. Now, men who owe their jobs to him personally fill all of the top army posts. Analysts of the Pakistani military say that it amounts to a coup within a coup, and the most important change in twenty years. [46] The dismissal and reshuffling of the top brass within the army can be interpreted in two ways. It signals the friction or tension concerning the organizational integrity of the army—something never exposed before in such clear terms. At the same time, it reflects the army's ability to resolve and overcome national security policy-making dilemmas. This friction is natural once the army evolves into an agent for security policy-making, rather than policy-implementing,which is inherently riskier and dangerous. One analyst suggests, "The friction itself may have been caused by certain structural imbalances that are the product not so much of the military's internal working but its interaction with civilian governments and the rise in its stature from implementers of policy to makers of policy." [47]

In a move similar to this purging of military commanders, three top nuclear scientists were detained for questioning about their links and alleged sympathies toward the Taliban. A more grave concern is not that the top brass generals and scientists were dismissed over the perceived policy differences from within, but for the extraneous reasons of their alleged allegiance and sympathies toward the Taliban. These acts indicate a disturbing eagerness to acquiesce and accept the influence of the United States and its interpretations of the security structure of Pakistan.

The External Security Economic Front
As referred to above, the military regime has shown a somewhat better performance on the external economic front by securing fresh loans and the rescheduling of debt payments from international sources like the Asian Development Bank (ADB), International Monetary Fund (IMF), and the World Bank. A profile of the government's cabinet also reveals a strategy of pursuing economic management. These developments resulted in steady cash inflows and debt restructuring by the new economic managers, even before September 11, 2001.

Nonetheless, complying with IMF reforms and adjustments means negating and going against local and national industry and business, in the form of the imposition of new taxes, price hikes in utilities and food, and taking away subsidies. These policies created an environment discouraging investments by domestic investors who become alienated and frustrated with the present regime. This is a situation again quite unlike that of the Ayub and Zia regimes. The Ayub regime not only made foreign capital inflow available, but also augmented local industry through financial incentives and reforms. Similarly, Zia also made reversals on Bhutto's decision to nationalize and won the confidence of local/national business and industry people. Meanwhile, the present regime seems to be at odds with local business and investors and relies heavily on foreign goodwill. The problem with foreign inflow is that it is highly volatile, inconsistent, unreliable, and strategic in nature (since it depends heavily on the state of international politics). Hence, too much reliance on foreign sources of financing makes the regime more vulnerable—and weakens national security in the long-term perspective.

The scenario also implies, if a trade-off between internal security and international security exists, that the present military regime is certainly disposed towards achieving national security through strategies involving international security, rather than through internal policy.

The United States
One of the common features that invariably all military regimes in Pakistan emphasize is extremely good relations with the United States. This may be because of a strange coincidence whereby military takeovers in Pakistan have accompanied a resurgence in its geo-political significance in world politics—thus making Pakistan a "frontline" state, and hence explaining the convergence of its interests and security policies vis-à-vis the United States.

Nevertheless, unlike previous military regimes in Pakistan who had other options for conflict resolution (rapprochement with the Soviet Union, for example, during the Zia regime)—the present regime seems to be under intense pressure to cooperate with the United States. [48] It may very well be that the regime was already inclined to cooperate, but in any case for all practical purposes it had no option other than to do so. Pakistan, upon resisting American wishes, would have been perceived as harboring terrorists and hence considered equally responsible for the events of September 11. In addition, India's readiness to join the American coalition against Afghanistan generated greater impetus for Pakistan to join the United States as well. The gravity of the situation was reflected in General Musharraf's statements that an alliance with the United States was a dire necessity and Pakistan chose this option in order to save its strategic interests and assets. At the same time, Pakistan is in pursuit of its legitimate concerns vis-à-vis Afghanistan; that is, not to have an unfriendly and pro-Indian regime in post-Taliban Afghanistan. The United States at the moment seems to take note of this concern. However, the question arises, what if the Taliban—predominantly a Pashtun entity that Pakistan has now antagonized—remains in one form or another? What if the United States pulls out abruptly (as happened in 1990) and leaves Pakistan once again to face the wrath of Afghan turmoil or civil war? What if the United States stays for longer than required? What if the United States becomes unable to set up a broad-based government in Afghanistan? What if the Northern Alliance and other groups vying for power refuse to accept the American version of peace? What if civil war persists?

The more pertinent issue here is to look for the degree of U.S. interests and hence America's commitment to Afghanistan and the region. This would be a determinant for explaining its security relations with Pakistan. At a very broad level, U.S. interests seem to be a mixture of short and long-term objectives: from the capture of Osama bin Laden and al Qaeda forces, to the destruction of terrorist camps, to routing out the Taliban, to oil pipeline and geo-strategic interests. These do not relate to September 11 only, but instead date back even before that. [49] Though the idea of the pipeline and geo-strategic interests are more often than not denied by the representatives of the U.S. State Department, [50] nevertheless, they do talk of its viability indirectly, and the opinion that the economic benefits of an oil pipeline will have a stabilizing impact for all states in the region, including fostering a strategic stability in post-Taliban Afghanistan.

Accordingly, the U.S. concern for Pakistan's strategic stability has increased manifold owing to the following:

i) Pakistan's geo-strategic centrality for providing a foothold in Central Asia and Afghanistan.

ii) The fact that most of the strategic analysts in Washington envisage the possible scenario (although this currently has a remote chance of coming true) that Pakistan, a country with nuclear capabilities, risks being taken over by radical Islamists. Hence, the United States wants to reduce such a possibility either by helping the regime in politico-economic terms or by evolving means to ensure the safety of Pakistan's nuclear weapons.

iii) The perceived need for greater control of fissile materials and its possible leakage into "the wrong hands" through personnel working in Pakistani nuclear installations.

iv) The desire to avoid nuclear war in the region. The India-Pakistan conflict and its escalation to an exchange of nuclear weapons is perhaps the more real and probable threat than any of the above.

Hence, American interest in the stability of the present military regime is not simply something related to the phenomenon of September 11 and its aftermath. Right on the eve of the takeover, General Anthony C. Zinni, Commander-in-Chief of the U.S. Central Command, said, "If Pakistan fails, we have major problems. If [military strongman, Pervez] Musharraf fails, hard liners could take over, or fundamentalists, or chaos. We cannot let Musharraf fail." [51] This was clearly pointed out in a report published in the Washington Post, that it was Zinni who "pushed the Clinton administration to open the diplomatic door with Musharraf when many demanded it be slammed shut. Convinced that Pakistan should be a regional stabilizing force, he helped persuade Clinton to visit Musharraf in March." [52]

It is equally important to recognize how Musharraf responded to the United States on the eve of the takeover. "When the general finally placed his call it was not to President Clinton, Secretary of State Madeleine K. Albright, Defense Secretary William S. Cohen or the U.S. ambassador in Islamabad. Instead Musharraf telephoned Marine Corps General Anthony C. Zinni, who happened to be sitting with Cohen at an airfield in Egypt. 'Tony,' Musharraf began, 'I want to tell you what I am doing...'" [53] This suggests the usefulness of further study, beyond the scope of this paper, on the deeper institutional links between Pakistan and the United States, especially as to how military-to-military relations impact democratization and polity in Pakistan. Some experts are of the view that institutional linkages of this sort may be the cause of democratization in Pakistan, as the U.S. military has become more sensitized over a period of time to the promotion in an effective way of democracy in developing countries. [54] Such linkages may act as an inhibiting factor preventing the military from intervening in a given country. Similarly, the U.S. military can effectively exert pressure for a return to democracy once a coup has taken place. Nonetheless, it can have the opposite impact as well, as happened in the case of Pakistan in past decades. With the realization of Pakistan's enhanced geo-strategic significance and American concern for regional stability, the military's presence in the polity is bound to prolong itself, as happened in the cases of Ayub and Zia. General Musharraf has already indicated that he intends to remain as President and Chief of Army Staff (COAS) even after holding the elections in 2002.

