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Gains from Trade and Structural Impediments to India–Pakistan Trade

PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2014.All Rights Reserved. Under the terms of the l icence agreement, an individual user may print out a PDF of a single chapter of amonograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: Asad Sayeed;date: 07 August 2014

UniversityPressScholarshipOnline

OxfordScholarshipOnline

InternationalRelationsTheoryandSouthAsia:Security,PoliticalEconomy,DomesticPolitics,Identities,andImages,Vol.2E.Sridharan

Printpublicationdate:2011PrintISBN-13:9780198070801PublishedtoOxfordScholarshipOnline:January2014DOI:10.1093/acprof:oso/9780198070801.001.0001

GainsfromTradeandStructuralImpedimentstoIndia–PakistanTrade

AsadSayeed

DOI:10.1093/acprof:oso/9780198070801.003.0009

AbstractandKeywords

IndiaandPakistanhavebeenreluctanttradingpartners.Althoughbilateraltradebetweenthetwocountrieshasincreasedinrecentyears,obstaclesremainintherealizationoftradepotential.Thischapterfirstdemonstratesthatgainsfromtradeforbothcountriesareunambiguous.Wethentakeastructuralandpoliticaleconomyperspectivethroughtheprismofstate-businessrelationsandevolutionofstatestructuresinthetwocountriestounderstandtheconundrumofthelackoffulltraderelationsbetweenthesetwolargeneighbouringcountries.

Keywords:trade,regionaltrade,interestgroups,politicaleconomy,statestructure

IndiaandPakistanhavebeenreluctanttradingpartners.Althoughbilateraltradebetweenthetwocountrieshasincreasedinrecentyears,obstaclesremaininthe

realizationoftradepotential.When,in2006,PakistanratifiedtheSouthAsianFreeTradeAgreement(SAFTA),thiswasseenasabreakthrough,consideringthatIndia–PakistantradehasbeentheprimarystumblingblocktogreatereconomicintegrationoftheSouthAsianAssociationforRegionalCooperation(SAARC)region.

Whethertraderelationsbetweenthetwocountriesimproveornotintheforeseeablefuture,thecriticalquestiontoponderoveriswhyPakistanandIndiaareperhapstheonlytwolargeneighbourswithsuchrestrictedtraderelations.InanenvironmentwherebothcountrieshaveliberalizedtheireconomiesandsigneduptotheWorldTradeOrganization(WTO),signifyinganexplicitstatementoftheirbeliefinopeninguptheirtraderegimes,thelowlevelsoftradeareagreataberration.

TheimplicationsofIndia–Pakistantradegowellbeyondtradeandeconomiccalculations.Thelong-standinggeopoliticalconflictbetweenthetwocountrieshasledinternationalobserverstoclassifythisregionasoneofthemostvolatileintheworld.Enhancedtradeholdsthepromiseofdilutionofanimosity,withpeacespilloversforSouthAsiaandtherestoftheworld.Atthenationallevel,thepeacedividendisexpectedtoaccrueasthroughthediversionofresourcesfromsecuritytodevelopment.

Theprevailingsituationraisesthreeimportantquestions.First,iftherearegainstobemadefromtradebybothsides,thenwhydobusinessinterestsinbothcountriesnotpushforgreatertrade?Second,(p.244) isitnecessary(evenifnotsufficient)thatenhancedtraderelationswillleadtoareductioninthegeopoliticaltensionsintheregion?Third,bythesametoken,willapeacedividendforthedomesticeconomiesofIndiaandPakistannecessarilyaccruethroughanincreaseintrade?

Thischapterattemptstotackleonlythefirstquestion.Aproperunderstandingofwinnersandlosersineithercountrywillcontributetoabetterunderstandingofthefactorsinhibitingtrade.Bothamongthebusinesslobbiesandthestate,therearesomewhostandtobenefitandsometolosefromtheopeningupoftraderelations.Itisthusimportanttoreviewthenatureofstate-businessrelationsinthetwocountriesinbothaninternationaldevelopmentalcontextandahistorical-structuralcontext.

Thischapterisdividedintothreesections.Inthefirst,thepatternofformalandinformaltradewillbeexaminedwiththeaidofsecondarydata,onthebasisofwhichIwillattempttoshowthegainsfromtradethatcouldpossiblyaccruetobothsides.Thesecondsectionwillprovideacriticalappraisalofeconomicandpoliticalfactors,bothofficialandunofficial,thathaveimpededthedevelopmentofamoreopentraderegime.Thethirdsectionhomesinonthenatureofstate-businessrelationsinIndiaandPakistantounderstandthestructuralreasonsfortradebarriers.

LevelofTradebetweenIndiaandPakistanTheleveloftradebetweenIndiaandPakistanhasaveragedlessthanUS$1billionduringthecourseofthepastdecadeorso(seeFigure8.1).1Giventhemagnitudeoftheirglobaltradevolumes,twofactspointtothelowvolumeoftradebetweenthetwocountries:first,neithercountryfallsinthecategoryofthetoptentradingpartnersfor

eachother2andsecond,between1999and2004,India'sshareinPakistan'strade(bothimportsandexports)averagedlessthan2percent,andPakistan'sshareinIndia'stradeaveragedlessthan1percent.3

Notonlyistheoveralltradelevellow,butalsomuchoftheofficialtradingtakesplaceinanexceptionallynarrowbandofcommodities.Figures8.2and8.3showthemajorgroupsofcommoditiesthataretradedbetweenIndiaandPakistan.Thereareonlyfourmajorcommoditygroupsbeingcurrentlytraded.ThechartalsorevealsthatthebulkofIndia'sexportstoPakistanareintheformofintermediategoods—chemicals,rubber,andplastics4—whereasPakistan'sexportstoIndiaareconcentratedinprimaryproductsand,toalesserextent,textiles.5(p.245)

Figure8.1 India–PakistanTradeFlows,1998–2005Source:IMF,DirectionofTradeStatistics(2006).

(p.246)

Figure8.2 PakistaniExports–IndianImportsSource:DepartmentofCommerceIndia,EIDB(2007).