An issue related to the stability of the military regime is the nuclear program and policy of Pakistan. Seymour Hersh, famous investigative journalist on nuclear affairs, articulates this American concern: "The Bush administration's hunt for Osama bin Laden and his Al Qaeda network has evolved into a regional crisis that has put Pakistan's nuclear arsenal at risk, exacerbated the instability of the government of General Pervez Musharraf, and raised the possibility of a nuclear conflict between Pakistan and India." [55]

The scenario envisioned by Hersh and a consequent contingency plan for Washington as to what happens to Pakistan's nuclear weapons in the case of any instability for the regime concerns taking care that those nuclear weapons do not fall into the hands of religious extremists, with the possible involvement of not only the Pentagon, but also the special-operations unit 262 of Israel. [56] This presents a very bleak security scenario for Pakistan, implying that nothing is secret and secured from Israel and the United States (and also suggests the potential for the involvement of India, given its level of cooperation with the two). Dr. Hasan Askari Rizvi responded to the article in a very comprehensive manner, asserting that the Pakistani army has established an elaborate and effective command and control authority over nuclear weapons, ever since 1977. In addition, he also showed that over a period of time various forces have attempted to defame Pakistan's efforts to become a nuclear state in the wake of Indian nuclearization, by terming it as an "Islamic bomb" and speculating about a possible attack on nuclear installations in Pakistan. [57] Though Dr. Rizvi has emphasized that this is a speculative scenario, it is not inconceivable, given that the American forces are already stationed in Pakistan, and considering the historical level of distrust and the fact that despite the on-going cooperation between the United States and Pakistan, American authorities, media, and think tanks [58] continue to differentiate between the military and Pakistan's main intelligence service, Inter-Services Intelligence agency (ISI) and subsequently end up blaming ISI for non-cooperation with the Musharraf regime and the United States. Therefore, any change in government regimes in Pakistan (though the chances are very remote, since it ignores the current institutional and societal dynamics) is bound to be interpreted as a result of religious extremism.

At this point, it is equally important to recognize that the opposition and resentment to the United States, and hence with the Musharraf regime, are of two types: one which is obviously manifested in the streets of Pakistan is religious-based activism; the second can be termed as a secular, genuinely nationalistic and patriotic one—passive and institutional in nature. The problem with American government, think tanks and media is that they are overwhelmed with radical Islam and hence unable to make distinctions between these two types of opposition, and increasingly the latter gets mixed up with the former one. This could prove fatal for the United States in the long-term, where America sees states like Pakistan either as blind and faithful allies or as religious extremists. In other words, people and institutions with genuine patriotic concerns are likely to be dubbed as radicals, and hence treated likewise. Therefore, the very rationale for going all-out along with the United States, perceptibly in order to enhance stability and security for Pakistan by the military regime, is not free from challenge and criticism.

Historically, U.S. policy towards Afghanistan had always been shared by and converged with that of Pakistan. Contrary to popular belief, Pakistan never followed an independent path divergent of U.S. interests and policies vis-à-vis Afghanistan. The Taliban has been attributed as a creation of both the ISI (though not acting alone) and the CIA, since both wanted strategic stability in the region. [59] In fact, what happened after the Taliban established power was that the Taliban's extremism, ties with Osama bin Laden, and refusal to cooperate with Unocal (who had proposed the construction of a Central Asia Gas pipeline between Turkmenistan and Pakistan that would have crossed western Afghanistan) made the United States anti-Taliban. The U.S. bombing of Afghanistan in 1998, seen in the context and events of September 11, represented a hardened and entrenched U.S. position to do away with the Taliban.

It is generally believed that Pakistan has completely reversed its Afghan policy under the military regime. However, this is not the case. Like other nations of the world, Pakistan also felt alienated by the Taliban and considered the Taliban government a liability due to its extremist policies and harsh treatment of women, young Afghans, and western aid workers. [60] There was a series of events from which Pakistan received diplomatic setbacks, such as the destruction of the Buddha statues in Bamiyan in February 2001, sectarian criminals hiding in Afghanistan, and the Taliban's inflexibility in dealing with United Nations workers. In actual fact, Sharif pursued a policy towards the Taliban similar to that of the current government. Recently it came out that Sharif's regime gave clearance to U.S. military operations in Afghanistan. This was further supported by the military's monitoring of religious institutions—the maddrassas—that acted as a social and financial support base for the Taliban. This leads to the fact that foreign policy in regards to Afghanistan remains the same and in continuity under civilian and military regimes in Pakistan. The events of September 11 increased the pace at once of the United States as well as Pakistan to adopt anti-Taliban policies. Like the United States, Pakistan is also in a quagmire regarding the possibilities for the post-Taliban settlement in Afghanistan. Deposed King Zahir Shah and the Northern Alliance are not attractive options for Pakistan. Pakistan has already annoyed the Taliban and the Pashtuns, the ethnic group that makes up almost 40-45 percent of the Afghan population. Similarly, the United States is also quite skeptical of the predominant role the Northern Alliance could potentially play after the fall of the Taliban. Both Pakistan and the United States are vying for a broad-based representative government in Afghanistan.

India's initial reaction to the change in government in Pakistan was not to recognize the military regime. It was widely believed in India that General Musharraf was the one responsible for the Kargil crisis and hence the exit of Nawaz Sharif, and that peace and negotiations (the Lahore Declaration) were something not acceptable to the Pakistani army. Nevertheless, owing to Musharraf's peace initiative, force reduction at the Line of Control in Kashmir, and U.S. pressure, India changed its stance. Subsequently, the Agra summit was convened. Later, the ascension of the military regime was considered and interpreted as an opportunity to settle down Kashmir, as the military was considered to be the real entity with which to talk and strike a deal (and this was the case even in times when a civilian regime was in power). It was also believed that the military enjoys greater popularity than political regimes. The Indus Waters Treaty signed by the Ayub regime was most widely cited as an agreement that stood the test of time.

The events of September 11 had a de-legitimizing effect on Kashmir, from the perspective of Pakistan. India quickly moved back to square one—that is, of confrontation and denial—from the position of continuing dialogue and diplomacy. India is now bent on cashing in upon the new atmosphere condemning global terrorism. India wants to make Kashmir militant groups into objects of the U.S. anti-terrorism campaign. [61] The United States has succumbed considerably to India's pressure, as the initial list of organizations whose assets were frozen by the United states included two (and later, a third one, Jaish-e-Mohammad) with extensive activities in Kashmir. India sees the build-up of relations between Pakistan and the United States as zero-sum in nature, and wants to prevent Pakistan from again becoming the driving force behind U.S. regional policy. [62] India has been playing off of and sensationalizing the U.S. concern for the stability of Pakistan and the region by threatening Pakistan with war. The recent massive firing on the international border, let alone on the Line of Control, upon the visit of U.S. Secretary of State Colin Powell and Secretary of Defense Donald Rumsfeld, constitutes a message not to ignore India. Hence, it is imperative that U.S. policy officials engage with India at the same time that they do so with Pakistan, so as to reduce the risk of an India-Pakistan war and further instability in the region.

For Pakistan, raising its voice at diplomatic and political levels has and will become even more difficult as India (through its powerful lobbying) is bent on establishing linkages between Afghans and the situation in Kashmir, thereby ignoring Pakistan's legitimate concerns and the historical context of the Kashmir dispute. India also intends to heighten its threat perception from Pakistan for its alleged support to Kashmir, and to legitimize hot pursuit across the border, possibly leading to war in the wake of the war of the United States against Afghanistan over terrorism. [63] From the American perspective, "an India-Pakistan crisis at this time would be most unwelcome to U.S. policy makers, and would strain relations with both India and Pakistan." [64]

Therefore, one can observe that with the arrival of the military regime, there has been no substantial shift in security policies of Pakistan towards the United States, Afghanistan, and India. The events of September 11 impacted in facilitating and enhancing the building of bridges in Pak-US relations, which even the erstwhile civilians wanted. In the wake of such a priority policy and as has been demonstrated above, Pakistan's policy towards Afghanistan should not be viewed as a reversal. Nonetheless, Pakistan-India relations suffered a severe setback, not because of regime change from civilian to military, but in the context of the post-September 11 world.

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Alleviating urban poverty - the Pakistan way
Appeared in: Manpower Journal. Special issue on impact of structural reforms on employment scenario. Guest editor: Amitabh Kundu. New Delhi: Institute of Applied Manpower Research. 34(Oct-Dec 1998)3. pp. 127-147.
Revised version of a paper presented at the international seminar "Urban poverty alleviation in Asia: challenges and perspectives", University of Kaiserslautern, 18th and 19th July, 1996.(1)

Urban poverty alleviation in Pakistan: challenges and perspectives

Pakistan, the fourth most populated country in Asia(2) and the most urbanized in South Asia,(3) presently suffers from tensions in its largest city of the worst kind. Assuming a direct relationship between political unrest and social disparities, the following questions arise: (i) What is the extent of urban poverty in Pakistan and how did it develop over time? (ii) Why and how and to whom is urban poverty in Pakistan challenging? (iii) What are the perspectives and what are the preconditions for different scenarios?

(i) Urban areas account for one third of Pakistan's population;(4) one fifth of the urban population is considered to be poor;(5) that makes nine million urban poor; they may be more, maybe up to one tenth of the total population.(6) This is, because figures appear to be rather inconclusive: If one third of the total population is considered to be poor,(7) and one sixth(8) to one third(9) of the poor live in urban areas, the number of urban poor could be anywhere in the range of 8 to 15 mn. Thus, Pakistan should be ranking fourth in South and South East Asia by the number of urban poor.(10) It is also difficult to establish, how poor the urban poor are, both in absolute terms and relatively. The rural poor in Pakistan, for example, have different income and consumption patterns, and even more so the rural poor in other countries, not to speak of the shortcomings of statistics. There are hardly any attempts to compare the social situation within South Asia: maybe because meaningful comparisons between India and Pakistan are not encouraged by either of their governments; social scientists of the two countries rarely have the chance to visit their neighbouring country, let alone are allowed to do independent research there. Comparative studies on Pakistan and Bangladesh would be easier, but seem to be less challenging.(11)

(ii) Urban poverty certainly is a challenge in Pakistan: morally, intellectually, socially and economically, but most of all politically. The largest concentration of the urban poor live in Karachi, where they constitute a most vocal group, which has been politically instrumentalised during the last decades to the extent, that Karachi has been described as "Asia`s answer to Beirut" and the "Belfast of Asia",(12) with more than 2.000 people killed in 1995 during political feuds. At times, the danger of a total break down of "law and order" and of the economy loomed over the city, threatening the unity of the country. Since internal and external politics of Pakistan and India are intertwined, such a break down should be unwelcome in India, which for its own reasons has to have the greatest interest in the status quo; it should be of concern to us also: it creates an environment suited to all kinds of undesired economic activities, e.g. the trade in narcotics and arms, and would also drive many out of the country [Mallet/Bokhari 1996].

(iii) A more optimistic scenario is painted by the advocates of the modernisation theory and a growth oriented strategy, which always had its followers in Pakistan. According to their expectations, the benefits of economic growth will trickle down to the poorer segments of the population: the gross domestic product not only grows as a total and per capita, but also for the average poor: urban poverty, thus, will be eliminated. The perspectives for the time being are, however, that the number of urban population will grow at a rate higher than the already comparatively high rate of population growth in Pakistan; the development of incomes and income distribution will depend, at least to some extents on domestic factors, especially government policy. Given the present situation in Karachi, a change of the political climate and political will seem to be preconditions for any improvements [Jafri 1996].

Present problems and possible remedies have to - and will - be discussed against the background of history. External shocks, e.g. colonialism and the partition of India, 1947, were responsible for a rapid urbanization, an increase of urban poverty, shortcomings of government intervention and - presently - ethnic and political strife.

Basic demographics of urban poverty

Pakistan experienced one of the highest growth rates of population world wide; the number of people eight-folded within a century;(13) it quadrupled in only 50 years to (1996) over 130 million.(14) The urban population growth accelerated from 4.3 per cent per annum in the last three decades (1960-1992) to 4.6 percent at present (1992-2000).(15) 34 per cent of Pakistan's population presently live in towns;(16) with around 45 million urban population Pakistan ranks 5th in Asia (after China, India, Japan and Indonesia).(17) With some ten million inhabitants,(18) Karachi is one of the largest cities in Asia; in South Asia it ranks only behind Bombay, Calcutta and New Delhi. According to the World Bank, Karachi is one of the fastest growing megacities of the world and expected to rank 7th by the year 2015 with then over 20 million inhabitants; having surpassed Calcutta and New Delhi it will be second to Bombay in South Asia; Lahore will rank 22nd internationally and 6th in South Asia with 12 million inhabitants, as many as Hyderabad, Bangkok, Osaka or Lima.(19)

Unfortunately, it is more than one and a half decades ago, that Pakistan's population was properly counted. No census could be completed after 1981; the 1991 census had to be abandoned after large scale rigging and it was impossible to have one afterwards.(20) Since the number of population is the basis for the distribution of seats in parliament and for allocating public funds, census figures ultimately decide who is going to rule, what language is to be spoken (officially) and who will get a job (by reservation). In the absence of statistical evidence, guesses based on simple trend extrapolations are used at will. Numbers are to be interpreted with great caution; if cited in the following and not stated otherwise, they refer to the 1981 census.

21 per cent of the total urban population live in one town, i.e. Karachi.(21) Nevertheless, the concentration is less marked than in most other countries. At ten million, Karachi's population would be just 7.5 per cent of the national population. Roughly half as many live in the second large city, Lahore; the 2:1 gap between them is less than in the other countries of the area, except India.

In 1981, four tenth of all urban population were living in the three cities with more than one million inhabitants, i.e. Karachi (1995: 9.8 mn), Lahore (5.0 mn) and Faisalabad (1.9 mn); their percentage must have increased in the meantime. Peshawar (1995: 1.7 mn), Gujranwala (1.6 mn), Rawalpindi (1.3 mn) and Multan (1.2 mn) also have crossed the one million line by now.(22) If we take all cities with more than 100.000 inhabitants, they comprise about two thirds of the overall urban population. There is a host of smaller cities, altogether there were 384 towns in 1981; few of them, however, are in the below 10.000 inhabitants category. In this connection, we have to consider, that Punjabi villages can be fairly big with far more than 10,000 inhabitants, without being classified as "towns".

90 per cent of all urban population live in the two major provinces, Punjab (56 %) and Sind (34 %). The North West Frontier Province (7 %) and Baluchistan (3 %) are less urbanized; together they have only one tenth of the urban but one fifth of the total population of Pakistan. The share of urban in total population is highest in Sind (43 %), followed by Punjab (28 %) Baluchistan (16 %) and, finally, NWFP (13 %).(23)

Small towns (with less than 25,000, but at least 10,000 inhabitants) are of some importance in Baluchistan (23 %) and the NWFP (17 %), very small towns (with less than 10,000 inhabitants) in Baluchistan only (13 %). Both groups do not much influence the distribution of the urban population by provinces.

Almost all major towns are to be found along a semi-circle spanning from Peshawar through North East Punjab to Karachi, with the highest number of towns in the triangle Lahore-Rawalpindi-Faisalabad. In the thinly populated areas west and east of the Indus Valley even small towns do have central importance, hence their official recognition as "urban".

Urbanization and poverty in perspective

The areas which presently comprise Pakistan have seen cities since pre-historic times. Remnants of settlements have been found at Mergah (Baluchistan) dating from 7000 B.C.; in Moenjo Daro (near Larkana on the mid Indus), we can still see impressive ruins of a large city. It is generally assumed, that the great Indus Valley civilization came to a sudden end in the middle of the second millennium B.C., shortly before or at the times of the Aryan migration from Central Asia to the Indian subcontinent. Whatever the reasons for urban decay, the level of urban organization at these early times seems to have been higher than that of most of the larger settlements of the region today. Similar remarks may be justified for the cities of Gandhara - more than a millennium later at the time of Alexander the Great, and a thousand kilometres to the North. And again, a millennium later, at the time of the Arab conquest of the lower Indus Valley (711 A.D.) and the beginning of the spread of Islam on the subcontinent, we hear of large settlements, like the port city of Debal and Multan, the centre of lower Punjab. And when - again a millennium later - the colonial power finally reached the North West of the subcontinent; they developed their own centres like Karachi, the port, and Rawalpindi, the largest garrison west of Delhi. In between, there must have been long periods of urban decline and mass urban poverty, ultimately leading to giving up many sites. We do know, however, little of the dynamics.

The British period in India has often been associated with de-urbanisation and de-industrialization, but this may not have been the case with what became Pakistan; Punjab and Sind, conquered only in the 1840s, were known as the rural backwaters of the subcontinent; the Frontier and Baluchistan were basically tribal areas and merely of strategic importance in the "great game". Lahore was then the only major town (with 128,441 inhabitants in 1875) [Latif 1995: 253], although with no industry.(24) Multan was the other, smaller, centre of Punjab. Lyallpur, now Faisalabad and the third largest city of Pakistan, was still to be founded by Mr. Lyall. Rawalpindi, not far away from Taxila, the seat of learning of the Gandhara period, was chosen by the British to set up tent at because of its strategic location at the foothills of the Himalayas, where the main road from the Khyber to the plains of the Punjab crosses the Margalla Hills; Ayub Khan built Islamabad as the new capital of Pakistan on the outskirts of Rawalpindi. Today, the twin cities may have as many inhabitants as Faisalabad. Gujranwala, on the Grand Trunk Road from Rawalpindi to Lahore, now the third largest city in the Punjab, is of little centrality, even in the provincial context, due to its proximity to Lahore; like a number of secondary cities, it has been benefitting from the spill overs of the capital of Punjab.(25) Sialkot, once the third largest city of (West) Punjab, was literally cornered after Partition and lost its importance.