(p.247)

Figure8.3 IndianExports–PakistaniImportsSource:DepartmentofCommerceIndia,EIDB(2007).

(p.248) Foreconomiesthatwereintegratedtill1947,formaleconomicintegrationwasexceptionallylowafterPartition,whenIndiadevalueditscurrencyin1949andPakistandidnot.Priortothat,56percentofPakistan'sexportsand32percentofitsimportsweretoandfromIndia.6Afurtherbreakintradeoccurredduringthe1965war.7RegionsconstitutingWestPakistan,previouslyknownasthe‘granaryofIndia’,exportedfoodgrains,cotton,spices,anddryfruitstoareasconstitutingpresent-dayIndia,whereasimportsfrompre-Partitiontimestopresent-dayPakistancomprisedcoalandironaswellasalargevarietyoffinishedproducts.8ThenotablepointisthatthemixofcommoditiestradedbeforePartitionandcurrentlyremainsmuchthesame.

InformalTrade:FormsandMagnitude

InformaltradebetweenPakistanandIndiatakestwoforms.Thefirstiswhatisusuallyreferredtoassmuggling,thatis,illegaltradethroughbordersbetweenthetwocountries.9Thesecondistradethroughacircuitousroute.Thisusuallytakestheformofcontainerizedtrade,withgoodsbeingshippedtoasecondcountry,thedocumentationonoriginofgoodsisthenchanged,andtheyareshippedonwardtothedestinationcountry.TheotherrouteisofgoodsbeingshippedfromcountryAtocountryB,destinedforcountryC,fromwheretheyarere-exportedtocountryD.MuchoftheinformaltradebetweenPakistanandIndiaisconductedonthebasisofsuchcircuitousroutes.10

Thereareavarietyofestimatesofinformaltradebetweenthetwocountries.ThesegenerallyrangebetweenUS$1–2billion.A2005studybytheSustainableDevelopmentPolicyInstituteistheonlystudythathasattemptedtoempiricallytrackalltheavenuesofinformaltrade.Thestudyestimatesthatinformaltradefor2004–5,throughboththethirdcountryaswellascross-borderroutes,wasUS$545million.Accordingtothisstudy,importsfromIndiaamounttoastaggeringUS$534.52million,whileexportstoIndiafromPakistanaccountforamereUS$10.36million.ThebreakdownofinformalimportsfromIndiatoPakistanisgiveninTable8.1.MuchofthistradetakesplaceincommoditiesthatarenotonthepositivelistbutwhichareinhighdemandinPakistan.Theleadingsectoriscloth,mostlysilks,followedbypharmaceuticals,textilemachinery,tyres,cosmetics,andjewellery.

Thatinformaltradebetweenthetwocountriesisvirtuallyunidirectional,overwhelminglyfromIndiatoPakistan,isnotsurprisingfortworeasons.First,asIndiahasgrantedMostFavouredNation(MFN)(p.249)

Table8.1InformalTradefromIndiatoPakistanItem Value(US$million)Cloth 186.0Pharmaceuticalandtextilemachinery 75.0Tyres 73.3Cosmeticsandjewellery 63.8Livestock 33.3Medicines 32.8Herbsandspices 24.9Electroplatingchemicals 15.0Bidi 8.6Others 6.0Autospareparts 5.3blankets 3.0Gutkaandpaanmasala 3.3Razorblades 2.2Total 534.5Source:SustainableDevelopmentPolicyInstitute(SDPI),‘QuantifyingInformalTradebetweenPakistanandIndia’,2005,p.18.

statustoPakistan,mostofPakistan'sexportsareroutedthroughtheformalchannel.Second,asIndia'sexportsareconcentratedinhighvalue-addedmanufactures,theirunitvaluesareexpectedtobehigher.

EstimationsonPotentialTrade

Thefirst-orderobservationwillbetogaugethegainsfromtradetobothsidesonthebasisofcurrentformalaswellasinformaltradelevels.Thisapproachdoesnothowevernottakeintoaccountpotentialbackwardandforwardlinkagesthatarecreated,andwhichexpandthetotalvolumeofgoodstraded.Fortwoneighbouringcountrieswithsimilarpercapitaincomesandoverlappingculturalattributes(particularlybetweennorthernIndiaandthePunjabandSindhprovincesofPakistan),theprobabilityofnon-tradeableseventuallyconvertingintotradeablesisalsoveryhigh.11

Basedonthesetradeexpectations,therehavebeenanumberofprojectionsthatplacetradepotentialbetweenthetwocountriesinthe(p.250) rangeofUS$10–15billionannually.12TheStateBankofPakistan(SBP)initsreportin2006,basedonthesimple

methodologyofcomparingonecountry'sexportstotherestoftheworldwiththeother'simportsfromtherestoftheworld,hasidentifiedsectorswherethepotentialfortradeinastaticsenseishigh.Thisexerciserevealsthatbasedonthe2004tradedata,overalltradewouldrisetoUS$5.2billion,withPakistan'sexportsconstitutingUS$2.5billionandexportsfromIndiatoPakistanUS$2.7billionwithouttradebarriers.13Italsoputsintoperspectivetheissueofinequalityinbilateraltraderelations.EvenifPakistanrunsalargetradedeficitwithIndia,itsimportbillwillreducebyUS$400–900million.14

Basedontheaboveexercise,SBP(2006)identifiesthefollowingareaswhereeithersidecanenhanceitsexportstotheother.Pakistan'sexportstoIndiacanbeincreasedinthefollowingcommodities:15

1.Textilesandrelatedproducts2.Preparedfoodstuffs3.Mineralproducts4.Rubber5.Vegetableproducts6.Power

Similarly,importsfromIndia,ofgoodsinwhichtradeincreasesareseentobesignificantare:

1.Tea2.Spices3.Autoparts4.Lightengineering5.Tyresandtransportequipment6.Entertainment7.Healthcare8.Informationtechnology9.Pharmaceuticals

GainsfromTrade

Thestaticscenariopresentedabovetouchesthetipoftheicebergintermsofpossiblegainsfromtradetobothsides.Thisexpansionispredicatedonthehistoricalcontiguitythatexistedbetweendifferentregionsofthetwocountries.SeveralscholarshavedocumentedhistoricallinksbetweentheIndianandPakistaniPunjab.16Similarly,linksbetweenKarachiand(p.251) Mumbai,andfromRajasthanandGujaratintopartsofSindhwerecentraltothelocaleconomies.Severalinformaltraderoutescontinuetooperateoneithersideprimarilybypeoplewhohavelinksacrosstheborder,someofwhichgobacktopre-Partitiondays.Ifnormaltradelinksarerestored,regionaleconomicbenefitsthatcanaccrueoneithersidewillhaveamultipliereffect.