Karachi now has a share of one third of the Sind population.(26) The metropolis was an unimportant harbour town(27) when the British conquered Sind on their way to Afghanistan and it was much smaller than Lahore (1901: 136.000 vs. 204.000 inhabitants) until Independence. Hyderabad, the second city of Sind, had been the major town of Sind at various times of its history, but crossed the 100.000 only in 1931. Its population shot up after Partition; in the 1970s growth almost came to a halt, most probably because of the proximity to Karachi. Hyderabad has become more attractive vis-à-vis Karachi during the last years, since Karachi became more crowded and - of lately - more dangerous.

Peshawar and Quetta are the only centres of the two western provinces. The Peshawar Valley has been the location of important towns throughout history; Quetta gained its importance after the Afghans had to cede this area to the British; it had to be rebuilt after it had been totally destroyed by an earthquake in 1935. Both cities became major centres of Pashtoon refuguees after the Soviet invasion of Afghanistan, whose number in and around Peshawar alone was estimated to be more than a million at times.

At the turn of the century, what became Pakistan had 31 towns with 1.2 mn inhabitants,(28) 7 per cent of the total population. Since Independence, the total urban population of Pakistan more than seven-folded: in 1951 they were only 6 millions, less than one fifth of the total population. In the late 1940s, almost all the Hindu and Sikh population were driven out of the country; those places with the largest Hindu and Sikh population saw the largest influx of refugees from India: in Faisalabad (then: Lyallpur) 70 per cent of the inhabitants of 1951 were born outside Pakistan, in Gujranwala 51 per cent, in Multan 49 per cent, and in Lahore 46 per cent [Zingel 1982 : 248].(29)

As a combined effect of partition and migration, only few of the urban population have their roots in these cities: they are migrants or descendants from migrants, often refugees from India. Those from East Punjab, the largest group, just changed places within their province: they remained in a familiar socio-cultural environment, where the same language was spoken and customs were - more or less - the same.

Karachi, one of the entreports developed by the raj, always had a mixed population. When Hindus and Sikhs were driven out, Urdu-speaking refugees, mainly from the United Provinces, Central Provinces, Bombay Presidency and Hyderabad State, arrived; like those refugees who accompanied Prophet Mohammad from Mecca to Medina, they were called mohajir. Karachi also received a number of traders and entrepreneurs, often members of merchant castes from the Kathiawar Peninsular and members of smaller (Muslim) religious communities. The capital of the new state was first established here, it was the major port of the country and its "link" to the eastern "wing"; it developed into a boom town during the late 1940s and early 1950s until the end of the Korean War, again in the early 1960s during Pakistan's second five year plan (1960-65), and once again in the 1970s after the beginning of the oil boom in the Gulf states. The prospect of getting a job with the government, industry or services always attracted many Punjabis and later Pashtoons and Baluchis. The secession of Bangladesh brought hundreds of thousands of refugees from the former province of East Pakistan, who also spoke Urdu, and - because they often came from Bihar - are called Biharis. The fact, that initially so few Sindhis came, has been explained by institutional factors, most of all the feudal order, which remained intact longer there than in the rest of Pakistan. The Soviet invasion of Afghanistan brought the Afghans, mostly Pushtoons; today, Karachi may have as many Pashtoon inhabitants as Peshawar does.

Quetta is situated within the Pashtu language area of Baluchistan; in addition to the Pashtu, Brahui and Baluchi speakers many Punjabis came with the government admistration and the Army (Pakistan's Staff Academy is in Quetta). Likewise, many Punjabi (Hindko) speakers went to Peshawar, from the Punjabi speaking areas of the NWFP (Derajat, Hazara) as well as from Punjab Province; it was only after the beginning of the Afghan War, that the share of Pushtoons increased dramatically.

Islamabad, finally, is a totally new city, planned on the drawing board by the Greek Architect Doxiades; the idea of a basically temporary population, who would reside in the city only for the few years their service was required by the government, could not be realized; few who made it to Pakistan's most prestigious address, want to leave; the governments did their best to keep population figures low: new sectors were opened only slowly, plots not awarded and tens of thousands of applications not forwarded.(30) Every change of government, however, brings in a new clientele to be honoured, and thus a new impetus for expanding the capital city. The growing number of domestic servants have to be housed as cheaply as possible in order to keep their wages low, a fact explaining why slums are to be found in posh neighbourhoods.

Measuring urban poverty

Pakistan enjoys a higher per capita income than the other South Asian mainland states;(31) still it has its share of poor, many of whom are concentrated in the big cities. Detailed statistics on urban poverty, however, are missing. For many years, not much has been written on urban poverty by the Pakistani academic community;(32) poverty issues are being dealt with only since the overall political situation in the country became less repressive. In 1993, prime minister Nawaz Sharif instituted the "Task Force on Poverty Alleviation and Self-Reliance" with four members, all well known Pakistani economists; the Task Force, however, had only one meeting; before the National Assembly was dissolved along with the Task Force.(33)

There are few indicators to determine the extent and structure of urban poverty. In the absence of reliable and up-to-date figures, indirect measures may be used. They can, however, be tricky: The World Bank, for example, states, that 44 per cent of total housing is "sqatter housing", i.e. housing stock occupying land illegally.(34) But in Pakistan, squatter houses can be fairly well built, they most probably have electricity (officially or inofficially), maybe access to piped drinking water, although proper latrines and drainage are less likely. And, as the seminal work of van der Linden [1975] shows in his survey of Karachi slums, these can be of very different quality. Organisers of an ecumenical self-help project in Karachi assured me, that secure legal titles to the land on which people had built their houses was the most effective obstacle to improving their housing conditions, not lack of money. The legality of occupancy rights, therefore, or rather the absence of legality, is of limited value as an indicator of poverty.

This also applies to the "rural-urban gaps", a term the UNDP use in their reports: The fact, that 100 per cent of the urban population "have access to health sevices" (1985-91) as compared to 85 per cent of the rural population, that 80 per cent vs. 45 per cent have access to water (1988-91), that 55 per cent vs. 10 per cent have access to sanitation (1988-91), and that child nutrition (1980-92) is better by one fifth,(35) is to indicate the distance between urban and rural areas. But, what does it mean to "have access" to health services? One of the most irritating observations that people from rich countries can make in almost any poor country is, that abject poverty exists in the immediate vicinity of affluence. "Having access", then, obviously does not necessarily mean "to benefit" from them. Likewise, having access to water, may mean only a standpipe nearby providing water of questionable quality, especially if low lifted from heavily polluted sub-surface water; and the sanitation, one has "access" to in urban areas, often means non-descriptive facilities, which are less hygienic than "no sanitation" in rural areas, which may stand for excursions into the sugar fields.

Associating poverty with economic informality may also fail. Pakistan's cities have always been service towns: in 1961 only the two most "industrial" towns of (then) Lyallpur and Gujranwala had more than 40 per cent of their labour force employed in industry. "Other services" accounted for up to 45 per cent: in Quetta [Zingel 1982 : 251], then not exactly known for its poverty.

Unemployment would be a good proxy variable for poverty if available on a household and not on a personal basis. Official figures for unemployment became much higher after the statistical concept was changed;(36) urban unemployment now (1993-94) is 7.0 per cent, slightly higher than the rual one (5.4 per cent).(37) An official of the Ministry of Manpower and Overseas Pakistanis in 1989 estimated, "that a large fraction of the labour force is engaged in the informal and non-wage sector and low-product activities indicates the existence of about 10 per cent of the employed labour force as presently under-employed. Taking together the unemployed [then officially 3 per cent] and the under-employed, under-utilization of the labour force is about 13.13 percent or approximately 4 million." [Hashmi 1989 : 15]. Official unemployment was (relatively) almost twice as high in the urban areas than in the rural areas in 1987-88,(38) but we have - unfortunately - no information on how many of the urban families are without income from employment.

According to the World Bank, the share of the poor ("people in absolute poverty") is lower in urban (1990: 20 per cent) than in rural areas (31 per cent);(39) this is not exactly in line with the indicators of urban infrastructure and has to be interpreted in a way, that "access" to urban infrastructure has little impact on poverty. On the other hand, a greater gap between these figures would explain the rural exodus.

Alleviating urban poverty I: Income and price policies

Pakistani policy makers have often been blamed for their blind faith in the market forces. The country has been more market oriented than India and - for some time - Bangladesh or Sri Lanka, despite a long tradition of five year plans. But there is still a tendency to emphasize economic growth and wait for social problems to be solved automatically. Pakistan also has been decentralized to some extent; in principle, social affairs come under the provinces rather than the federal government. Unfortunately, Pakistan during most of its history, has been a federal republic more in name and on paper than in practice. Subsidiarity, therefore, has hardly been practiced, although - to me - it seems to be one of the guiding principles for welfare in Islam.

The current (eighth) five year plan (1993-1998) has a short chapter on "Poverty alleviation", in which the history of such policies is summarized in a very general way:

"In Pakistan the strategies for poverty alleviation have been varying over time. In the early years some ad-hoc approaches were adopted to provide temporary relief to the poor. In subsequent [sic] period when systematic planning was started, high growth was chiefly considered a panacea for various economic problems including poverty. Towards the end of the sixties, it was realized that the trickle-down effect of growth process could not be expected to relieve the burden of poverty. The problem of income disparity especially at regional level assumed alarming proportions which was also used by some politicians as one of the justifications for the separation of the eastern wing of the country."(40)

Without going much into detail, the Planning Commission state in the same document: "Poor mostly live in rural areas and are dependent on agriculture. [...] Labour intensive process of industrialization based on use of technology will be encouraged."(41) What follows is an optimistic outlook on the implementation of the Social Action Programme:

"The Social Action Programme lays emphasis on primary education, basic health, population welfare, sanitation and potable water. It is targeted towards rural areas and women. Elaborate operational strategy and machinery has been devised and funds to meet development and recurring expenditure have been earmarked to ensure effective implementation of the programme."(42)

As far as "funds" and "effective implementation" are concerned, there is little cause for optimism: the budget for 1996-97 hardly leaves any room for "development and recurring expenditure"; only 1.6 per cent of the federal budget are earmarked for social services, and funds have to be found first to close the frightening gap between planned outlays and expected revenues [Haidari 1996]. As for the current five year plan, there is no mention of any programme designed for the urban poor.(43) This is in line with much older plans, which were neither specified nor followed by any recognizeable action:

"The challenge faced by the urban works programme, therefore, is to ignite a new spark of enthusiasm which will effectively harness the energies of the urban unemployed or underemployed to the improvement of slum areas, low cost self help housing, development community parks and other commuity facilities."(44)

There is no policy of alleviating urban poverty as such in Pakistan. And there are only few economists, who think that poverty has to be removed directly. One is A. R. Kemal [1995 : 53]. Discussing macro-economic policies, he summarises:

"Preceeding discussion brings it quite clearly that macro economic policies of Pakistan need major revisions. The policies of growth without much regard to income distribution shall have to be reconsidered with a view to eradicating poverty and unemployment problems."

Ashfaque H. Khan [1994 : 83], another leading economist in Pakistan, follows the rather traditional approach, although he adds a note of caution:

"Public policy should primarily aim at achieving a higher GDP growth rate of 6.5 - 7.0 per cent on a sustained basis over the next couple of years. To do that, investment rates must be in the range of 22 - 26 per cent. Needless to state, these growth and investment targets must be associated with political stability and improved law and order situation. If these economic and non-economic targets are achieved, the country's employment situation is likely to improve considerably."

The question remains, how the poor are to be reached. Farooq-i-Azam [1995 : 60], a senior civil servant in the field of manpower development, expresses little hope in government activities in the informal sector, where most of the poor are to be found:

"The government's policy and programmes have been almost exclusively directed at the large sector, and the small sector (the term is used here to denote both micro and small enterprises) has been expected to develop by default, which it actually did. Unfortunately, given the government's trek [sic!] record, some people are sceptical of any government intervention in the small sector and believe that it should be left alone, if its present growth potential is not to be underminded. However, the current economic climate in the country has more than ever increased the need for the government's intervention to stimulate and support the small sector's growth."

There has been little effort, to attack urban poverty directly, e.g. by slum improvement policies, and these have - despite some international assistance - been utterly unsuccessful, as Kool et al. [1988 : 28sqq. and 36 sq.] describe.

For a long time, migration was seen as a vademecum: The underlying assumption is, that spatial income differentials (existing, assumed, expected) cause migration, because migrants try to improve their well-being by moving to other places. This would explain the mass rural exodus as well as outmigration. It would be plausible to assume, that people in Pakistan set out for migration only after trying to obtain sufficient information, and we can observe, that migration typically follows etablished trails, laid out by members of the baraderi (extended family); in cases for which such information is missing, funds are pooled to send out a scout to check new destinies; these patterns were even followed - to the extent possible - in the late 1940s. Manpower agents came in on a large scale during the first years of the oil boom, but now it seems, that new migrants make more and more use of their own networks. Conditions in the rural areas, where most migrants into the urban areas come from in Pakistan, therefore, have to be considered as comparatively unattractive (in the eyes of the migrants), at least in perspective, to explain the mass rural exodus.

There has never been a policy in Pakistan to stem the rural exodus. Migration policy in the first years of the new state was the (re-)settlement of the refugees and some secondary migration. There was hardly any regional analysis or regional planning; the word "regional" itself from the mid 1950s onwards was reserved for the east-west conflict within Pakistan; all areas of West Pakistan were amalgated into a "One Unit", i.e. West Pakistan Province, in 1955;(45) all political and administrative decisions were highly centralized during the military dictatorship of Ayub Khan (1958-1969); discussing any regional distribution became "Anti-Pakistan". Obtaining a passport was difficult and emigration, thus, almost ruled out.

The picture changed, after the regional question was finally "solved" by the break-up of the country. Zulfikar Ali Bhutto had promised, that everybody would get a passport; Pakistan was one of the first countries to take the golden opportunity of sending workers to the newly rich oil states from 1973 onwards. Cities, especially Karachi, became through-stations to the Gulf, remittances becoming the most important foreign exchange earner. Many of the migrants belonged to underprivileged groups like artisans, craftsmen, and those who did the most menial jobs, leading to a scarcity of domestic servants and even sweepers at times, upsetting the social order [Streefland 1979].

Migration almost became a substitute for any meaningful social policy. Home remittances allowed people to make generous contributions, especially for building mosques, which, additionally were sponsored by all kinds of agencies of the Islamic oil exporting countries and - after the military coup of Zia ul-Haq in 1977 - by the Pakistan government. The still intact family networks made sure, that even distant relatives were supported by remittances, which - indirectly - boosted the demand for education and the setting up of private schools.

Despite some studies, little is known about the mechanics of outmigration and remittances. What is known, is that migrant workers especially come from the rain fed barani areas of the Potwar Plateau and the Frontier, but also from Karachi and Baluchistan. Things are more complicated, because of the income mix of most households. Income from remittances is tax-free and - individually - unaccounted for; not all remittances come through official channels (banks). I have not seen any figures, which would allow conclusions on how many families in Karachi have access to remittances, or - even more desirable - which groups are benefitting therefrom.

Other schemes for income generating aimed at small enterprises. Prime Minister Nawaz Sharif inroduced the "yellow cabs", i.e. taxis imported duty free and sold under soft credit terms in order to create incomes for the owners/drivers and - at the same time - provide urban transport. The programme was in line with privatisation of public transport, but added to the foreign exchange problems as well as to traffic congestion (not to speak of allegations of large scale corruption).

For a long time, price policy and consumer subsidies were seen as instruments to alleviate poverty [Zingel 1986]. Like India, Pakistan inherited the public distribution system for essential consumer goods, which had been introduced in the subcontinent at the beginning of World War II. This system was abolished during the 1980s; sugar was the last item to be de-rationed; the de-rationing went surprisingly smooth; food items provided through the ration shops were not very attractive, quality-wise, and out of reach for many consumers for lack of availability or income, anyway. Other attempts, like selling pre-baked bread (roti), in order to save energy costs for the poor, totally failed for lack of acceptance. A strict price regime (fixed and ceiling prices) was attempted by the military but could not be enacted even when tried with brute force.

Foreign trade and foreign exchange policies also have had their impact on the real income of the poor. The Pakistani Rupee is now partly convertible; imports and exports of food items are still regulated and the respective markets are delinked from the world market. As a basically still agricultural country, Pakistan can feed its population itself: rice of superior quality is exported and cheap wheat (of similar caloric value) is imported, which makes sense economically.