SeveralsegmentsofthePakistanieconomythatcouldbenefitfromincreasedtradewithIndiahavebeenidentified.First,expansioninthevolumeoftradeasaresultofaccesstoalargermarketwilllowerunitcostsforPakistaniexporters,whichwillimprovetheir

overallcompetitiveness.17Second,consumersinPakistanwillclearlybenefitaspricesofIndianimportswillbelowerincomparisontothosefromtherestoftheworldbecauseoflowerunitcostsinIndia,aswellaslowertransportationcosts.18Third,itwillhaveabeneficialimpactonpublicfinanceasincreasedtradevolumeswillhaveapositiveimpactoncustomsrevenues.19Moreover,iftheproposedgaspipelinebecomesareality,theestimatedrevenueimpactisexpectedtobeintheregionofUS$500–700millionannually.20

SimilarbenefitswillalsoaccruetoIndia,thoughtheirmagnitudewillnotbeassignificantasforPakistansimplybecauseofthesizeanddiversifiedstructureofIndianexports.21EnhancedtradeisalsoexpectedtoexpediteIndia'stradewithcentralAsiancountries,makinguseofthelandrouteviaPakistan.22

Besides,inaneraofincreasinglyopentradeundertheWTOregime,regionalalliancesservetoprotectdevelopingcountriesfromtheonslaughtofdevelopedcountries'unfavourabletermsoftrade.

Thenegativeimpactsofopeninguptradearefew.First,certainsectors,moreinPakistanthaninIndia,willloseoutintheshortrun.Someofthesesectorsareinanyeventnotgoingtosurvivetheonslaughtofimportsfromothercountries,particularlyChina.Second,onefeatureofregionaltradeisthatmuchofitoccursatanintra-sectorallevel.23Overtime,therefore,apartfromafewindustries,24mostwilladjusttotherealityofintra-sectoraltrade.

WhyDoIndiaandPakistanNotOpenupTradeRelations?Inspiteofthegainsfromtradetobemadebybothsides,anumberofjustificationsareadvancedbystatefunctionariesaswellaspoliticalandbusinessgroupsinfavourofmaintainingthestatusquo,thatis,limited(p.252) tradebetweenthetwocountries.Thissectionwillattempttocriticallyscrutinizethesepropositionsfortheireconomicvalidity.

MFNStatustoPakistanbutLowLevelsofTradefromPakistantoIndiaPersist

ThattheleveloftradefromPakistantoIndia,althoughincreasing,isstillsignificantlylowpointstothefactthatevenafterIndiahasgrantedMFNstatustoPakistan,hurdlesexistthatinhibitPakistaniexportstoIndia.IndianbusinessgroupsinvokedtheargumentthatallIndiacandoistogivePakistanMFNstatus.TherepresentativesofFederationofIndianChambersofCommerceandIndustry(FICCI)wentsofarastosuggestthataftergettingMFNstatus,‘theonusisonPakistan’toincreaseitsexportstoIndia.Thispropositionisindeedvalid:ifPakistanhasbeengrantedMFNstatus,whydoesitnotincreaseitsexportstoIndia?

Pakistan'sbusinessmenandstatefunctionariesclaimthatthereasonsfortheslowgrowthofPakistaniexportstoIndiaaretwofold.ThefirstandmoreimportantreasonisthatIndia'stariffandnon-tariffbarriersareanimpedimenttoaccesstoIndianmarkets.Second,itappearsthathightransactioncostsalsoinhibitPakistanientrepreneursfrominvestinginmarketingtheirproductstoIndia.

AlthoughaverageimporttariffsinIndiahavebeenreducedsubstantiallysincetheeconomywasliberalizedintheearly1990s,25accordingtoSBP,agriculturaltariffscontinuetoremainhigh.26EvenifoneconcedesthatthereareimpedimentstoaccesstoIndianmarketsforagriculturalproductsduetohightariffbarriers,thisargumentdoesnotholdtruefornon-agriculturalproducts.IndiahasconsistentlyreducedtariffbarriersinaccordancewithWTOprovisionsformanufacturesandsemi-manufactures,anditisasdifficult(oreasy)forPakistantogainaccesstoIndianmarketsasitisforothermarkets.Evenforagriculturalproducts,highertariffsarecompensatedforbylowertransportationcostsandquickerdeliverytime,particularlyinthecaseofperishableitems.27

Theexistenceofnon-tariffbarriersisafarmorecrediblereasonforthelowlevelsoftradebetweenthetwocountries.AccordingtoPakistaniaswellasIndianobservers,non-tariffbarriersfromtheIndiansideareasignificanthurdleforPakistan'sexportstoIndia.Non-tariffbarrierstakeondifferentforms.Onecategoryisstringentrules-basednon-tariffbarriers.Forinstance,sanitaryandphyto-sanitaryrequirementsinIndiaareconsideredtobeexceptionallystringentbytheexporters(p.253) ofagricultural,fisheries,andlivestockproductsfromPakistan.28ThesebarriersaresaidtoinhibitprocessedfoodexportsfromPakistan,acommodityforwhichthereisconsiderablepotential.Similarqualitycertificationsarerequiredforotherproductstoo,aswasrecentlyrequiredforcementexportstoIndia.29

Theotherformthatnon-tariffbarrierstakeisroutinebureaucraticredtape.AccordingtoonePakistaniexporter,theproformawas200pageslongand‘consideringthecontentsoftheproformaitwouldhavebeenverydifficultforanyPakistaniexportertoexportthecommoditytoIndia’.30Regulatorycertificationsprovidethebureaucracywiththeleveragetodiscriminatebetweenproductsandcountries.Althoughinprincipletheseregulationsareapplicabletoallcountries,Pakistaniexportersclaimthattheyhaveoftenbeensubjectedtoarbitrarydiscriminationbasedontheregulatorystructure.31