Alleviating urban poverty II: Leaving it to the NGOs

For alleviating the worst cases of need, a number of NGOs are working in the country, often supported by foreign agencies/funds.(46) The term of NGO is, however, often a misnomen, since much of the funds originally come from government sources or from tax exempted income, as would be the case for most of the German contributions.

Zakat and ushr are religious "taxes", which - in principle - have to be paid by the faithful (2.5 per cent annually on wealth in the case of zakat) for the benefit of the poor, the needy, and some other related target groups. Since 1980, zakat is being collected by the state; income from zakat, however, amounts to 2 per cent of public current revenue and 1 per cent of social expenses [Malik 1992]. The introduction of zakat and its central collection and administration met with heavy resistance from the shia community (they were later exempted) and was seen as another step of the military dictatorship to usurp religion. Ushr taxes agricultural income and has been less popular and yielding much less revenue [Mustafa 1996].The Ministry of Aquaf, i.e. of religious affairs, took over more and more mosques and their "aquaf boxes", i.e. their donations. This discredited the whole system of zakat and alms giving [Clark 1986].

Most social work is probably done by informal groups organized by the mohallas, the pirs, i.e. around the mosques and shrines. The Agha Khan Foundation, an international NGO with headquarters in Switzerland and headed by the Agha Khan(47) set up - among others - a Medical University in Karachi. The AKF is a funding as well as an executing agency, receiving funds also, for example, from the German government [Kahlen 1987]. The other Muslim organisation, which is known outside Pakistan too, is the Edhi Foundation, said to be the largest welfare organisation in Pakistan, funding hospitals, clinics, orphanages, emergency relief and social services. Funding mainly comes from private zakat payments [Zaidi 1996].

Social work is also done by more formal groups like the Rotaries and Lions, by business associations etc. The extent of such private attempts at alleviating urban poverty is totally unknown and in all likelihood underestimated. The latest, well publicised, private social engagement is that of the former captain of the Pakistan cricket team, Imran Khan; he is ímmensely popular and set out to build a private cancer hospital in Lahore, financed by own funds and private contributions; after the government was rather unhelpful in this matter, he started his own political movement, after which relations with the government further deteriorated; a bomb attack on his hospital may be an indication, that private social engagement seems to be unwanted once it extends to more than charity. The same can be said for human rights movements, like the Women's Action Forum (WAF) or the Human Rights Commission of Pakistan (HRCP) of Asma Jahangir, a lawyer, who has become known also outside Pakistan.

Because Pakistan only has a small minority of Christians and since trade unions had been banned for many years and have (thus) not been very organised, two established channels for foreign non-governmental aid, which proved to be useful in many other countries, play no important role in Pakistan. A prominent example of church support is the working of the German doctor, Ruth Pfau, who almost singlehandedly set up a nation-wide organisation to eradicate leprosy in Pakistan. She has been surprisingly successful and has been appointed as National Adviser to the President of Pakistan, but has to supplement the financial contributions from the Pakistan government with international private donations.(48)

All these organisations are filling a vacuum left by a - (again) democratically elected - government on the federal and provincial level. There is hardly any local government on the town (city) level, which could be compared to institutions of the same name in central Europe


Summing up: there is considerable poverty in the fast growing cities of Pakistan. The relationship between a growing urban population and urban poverty is not clear and cannot be established given the lack of statistical data. Thus, we cannot say, whether the number of poor or the extent of individual (average) poverty in the urban areas is growing faster than the number of urban population or not. And - whatever this relationship may be - we also cannot say, what is cause and what is consequence; but people migrating into the urban areas most probably do this in the expectation of a more promising future, there. In any case, there seems to be a trend of faster growth in secondary centers, not the least because of increasing problems of internal security in Pakistan's largest city.

Given the fact, that the government is totally absorbed, politically, in their power struggle, and is financially impotent, due to vast outlays for debt servicing, defence and "law and order" and a tendency to ad-hocism, they pursue a policy of laisser faire, hoping for a solving of social problems by economic growth and leaving them otherwise to foreign donors and private charity. Pakistan has the benefit of substantial financial funds in the hands of their citizens inside and outside the country, plus the technical skills, organisational know-how, international experience and connections, which could be used in the same way as in East Asia. It also has the advantage of the traditional family structures still intact, which provide the social safety net. Foreign aid has lost much of its importance already; the preparedness of the western donors and the ability and willingness of the Islamic oil-rich countries to step in, when the Pakistan government fails, may increasingly be limited.

The idea of social solidarity in the name of the religion may have suffered due to the ordained Islamization under a military regime; the zakat and ushr funds never played the role expected. This idea has also been discredited by unnecessary secrecy and central administration.

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A World Upside Down

After the defeat of the British army at Yorktown, during the climatic battle of the American Revolution, the British army band was heard playing a song called, “the world has turned upside down” as the British soldiers laid down their muskets and surrendered their regimental banners before the victorious American army. In many ways, the events of September 11, 2001 turned the affairs of the world upside down and in a significant manner heralded the dawn of the twenty first century. Chronologically speaking, the arrival of the new millennium was celebrated almost one year and nine months and eleven days before the collapse of the twin towers of the World Trade Centers in New York, but in a psychological sense, the new millennium began with the events of that fateful morning in September. After the attacks in New York and Washington, the world changed, and was never to be the same again, and in doing so, changed the way in which people viewed themselves and the world they inhabited.

The September terrorist attacks rattled the confidence of the United States. The attacks also made it clear that the United States was liable for the actions of its foreign policy and could not operate unilaterally in a multi-polar international environment and escape the consequences of its deeds. The United States’ foreign policy, in the aftermath of the attacks, had to be re-formulated to deal with a crisis, which was unprecedented in its scope and audacity. The traditional precepts of international diplomacy defined by the bi-polar ideological struggle between the United States and the former Soviet Union and tinged with the re-emergence of the multi-polar world stood discredited. The cold war diplomacy, which was based on the respect of a status quo ante and division of the world into distinct spheres of influence ended with the Second Gulf War in 1991. After 1991, there emerged a collective consensus in international affairs, presided over by the United States, and it was hoped that the notions of collective security and respect for individual sovereignty would be paramount in international relations.

This dream of a global cooperation in international relations would not survive the demise of the Soviet Union in August 1991, because in the wake of dissolution of the Soviet Union, the United States emerged as the world’s only super power capable of dominating the world in all aspects. The pre-dominance of the United States’ influence in the world created a sense of arrogance in the United States’ foreign policy and Washington increasingly adopted a unilateralist approach in the pursuit of its national security interests. Unfortunately, as the United States implemented its singular view in international relations, it seemed to discount Sir Isaac Newton’s laws of physics, because for every American action there was an equal and opposite reaction; a reaction often ignored by the United States or belittled as inconsequential.

In order to understand the reasons behind the failure of the United States’ foreign policy in fathoming the causes behind the resentment against its foreign policy objectives and the means employed to attain them, it should be pointed out that the United States’ foreign policy is not a monolithic entity. The creation of the United States’ foreign policy and the rationalization of its objectives is a highly fissured enterprise. The United States’ foreign policy or its national security interests, when articulated, is a series of compromises between the various groups/interests, which exist under the umbrella term of the United States’ foreign policy. There are six major interest groups, within the United States, which are responsible for the creation and the implementation of the United States’ international policies/objectives and are capable of influencing it. These interest groups are the White House, the State Department, Congress, Pentagon, Central Intelligence Agency and the media in the United States. All of these groups have distinct political intentions and it is not necessary that the intentions of all these interest groups should harmonize and in the past, the interests of these various groups have been known to be at cross-purposes with one other.

The State Department has been traditionally tasked with the execution of diplomacy and being a diplomatic facet of the American foreign policy, its institutional tendency is towards reconciliation and in the maintenance of stability in the regime of international relations by favoring the status quo and the policies of cooperation. The White House, due to its executive nature, operates more in the realm of creating policies and in defining the security interest of the United States, which it wants to achieve. Given the political personality of the White House, the White House is more attuned to the political nuances of the international relations and thus, tends to have a political, immediate, rather than a strategic focus in its policy deliberations. Therein lies the dichotomy between the situational analysis of the State Department and White House and which is why, each American administration has sought to have a secretary of state who shares the White House’s perspective and is willing to implement it over the objections of the career diplomats in the State Department.