PakistaniexportersandtheirrepresentativesciteanumberofinstanceswhereIndiancustomsinordinatelydelayedtheclearanceofgoods,32ortherailwaysfailedtofacilitatethetimelydeliveryofgoods.33

Apartfromreasonsassociatedwithregulationandbureaucraticinertia,hightransactioncostsalsobecomebarrierstotrade.ThestringentvisaregimeonbothsidesiscitedasanimportantreasonforlowlevelsofofficialPakistaniexportstoIndiainparticularandbilateraltradeingeneral.Attherootofthisbarrierliesperhapsthenatureofpoliticalrelationsbetweenthetwocountries.Theprivatesectorfaceslong-termuncertaintyundersuchascenario,makingitdifficulttotakedecisionsrelatingtoinvestmentsinrelationshipsandinfrastructure:suchasopeningofficesintheothercountryandemployingitsnationalsforsalesandmarketing.Similarly,thelargeinfrastructureofinformaltradealsoactsasatradebarrier.Tradershaveinvestedinthird-countryroutes,havesetupofficesinthosecountries,andhaveinvestedinnetworksforcustomsclearancetoovercometheissueofrulesoforiginproblemsthatarise.34Unlessgreatercertaintyinthebroaderpoliticalenvironmentisachieved,theproblemoflong-termtrade

commitmentswillremain.

WhileindividualPakistaniexporters(andIndianimporters)arejustifiedininvokingproblemsassociatedwiththetraderegimefornotenhancingtheirtradewithIndia,itispossibleforbusinessassociations(andothercollectivefora)andpolicy-makerstoresolvetheseissues.Inthefirstplace,WTOrulesprovidefortheresolutionofsomeoftheseissues.Otherissuescanberesolvedbilaterally.Itisaroutinefunctionof(p.254)commerceandtradeministriesallovertheworldtobilaterallyresolvesuchissueswiththeircounterparts.

ProtectionismandtheKashmirDispute:PakistaniPositionsonRestrictedTradewithIndia

TheissueofprotectionismintradewithIndiaisoftenraisedbysectionsofthebusinesscommunityaswellasbythosetotherightofthepoliticalspectruminPakistan.Itisallegedthatindustriessuchassteel,lightengineering,theautoindustry,andpharmaceuticalswillbeadverselyaffected.Suchpronouncementsdonotappearverycredible,particularlywhenmadebyacountrythathassigneduptotheWTOandhasanopentraderegimewiththerestoftheworld.35

Finally,therealstumblingblockinIndia–PakistantradeisthefactthatPakistanhasnotgrantedMFNstatustoIndia.The‘official’positionfromthePakistanisidethatisrepeatedadnauseumisthatunlesstheKashmirdisputeisresolved,PakistanwillnotnormalizetraderelationswithIndia.36UnderlyingthispositionistheapprehensionthattradelinkswithIndiawillcreatealevelofeconomicinterdependencebetweenthetwocountriesandhasthepotentialofcreatinga‘vestedinterest’amongstthebusinesscommunityandconsumersofIndiancommoditiesthatwilldilutethe‘urgency’oftheKashmirissue.

Althoughthelogicalconclusionofthis‘official’Pakistanipositionisneverspeltoutbyitsproponents,itcanonlymeanthatnormaltraderelationsbetweenthetwocountries,itisfeared,willprecludethepossibilityofescalatedmilitaryconflict.Evenifonetakesalessstarkview,economicandcommercialrelationscandilutea‘ColdWar-like’situation,manifestedinhighlevelsofmilitaryexpenditure.RegardlessofwherePakistanisstandonthecentralityorotherwiseoftheKashmirdisputevis-à-visitsrelationswithIndia,itisnotnecessaryforpoliticaldisputestobesweptunderthecarpetatthealtarofeconomicexpediency.China'slong-lastingterritorialdisputeswithTaiwanandJapanhavenotbeendilutedbyeconomicrelations.

Thesubservienceoftradeandtheeconomicwell-beingofthepopulacetopoliticalandterritorialdisputesmayhavebeenanideainvogueduringtheColdWar,butinthetwenty-firstcenturyitwillbeincreasinglydifficultforPakistantosustainthispositioninstatepolicy.37Moreover,byliberalizingitseconomy,Pakistanhasalsoacknowledgedthatitvaluestradeasanimportantcornerstoneofitseconomicpolicy.(p.255) TradediscriminationagainstIndia,regardlessofterritorialandpoliticaldisputes,isthusinconsistentanduntenable.

StructuralExplanationforRestrictedTradebetweenIndiaandPakistanIftherearegainstobemadefromtrade,andproblemsinthewayofanopentrade

regimearenotentirelyinsurmountable,thequestionthatarisesis:whydoIndiaandPakistannottradefreely?Withtwoofitslargestentitiesnotdevelopingfulltraderelations,theSouthAsianregionremainstheonlygeographicallycontiguousregionintheworldtodaythatisyettodevelopafullyfunctionalandeffectiveregionaltradingbloc.38

Whileregionaltradingblocsarethenormtoday,theyarenothistoricallyunique.MostofthesearrangementsemergedafterWorldWarII,andmanyofthememergedattheendoftheColdWar.Prioritizingtrade,andbydoingso,prioritizingthewelfareofitsownpeopleoverterritorialandpoliticaldisputes,isthusarelativelynewphenomenon.

Thenextsectionwillassessthestructureofstatesthatweresuccessfulinestablishingfulltraderelationswithpoliticaladversaries,andcomparethemtothestructureofthestateinIndiaandPakistan.Acorollarytothestructureofthestatesisthedynamicsofstate-businessrelations.Itisimportanttoexplorethisdynamictodeterminetheextenttowhichtheprivatesectorineithercountrycanpushforopeningupoftradeinasituationwhere,asdiscussedearlier,businessesstandtogainfromtrade.