Pentagon and the Central Intelligence Agency (CIA), though they are critical in the carrying out of United States’ policy objectives in the world, operate under different assumptions. The CIA is responsible for collecting, collating and assessing information, which has a potential to affect the ability of the United States to effectively carry out its national security aims. Pentagon has always been considered the last option for the United States once all the other options have been exhausted. It was only during the period of the Clinton administration (1992-2000) that the Pentagon was used overwhelming as the preferred option in enforcing the United States’ writ in international affairs over diplomacy in situations from Somalia to Kosovo.

The other significant interest group, in this oligarchy of United States’ foreign policy establishment, is the Congress. The role of Congress, in the debate on the United States’ foreign policy, is an extra-constitutional responsibility, which the Congress earmarked for itself through the last one hundred years. Constitutionally speaking, the role of Congress is merely restricted to ratifying international treaties signed by the president of the United States and under the constitution; the Congress was never empowered to make foreign policy. The influence of the Congress in the foreign policy discussions of the United States can be traced to the American economic interests in Latin America at the turn of the century and this role, would be formally legitimized by Henry Cabot Lodge, a Republican senator, when he refused to allow the United States to join the League of Nations and in doing so, started a tradition for Congressional involvement in arena of foreign policy.

In order to understand the compulsions under which Congress makes its foreign policy choices, it is instructive to note that sole criteria for Congress, in deciding foreign policy issues, is geared towards the electoral constituency, which elects the members to the United States’ Senate and the House of Representatives. Unlike the White House, or even the State Department, Congress is wedded to the doctrine of Woodrow Wilson and his idea of a foreign policy based on the populist approach to international relations. There is a strong streak in the United States’ Congress to moralize international relations and see them through a Manichean prism: good versus evil and this can be seen in the preferred methodology of Congress, which is to legislate foreign policy. It is this Congressional policy of legislating international affairs, which is the primary cause of the myriad resentments, which the execution of the United States’ foreign policy causes in the countries targeted by the Congress through the regime of international sanctions – the favored Congressional response to make nations more malleable towards the United States’ interests.

The last of the interest groups is the American media. The importance of the United States’ media rests in its ability to influence the foreign policy debate and add to the plurality of the opinions, which does not necessarily implies a coherent foreign policy decision. The American media has drastically altered the rules of international diplomacy, because it has curtailed the time needed to arrive at a decision and has forced the policy makers to operate under the “CNN effect”; the requirement for an instant reaction, without fully comprehending the multi-faceted dimensions of a crisis. It is this duress, imposed by the media on the policy makers, which often causes the United State’s reaction to an international crisis to resemble a knee jerk response. The instantaneous nature of the media coverage of a crisis makes it impossible for the American decision makers deal with the crisis, because more often than not, the media’s speculation of the crisis forces the events to cascade outside the ability of decision makers.

In the aftermath of the September 11, 2001 attacks, the United States’ foreign policy has shown a coherence of purpose and seems to be changing from its post-cold war patterns, when all of the above mentioned interests groups used to view each other as adversaries, instead of partners, competing for a slice of the American budget in order to preserve their own bureaucratic prerogatives. The new contours of the American foreign policy seems be one, which is a blend of realism and an unilateralist commitment toward ending the scourge of international terrorism. The real intentions of the Bush administration are not known, because of its reluctance to discuss its options. In this sense, the American media’s reporting of the crisis, though factual to an extent, is more speculative than it is substantive and does not accurately represents the real policy choices being considered by the Bush administration in deciding the United States’ response to the terrorist attacks.

The critical question confronting the administration is not the timing or the scale of a military attack, but how to grapple with the political and economic shades of this crisis. The most crucial time period in this crisis was the initial forty-eight hours and once that period passed, it allowed the American decision makers to avoid responding to the crisis in a emotional state of mind, which had they done so would have been disastrous. The American response to this crisis will be more political and economic than it would be militarily, because the international coalition that the United States is creating will be based on a political consensus. It is, because of this continuing debate, on how to define the United States’ security priorities, that there has emerged a well defined asymmetrical convergence of views on how to create the primary architecture of an American response, which will help in the attainment of Washington’s intended goals in combating international terrorism.

The problem confronting the decision makers in Washington is that this crisis, unlike any other international crisis in the past, has no precedent by which to judge and articulate a response. In many ways, this crisis and the American response to it demands a fine synthesis of military, political and economic policies. The American response, which is slowly emerging, is more likely to be based on political realities and economic limitations and not so overtly on the military might available to the United States. The underlying political nuance to any American response would be balance the interests of its coalition partners with the intended aims of the United States’ policy interests and to operate within a consensual frame work. Furthermore, the early stages of this crisis have proven that the United States is willing to subordinate the principles of the Wilson doctrine in the pursuance of its national security interests.

Another facet of this crisis and the American response is that the United States’ strategy is to maintain the international coalition against terrorism and in order to achieve this intention, the United States has to give due consideration to the political constraints under, which some of its allies might be operating. The American response, as said earlier, in the long term will be a political one and though in the immediate sense, it might have opt for military strikes, the United States cannot solve the problem of international terrorism through military means. The solution to this problem has to be a politically oriented one, which is reinforced with an economic incentive. The United States has to undertake a strategic review of its past foreign policy decisions in order to understand the events of September 2001 in order to effectively address the problem and solve it.

Therein lies the challenge to the American foreign policy establishment and questions still remains: can the United States honestly determine the reasons behind the tragedies in Washington and New York by critically reviewing its past foreign policy decisions? Can the United States curb its sermonizing approach to international relations, but more importantly, does the United States have the ability to listen to what the world is saying and not ignore the voices on the periphery, which are asking to be heard?

If the United States adopts a pragmatic approach in responding to this crisis and accounts for its past misdeeds, it will emerge a more powerful, but a more importantly as a humane nation and if it does not, then the world will merely hear another rendition of an old British army song lamenting that the world has indeed turned upside down.
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India’s Real Intentions

Why did India escalate its dispute with Pakistan over the Kashmir issue to the point that a nuclear war between the two countries for a while seemed a distinct possibility? And, having taken South Asia to the edge of a nuclear holocaust why did India agree to de-escalate a bit and provide Pakistan with some breathing room? The conventional answers to these two questions are by now familiar. They have been given in the countless newspaper commentaries that have appeared over the last several months in the western, Pakistani and Indian newspapers and news magazines.

But there are also some new and, therefore, non-conventional answers. I have hinted at them in some earlier articles. Some were also given in a Wall Street Journal editorial I cited in my article two weeks ago. More interestingly, they were included in an interesting newspaper article by Henry Kissinger published recently. I will deal with the non-conventional wisdom in some detail in the article next week. In the present one, I will cover the conventional view.

The conventional view begins with the assumption that the insurgency in the part of Kashmir occupied by India has inflicted a heavy economic damage on that country. It also assumes that India could overcome this insurgency if it could somehow discourage Pakistanis from aiding the militants in Kashmir. How could this be done? India had no clear answer to this question before September 11. After September 11, President George W. Bush opened an opportunity that India was quick to grasp. It had to act since the troubles in Kashmir had begun to cost a great deal.

India has maintained half a million troops in the state, killed some 35,000 to 40,000 Kashmiris, caused some damage to its own economy and hurt the economy of the state of Kashmir a great deal more. Today the Indian economy is doing less well than a few years ago. The rate of GDP growth has slowed down as has the rate of increase in exports. Combined budgetary deficits of the central and state governments have reached to unsustainable levels. A number of foreigners have fled, slowing down the flow of foreign direct investment. The economic cost for India of maintaining a large military pressure had begun to take a heavy toll.

The situation for India began to get worse once the jihadis picked up the cause of Kashmir adding it to the several other causes they were pursuing in other parts of the world. However, as the wars in Bosnia and Kosovo settled down and as it became extremely costly to continue to challenge Russia in Chechnya, the jihadis turned even more of their attention to Kashmir. The Indian casualties began to mount. It was in this situation, growing difficult by the day, that America created a unique opportunity for India. The terrorists struck America on September 11 and President George W. Bush proclaimed what came to be called the Bush doctrine.

The Bush doctrine labeled all attacks on non-military targets and assets as terrorism. The American president invited all countries of the world to join America against the war on what he described as a global scourge. This scourge had to be eliminated no matter how much time and power was needed. His famous call to arms - “either you are with us or you are against us” - came at a very convenient time for the Indians fighting the Kashmiris in Kashmir and for the Israelis fighting the Palestinians in Palestine.