ATypologyofStructuralCharacteristicsofStateTypes

Asabroadbrushcharacterization,39twostructuralattributesarediscernibleinstate-societyrelationsbetweencountriesthathavemadeatransitiontoprioritizingeconomicwell-beingovermilitaryconflict.ThefirstistheEuropeanandNorthAmericanmodel,inwhichcoreinterestsofthebourgeoisietakeprecedenceoverandabovethoseofothergroupsandclasses.40Thesecondcategoryisofthosecountries,principallyinEastandSouthEastAsia,wherethestatehasbeentermedasbeing‘developmental’.AccordingtoEvans,adevelopmentalstateisoneinwhichthestateisautonomousof‘politicallypowerfulconstituents’.However,Evansgoesontoarguethatthisautonomyisembedded‘inadensenetworkoftiesthatbindgroupsandclassesthatcanbecomeallies(p.256) inthepursuitofsocietalgoals’.41Inboththesestatetypes,therefore,eithertheinterestsofthebourgeoisieorthe‘nationalinterest’,asdefinedbythedevelopmentalstate,haveplayedanimportantroleovertimeingivingprecedencetoeconomicgrowthandwelfare,ofwhichtradeingeneral,andregionaltradeinparticular,isanimportantcomponent.

Arguably,thestateinSouthAsiahasdifferentantecedents.Thestructureandcharacterofthestatecontinuestobeardeepimprintsofthecolonialmodeofgovernance.AccordingtoJalal,42thenon-electedarmsofthestateremainascendantovertheelectedarmsofthestate,thusprecludingsubstantivedemocracyintheregion.Thesenon-electedarms,thebureaucracy,themilitary,andthejudiciary,inthisschemeareseentobe‘overdeveloped’inrelationtotherestofsociety.43AlavicharacterizesthestateinSouthAsiaas‘relativelyautonomous’fromdominantgroupsandclassesinsocietyandthereforenoneofthesegroupsaredeemedtobestrongenoughtodominatethestate.44

InthePakistanicontext,thebureaucratic-militaryoligarchyhasremainedascendantintheabsenceofformaldemocracyinthecountryforthebetterpartofitsexistence.Infact,overtime,ashiftfromtheoligarchicruleofthebureaucracyandthemilitarytoone

ofmilitaryhegemonyisdiscernible.45

Theinterestsofthemilitaryprecludeprioritizingtraderelationsoverterritorialdisputes.AccordingtoGazdar,46anyprocesswhichnormalizesrelationsbetweenthetwocountries‘wouldunderminethepoliticallegitimacyofthemilitaryasanentity,consequentlygivingrisetochallengestoitsclaimsonthecountry'seconomicresources’.

Moreimportant,however,isthepoliticalandideologicalroleofthePakistanimilitary.HaqqanishowsthatsincetheimpositionofmartiallawbyYahyaKhan(1969–71),religiousgroupshaveprovidedsupporttosubsequentmilitarydictatorshipsinPakistan.47Thiscollusionbetweenthemilitaryandreligiouspartiesispredicatedonanideologicalaffinity,especiallyintheiranti-Indiaposture.Addedtothisideologicalcongruence,isthestructuraldependenceofthemilitaryonthemilitantarmsoftheright-wingparties.SincethePakistanimilitaryembarkedonastrategyofcovertwarfareinAfghanistanandKashmir,thedependenceofthemilitaryonsuchmilitantgroupstoexecutecovertwarfarehasaddedanotherdimensiontothiscollusiverelationship.48

InIndia,ontheotherhand,formaldemocracyhasacquireddeeprootsandmediatedtheinterestsofsocietywiththenon-electedelementsofthestatetoamuchgreaterdegreethaninPakistan.Bardhancontendsthatamongstthedominantproprietaryclasses—thecapitalists,(p.257) thetraders,thebureaucracy,therichpeasantry,andtheeducatedmiddleclasses—nonearesufficientlypowerfultodominatethestate.49Bardhanalsocontendsthattheintermediateclassesandtherichpeasantryhavemanagedtoacquirealargechunkofpublicresourcesintheformofstatesubsidies.50Thesizeanddiversityofinterestgroupsandclassdivisionshavemeantthatcollectiveactionisdifficulttoforge,whichconsequentlysustainstherelativeautonomyofthestate.

Theabovediscussiononthestructuralcharacteristicsofstatesasanexplanationforthelackofprioritizationoftraderelationsoverpolitico-militaryconcernsisadmittedlyastaticapproach.Afterall,bothcountrieshaveliberalizedtheireconomiesoverthepasttwodecades.Consequently,thegrowthoftheprivatesectoringeneralandbigbusinessinparticularhasbeenfacilitatedbybothstates.Therefore,inthismilieuofprivatesector-ledgrowth,canitbeassumedthattherelativepowerofbigbusinessvis-à-visothercontendinggroupsandclassesinsocietyhasnotimprovedtotheextentthatitsinterestsandgrowthprospectsareadequatelyprotectedbystatepolicy?Iaddressthisissuebelow.

State-BusinessRelationsandRegionalTrade

TheroleoftheprivatesectorinbotheconomieshasincreasedoverwhelminglysincetheliberalizationoftheeconomiesofIndiaandPakistan.TheIndianeconomyhasdemonstratedconsistentlyhighgrowthratesoverthepastfifteenyears,andPakistan'seconomyhasalsowitnessedgrowth,albeitlessconsistentlythaninIndia.Towhatextenthasthisincreasedtheleveragethatbigbusinesshaswiththestateinthetwocountries?Inotherwords,havethestatesinIndiaandPakistantransformedovertimeenablingbigbusinesstosignificantlyinfluencetheoveralldriftofstatepolicy?Bytrackingthehistorical

evolutionofstate-businessrelationsinbothcountries,Iattempttoanswerthisquestion.

The‘PoliticalEconomyofDefence’:State-BusinessRelationsinPakistan

BigbusinessinPakistanhashistoricallytendedtocolludewithmilitarygovernments.ThiscollusionwasideologicallydrivenduringtheColdWar:themilitaryshieldedtheprivatesectorandbigbusinessfromleftwingpoliticians,andinturn,bigbusinessprovidedtherequisitepolitical(p.258) supporttothemilitary.Inordertogenerategrowthandrevenuesforthestate,militarygovernmentsformulatedbusiness-friendlypolicies,withampleopportunitiesforbusinessestoseekrents.

However,thiscollusiverelationshipoftheColdWareradidnotmeanthattherewasanyformof‘businesscaptureofthestate’,assuggestedelsewhere.51KochanekarguesthatalthoughunderAyubKhan's(1958–69)dictatorship,bigbusinesswasfacilitatedbythestateanditsrepresentativeswerenominatedinanadvisorycapacityonanumberofpolicymakingfora:‘thegovernmentretainedtheabsoluteright’todeterminepolicy.52

AfterabriefhiatusduringthepopulistregimeofBhutto(1971–7),bigbusinessagainresumeditscollusiverelationshipwiththeZia-ul-Haqmilitaryregime(1977–8).WhilethetermsofengagementweresimilartothoseintheAyubdays,Ziafurthererodedthepossibilityofcollectiveactionamongstbusinessgroupsbypromotingdivisionsonethniclinesbetweenbusinessassociations.53BythetimetheMusharrafregime(1999–2008)cametopower,themilitaryhademergedasanentrenchedcorporateentity.Siddiqahasdocumentedsignificantinterestsofthemilitaryinmanufacturing,construction,communications,andfinancialserviceswhichwerefurtherconsolidatedduringthedictatorship.54

AlthoughtheperiodofMusharraf'srulespeltprosperityforbigbusinessinPakistan,bothduetopro-businesspoliciesaswellasexcessliquidityinthemarketafter9/11,thehegemoniccontrolofthemilitarydidnotchange.Thisisbestgaugedfromthefactthatalthoughmilitarycapitalhasbeensteadilyencroachingupontheterritoryofbigbusiness,55butthelatterhassettledforasmallermarketsharebycolludingwithitratherthanresistingit.

WithregardtoIndia–Pakistantrade,thereisaperceptiblechangeinthebigbusinessassociationsinPakistan.Throughthe1990s,afewvoicesemergedfromwithinthebigbusinesscommunityinsupportofopeninguptradewithIndia.ThemostprominentdevelopmentinthiscontextwasthepublicationofareportbytheKarachiChamberofCommerceandIndustry(KCCI)thatadvocatedgrantingIndiaMFNstatus,particularlyafterPakistanhadliberalizeditsregimeandsigneduptoWTO.56Bythemid-2000s,interactionbetweenbusinessgroupsinIndiaandPakistanincreasedmanifold.Eulogizingthebenefitsoftradewitheachotherhasbecomepartofthediscourseofthebusinessassociationsinbothcountries.ImprovementofbilateralpoliticalrelationssincetheMusharraf–VajpayeesummitinJanuary2004haspavedthewayforthisincreasedinteractionbetweenthe(p.259) businesscommunities.Thisreflectsthefactthatbusinessassociationsalsoactivatetheirlobbyingoncethesecurityandgeopoliticalenvironmentbecomesfavourable.

Pakistan'sbigbusinesshasbecomemoreinfluentialtotheextentthatitwillbedifficult,ifnotimpossible,foranygovernment,whethermilitaryorcivil,toreversethebasicpreceptsofliberalization.However,withregardtotradewithIndia,themilitary–hegemonicstateisstillpowerfulenoughtorideroughshodoverallinterestgroupsandclassesthatthreatenitsinterests.

State-BusinessRelationsinDemocraticIndia

State–businessrelationsinIndiadifferfromthoseinPakistaninseveralways.First,India'sgrowthoverthepasttwodecadeshasbeenmoresustainedthanPakistan's.Second,Pakistan'seconomyhasalwaysbeenrelativelymoreopenthanIndia'supuntiltheearly1990s,andinconsequence,Indiahadanentrenchedgroupofprotectionistbusinesseswhichhaddevelopedoveralongperiodoftime.57Third,andmostimportantly,state–societyrelationsingeneralandstate-businessrelationsinparticulararemediatedthroughthedemocraticprocessinIndia.

India'sgrowthtrajectoryisgenerallytracedfrom1991,whentheCongressgovernmentliberalizedtheeconomy.Kohli,however,tracesa‘paradigmshift’instate–businessrelationsstartingin1980whenIndiraGandhireturnedtopower.58Itisthenthatshemovedawayfrom‘garibihatao’asthefocusofhersocio-economicagendatowardsonebasedonimprovingtheproductivebaseoftheeconomy.Whilethispolicyshiftdidenhancetheinfluenceofbigbusinessvis-à-visotherimportantgroupsinIndia,itwasclearlyastate-ledinitiative.

AccordingtoSinha,India'sbigbusinessassociations,theFICCIandAssociatedChambersofCommerceandIndustryofIndia(ASSOCHAM),whilebenefitingfromreducedredtapeandtheprotectionthatwasstillprovidedtothem,resistedanyfurthereconomicliberalizationthatwouldresultinopeninguptheIndianeconomytoforeigntrade.RajivGandhi,however,attemptedtodilutetheinfluenceofFICCIandASSOCHAMbypromotingtheAssociationofIndianEngineeringIndustry(AIEI),whichlatercametobecalledtheConfederationofIndianIndustry(CII),andbecamethecountervailingforumtotheentrenchedbusinessgroups,advocatingamoreliberalizedtraderegime.59TheemergenceofAIEI/CII,tocreateaneffectivecountervailingforcehappenedbecausethestatedemonstratedadegree(p.260) ofautonomyvis-à-visbusinessgroupswhichallowedtheleadershiptoundertakesuchamove.Moreover,theopeningswithinthefederalanddemocraticstructureallowedAIEI/CIItointeractwithandprovideservicestovariousstategovernmentsthatreinforcedtheirpoliticalinfluence.