At that point India was looking for an explicit opportunity to apply the Bush doctrine to Pakistan’s support of Kashmir. That came in December. Two months after America began to bomb Afghanistan, a group of terrorists struck at the Indian parliament in New Delhi. More than a dozen people were killed in that assault and India blamed Pakistan for having supported the group that had carried it out. The Indian leadership began an extraordinary mobilization of its armed forces all along the Pakistani border. Put under an enormous amount of pressure by the Indian action that had the seeming support of the international community, President Pervez Musharraf declared his own war against the jihadi groups in Pakistan.

In a remarkable speech delivered on January 12 that was listened to with great interest not only in Pakistan but by the entire world, the Pakistani president announced that his government would actively pursue the Islamic groups that were working in the country outside the law. He also declared that Pakistan would not allow terrorist attacks to be launched from its soil. There was a clear implication that this principle would be applied to the organizations that were active in Kashmir but were maintaining training camps in Pakistan. A number of them were banned and a couple of thousand of known jihadis were arrested and put in jail.

That General Musharraf’s action would draw a negative response from the Islamic groups was to be expected. It came in the form of four attacks launched inside Pakistan against foreigners and one exceptionally brutal attack in Kashmir. The four attacks in Pakistan involved the abduction and murder of an American journalist in Karachi, the bombing of a church in Islamabad which killed three Americans, the bombing of a bus outside a hotel in Karachi that killed a dozen French technicians, and now the explosion of a car bomb, Beirut style, outside the American consulate in Karachi.

The responsibility for the latest attack in Karachi was taken by a group that called itself al-Qanoon. It issued a chilling warning to the government of President Pervez Musharraf after announcing its involvement in the attack. “America and its allies and its slaves Pakistani rulers should prepare for more attacks. [This] attack is just a beginning of al-Qanoon’s Jihad operation in Pakistan,” it said in the fractured English that has become the hallmark of the statements issuing by the Jihadi groups.

The attack in Kashmir killed more than a score of women and children belonging to the families of the Indian soldiers stationed in Kashmir. In keeping with the Bush doctrine, India increased its pressure on Pakistan. It now threatened to launch attacks on the Pakistani territory if Islamabad did not completely seal the Line of Control separating the two parts of Kashmir, one occupied by India and the other governed by Pakistan.

At one point an attack by India on Pakistan appeared imminent and Pakistan made it clear that it would react with all its might to such an action by India. The use of nuclear weapons was not initially discounted. The Americans, in order to bring some rationality into the actions and counteractions of the South Asian leaders, presented a scenario of what a nuclear exchange between the two countries would entail. Many large cities will be vaporized, said the American study, 12 to 20 million people will be killed, a hundred million more will be injured, and many parts of the subcontinent would be thrown back to the Stone Age. Economic recovery from such devastation would take many decades.

It was in this environment that an alarmed world descended on Islamabad and New Delhi, sending in senior emissaries to hold discussions with the leaders of the two governments. Pakistan came under enormous pressure from the West and Russia to accede to the Indian demand to stop the movement of jihadis into Indian occupied Kashmir. The Indians wanted not a slowing down of such a movement but a complete stop to it for all times to come. General Musharraf once again appeared on national television to address the Pakistani people and send another message to the world at large.

This time he promised to stop the crossing of the Line of Control separating the two Kashmiris for all time to come. On the basis of that promise, India began to make some minor gestures of normalization to Pakistan. It said that it would send back its ambassador to Islamabad and open its airspace to overflights by Pakistan. It also began the process of withdrawing its warships from the waters close to Karachi, Pakistan’s only port. But the Indians indicated that they will not pull back their troops from their border with Pakistan until October. Why October? In October India plans to hold elections in Kashmir which it promises will be free and fair, unlike the elections held more than a decade ago when the heavy hand of India installed a government in Kashmir that was sympathetic to its stance.

India expects that if General Musharraf holds to his promise, New Delhi will be able to reduce the level of violence in Kashmir to the point where some of the less radical groups may be able to work with it. With the participation of these groups in the October elections, India will be able to provide a sense of legitimacy to the government that will take office in Srinagar, the state’s capital.

In other words, the extension of the Bush doctrine to Kashmir would have helped solve what at one point seemed an intractable problem.

This then is a summary of the conventional reading of the latest “near-war” between Pakistan and India. Before going on to detail the non-conventional interpretation - from my perspective a more accurate reading of India’s intentions towards Pakistan - let me make one additional point by answering the following questions. Was it ever in Pakistan’s interest to obtain the accession of Kashmir by encouraging the victory of jihadi groups over the Indian forces occupying Kashmir? What would have happened to Pakistan if the Islamic groups battling the Indian forces succeeded the way the Mujahideen had triumphed against the Soviet Union in Afghanistan in the eighties? How would Pakistan have accommodated a ‘talibanized’ Kashmir into its body and into its own political structure?

There is the same answer to these three questions. Kashmir’s accession to Pakistan, secured as a result of a military victory by Islamic militants, would complicate enormously Pakistan’s own situation. At this point President Musharraf is engaged in a difficult project - to rescue Pakistan from the grip of the obscurantist elements in society who want the country to be thrown back into the dark ages.

He wants Pakistan to join the rest of the world by modernizing its economy, its society, and its political structure. Such a project would suffer a great set back if the jihadis were to succeed in Kashmir and bring it into the fold of Pakistan.
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Politics and economics interplay

DR Shahid Javed Burki (article, April 11) is right in emphasising the interplay between politics and economics. However, in treating the history of Pakistan, he seems to have inverted cause and effect. He asserts that political instability was due to repeated economic crises when the fact is that it was the other way round. It was mostly the frequent martial laws and other negative political developments that aggravated economic difficulties, which a developing country inevitably faces.

Of course, this is an oversimplification, since history is a far more complex affair, but to reinforce my view, l give four instances where political mistakes or political events caused a major national setback, with adverse economic, political and social consequences. These were the 1965 war, the separation of East Pakistan, the encouragement of Islamic fundamentalism in Afghanistan and the atomic explosion in 1998.

The Third Five-Year Plan for 1965-1970 envisaged a massive transfer of resources to East Pakistan intended to alleviate the problem of growing economic disparity between the two wings. The Third Plan and the underlying strategy were aborted by the 1965 war. What was the economic compulsion for this misadventure? None. We are too deferential to the military to attempt an assessment of the economic loss sustained by the country because of the 1965 war. In my view, Dr Burki is not right in asserting that disillusionment with economic policies was the main cause of President Ayub’s overthrow. He was forced to abdicate for largely political reasons (Tashkent, denial of democracy, censorship, corruption, loss of confidence of the military brass)

The greatest disaster in Pakistan’s history, the civil war in 1971 and the violent separation of East Pakistan, was entirely a political failure. Even though East Pakistan had many economic grievances, the critical cause of separation was that the rightful share of political power was continuously withheld from the people of that wing because of the repeated promulgations of martial law by which a non-Bengali army was seen as dominating the political processes.

Dr Burki has stated that in 1977 Mr Bhutto ran into difficulties because his economic policy failed to end poverty and various regions were unhappy at the way Islamabad was treating them. It is true of course that big business and persons adversely affected by nationalisation were unhappy about economic policies but the public agitation against the PPP government was based mainly on political demands, i.e, free election and the establishment of ‘Nizam-i-Mustafa’. Economics did not figure prominently either in the themes pursued by the combined opposition parties or in the US displeasure, expressed by Dr Henry Kissinger.

The encouragement of Islamic extremism in Afghanistan, for the political purpose of acquiring strategic depth, was initiated and maintained by the military though the democratic governments acquiesced in it. The damage done by this policy to the political and social infrastructure and economy of the country has been enormous and continues to this day.

Lastly, the crisis of 1998 was due to the explosion of the atomic bomb and the consequent imposition of international sanctions. The country was in economic difficulties but nowhere near a breakdown. The problem was due to a political decision to explode the bomb and the adverse international reaction that followed.

Dr Burki’s article, unintentionally I am sure, helps the propaganda line of the present military government that martial law is essential for salvaging the economy. The government has undertaken a systematic campaign to demonise democracy by exaggerating its economic failures and often falsifying the record.

I hope Dr Burki will forgive me for recalling that when Mr Bhutto came to power at the end of 1971, Dr Burki had greeted him with an article in The Pakistan Times titled ‘GDP dethroned’. This posed a difficulty for some of us who were trying to convince our new socialist bosses that while pursuit of equity was very important, it could not be achieved without growth. It did not help that an eminent economist was stating that GDP (or growth) was a tyrant that was best removed from the economic scene. Since then Dr Burki has had a distinguished career in the World Bank and must have modified his views on growth. This illustrates the interplay between economic postures and political circumstances
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Old Tuesday, October 02, 2007
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thx but what is the source????plz site sources
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