Thepost-1991reformshavealsobeensustainedbythestatebalancingthedemandsofdifferentinterestgroupswhileretainingwithitselftheleversofpolicymaking.AccordingtoKohli,theinitialleveragewasgainedbythestateundertheguiseofpolicyconditionalitiesimposedbytheIMF.Whilesustainingthereformswasnotasmoothprocess,60thelackofcollectiveactionamongstbusinessinterestsaswellasnegotiationsthroughthepoliticalprocessamongstvariousprotagonistsresultedinessentialelementsofthereformsenjoyingbipartisanconsensus.61

BroadeningthescopeofBardhan'sframework,howarenonbusinessproprietarygroupsinsocietyplacedintheeraofeconomicliberalizationandgrowth?Didtherelativepoweroftherichpeasantry,thebureaucracy,andtheintermediateclasseswanewiththesustainedprivatesectorledgrowthsince1991?Jenkinsarguesthatfarfrombeingirrelevant,thepoliticalprocessplayedacatalyticroleinbusinessgroupsforgingallianceswithotherinterestsinsocietythroughpatronagenetworks.Whetherbusinessgroupshavestrengthenedtheirpositionvis-à-visothergroupsoverthepasttwodecadesisamootpointforourpurposes;62whatisimportantisthatotherproprietaryclassesaresufficientlyrelevanttoenablethestatetomaintainadegreeofrelativeautonomyfromallgroupsandclasses.

Theanalysisinthissectionsuggeststhatwhilestate–societyrelationsarefairlydifferentinIndiaandinPakistan,neithercountryhasbeentransformedinthedirectionofdevelopmentalstatesasinthecaseoftheEastAsianstates,noraretheybourgeoisie-dominatedasintheOECDcountries.Thechapterhasalsoarguedthatstate–societyrelationsinbothIndiaandPakistanhavenotstructurallyalteredinspiteofliberalizationandprivate-sectorledgrowthinbothcountries.

Thischapterhassoughttoarguethatconsideringthemannerinwhichstate–societyandstate–businessrelationsarestructuredinIndiaandPakistan,thestatewillhavetonormalizetraderelationsrelativelyautonomously.

(p.261) Theweightofeconomiccompulsionsandchanginggeopoliticalconfigurations,withtheUShavinganinterestinPakistanandIndiaburyingthehatchet,willsoonerorlatercompelthestatestodismantletheexistingbottlenecksintheirtraderelations.Moreover,giventhedriftofglobalization,theemergingglobaleconomiccrises,andPakistan'sneedforforeigncapitaltoboostinvestmentandtideoveritsperennialbalance-of-paymentsproblemshasincreasedtheprobabilityofcapitalflowsbetweenthetwocountries.

Moreover,sincetheonusofnormalizingbilateraltradeandeconomicrelationsisonPakistantoagreaterdegree,thereareencouragingsignssofarasthepresentpoliticalconfigurationinthecountryisconcerned.Thedominantpartnersinthecoalitiongovernment,thePakistanPeople'sPartyandthePakistanMuslimLeague(N),havebothfavouredimprovedeconomicrelationswithIndia.ThisisanopportunemomentalsobecausethePakistanimilitaryisonaweakpoliticalfootingandfightingbattlesagainstIslamicextremists.

Thischapterhasalsoattemptedtodemonstratethatastherearegainsfromtradeforbothcountries,itisimportantthathealthyeconomicrelationsbetweenthetwocountriesbetreatedasanendinitself.Thetendencybybothliberalsandconservativestoinvokethedebateontradetoeitherpromotethecauseofpeacebetweenthetwocountriesorraisefearsaboutideologicalorterritorialissuesbeingpushedbackhastendedtoobfuscatewhatisessentiallyaneconomicdebate.

Notes:

(1).Thelatestfiguresavailableatthetimeofwritingarefor2005.

(2).StateBankofPakistan(SBP),‘ImplicationsofLiberalizingTradeandInvestmentwithIndia’,SustainableDevelopmentPolicyInstitute,2006,p.10.

(3).Ibid.

(4).Notethatthelargejumpin‘FoodandBeverages’importsbyPakistanin2006–7isdrivenbytheincreaseinsugarimports,andisanon-recurringphenomenon.

(5).Notethatthelargejumpin‘Chemicals,Rubbers,andPlastics’exportsbyPakistanin2006–7isdrivenbytheincreaseinmineralfuels,oils,andotherproducts.SeeSBP‘Implicationsinrisingtradeandinvestment’,pp.11–12foradetaileddescriptionofthis.

(6).I.NabiandAnjumNasim,‘TradingWithTheEnemy—ACaseforLiberalizingPakistan–IndiaTrade’,inSajalLahiri(ed.),RegionalismandGlobalization—TheoryandPractice(London:Routledge,2001),p.175.

(7).ThelevelofintegrationupuntilthatpointcanbegaugedfromthefactthatIndianresidentsstillownedandoperatedbusinessesinPakistan.IwasinformedofthisbythelateVineetVirmani,formermember,India–PakistanChamberofCommerceandIndustryandformerpresident,Punjab,Haryana,DelhiChamberofCommerceandIndustry,inaninterviewdated6December2005.

(8).ShahidJ.Burki,withMohammedAkbar,‘Pakistan’,inSouthAsianFreeTradeArea—OpportunitiesandChallenges(WashingtonDC:USAID,2005),p.172.

(9).ThistradetakesplacethroughtheAmritsar–WagahrouteinthenorthandtheMumbai–KarachiroutebyboatandthroughthebordersinRajasthanandGujaratwithSindhinPakistan.(SeeSustainableDevelopmentPolicyInstitute[SDPI],‘QuantifyingInformalTradebetweenPakistanandIndia’,2005).

(10).Thecircularroutesare:India–Dubai–BandarAbbas(Iran)–Afghanistan–Bara(NWFP,Pakistan);India–Dubai–BandarAbbas–Afghanistan–Chaman(Balochistan,Pakistan);Mumbai–Kabul–Bara;andAfghantransittradethatlandsinPakistan,goestoAfghanistanandthenendsbackinPakistanthroughthelandroute.ThirdcountryroutesmostfrequentedareIndia–Dubai–Karachi,othersaretheIndia–Singapore–KarachiandIndia–HongKong–Karachiroutes.Fordetails,seeSDPI‘QunatifyingInformalTrade’.

(11).NabiandNasim,‘TradingwiththeEnemy’,p.177.

(12).KarachiChamberofCommerceandIndustry(KCCI),FreerTradewithIndia:ItsRaisond'etreandImpact(Karachi:ResearchandDevelopmentCellKCCI,1996).

(13).Foradetailedmethodologyofcalculation,seeSBP,‘ImplicationsinRisingTradeandInvestment’,pp.24–30andAnnexes5and6.

(14).Ibid.,p.21.AsimilarestimateforIndiaisnotgiven.

(15).InaninterviewwithAnjumNasim,oneoftheco-authorsofthisreport,hestatedthatatthetimeofthisstudy(1995–6),thePakistanisparepartssectorwasrelativelymorecompetitivethanitsIndiancounterpartsimplybecausePakistanhadthenbeenamoreopeneconomyforalongerperiodoftimethanIndia.India'sengineeringsectorhasnowcaughtup.Thisgoestoshowthattimelostinliberalizingtradecanaltercomparativeadvantageveryrapidlyinafastchangingworld.InterviewconductedinNovember2005.

(16).BurkiandAkbar,‘Pakistan’;NabiandNasim,‘TradingwiththeEnemy’.

(17).SBP,‘ImplicationsinRisingTradeandInvestment’.Thispositionwasendorsedbyatextilemillowner,ArifSaeed,on30November2005inLahore.

(18).SBP,‘ImplicationsinRisingTradeandInvestment’,p.66.NabiandNasim,‘TradingwiththeEnemy’,pp.178–9,alsoarguethatanumberofgoodsthataresmuggledorremainnon-tradeables,suchaspaans,banarsisaris,andHindimusic,amongstotherswillbecomeeasilyavailableandincreasetheconsumersurplus.

(19).Itmaybearguedthatbecauseoflowerunitvalues,andnowbecauseofloweringoftariffsunderSAFTA,revenuesmayactuallyfall.Thisphenomenonwillhoweverbeoffsetbyreductioninsmugglingandtheexpansionintradethatopeningupoftradewillbringabout.

(20).SBP,‘ImplicationsofRisingTradeandInvestment’,p.67.

(21).Forinstance,Indiantruck,tractor,andnon-vehiculartyresareusedextensivelyinPakistan.PakistanisinfactthelargestmarketforIndiantyresinthesecategoriesiftradetoAfghanistanandUAEistakenintoaccount(informationprovidedbytheAutomotiveTyresManufacturersAssociation,NewDelhi).Similarly,incertainformsofmachinery,suchastextilesandpharmaceuticals,Indianmanufacturers'volumeswillincreasesizeably.

(22).InterviewwithShabnamParekh,PHDCCI,NewDelhi,December2005.

(23).Forinstance,Indiaappearstohaveadecisiveadvantageintheengineeringgoodsindustry.However,someyearsago,whenconductinganotherstudy,ImetsomeagriculturalmachinevendorswhohadreceivedordersforthresherpartsfromIndianPunjab.

(24).OnthePakistaniside,theironandsteelindustryandvehicleassemblyplantscanbeclearlosers.

(25).Indianimporttariffswerereducedfrom128percentin1991–2to34percentin

1997–8.SBP,‘ImplicationsofRisingTradeandInvestment’.

(26).In2003,theaverageagriculturaltariffwas40.1percent,whileaveragenon-agriculturaltariffwas19.7percent.(SBP,‘ImplicationsofRisingTradeandInvestment’,pp.18–19).

(27).However,complexitiesindutyandtariffstructuresstillimpedetradegrowthbetweenthetwocountries.Forexample,Indianeconomistshavepointedoutthat‘[i]mportdutyonfabricinIndiais10percentoracertainfixedamountperkilogram,whicheverishigher.ImportdutyonfabricinPakistanis25percent.However,theminimumperkgdutyonfabricfixedbyIndiaismorethanthe25percentdutyonfabricimposedbyPakistan’.MansoorAhmad,News,13March2008.ThisdutystructureisdeemedtorestrictPakistan'sfabricexportstoIndia.

(28).SBP,‘ImplicationsofRisingTradeandInvestment’,p.22.

(29).AhmadMushfiq,‘CementexporttoIndia:BISawardsapprovalcertificatetoLuckyCement’,DailyTimes,23August2007.

(30).Jointstatement:LahoreChamberofCommerceandIndustry(LCCI)president,ShahidHassanSheikh,seniorvicepresident,YaqoobTahirIzhar,andvicepresident,MubasherSheikh,DailyTimes,‘Non-TariffBarriersHamperingIndo-PakBilateralTrade:IndianCommerceMinistryIssuesPro-FormatoCementExporters’,26September2007.

(31).OpeningofbankLCs(LettersofCredit)alsoposesatradebarrier:‘duetothenon-availabilityofrepresentativesoflocalbanksfromeithercountryintheother,LCopeningisanothermajorproblem,asIndiaallowsLCstobeopenedonlyinbanksrecognizedbytheIndiangovernment.’SBP,‘Implications’,p.21.

(32).ThiswasaccordingtoSaifuddinKhan,generalmanagerofmarketingatLuckyCements,oneofPakistan'slargestcementcompanies.Hesaidthatinitially‘Indianbuyerswereverycautious’inimportingcementfromPakistan.‘Theyweregivingordersfor200tonnessothattheycouldcheckoutthedutystructureandfigureouthowtogetthesupplyoutofcustoms,’referringtoboththecomplexityofthedutyregimeinitselfandpossiblecustomsclearanceissues.Awaz,2008.

(33).InacaseofmolassesexportsfromPakistantoIndia,theIndianRailwaysdidnotchangethetrackgaugesontheirsideoftheWagahBorderintimefortheperishablecommoditytobetransported(interviewwithanIndianbusinessman,December2005,Delhi).

(34).IwastoldthatanumberofPakistanityreimportersfromIndiahavesetupshopinDubaiwheretheyimporttyresfromIndiaandthenre-exportthemtoPakistan.ThiswasalsoconfirmedbytheAllIndiaTyreManufacturersAssociation(ATMA).

(35).OnePakistanibusinessmantoldme,‘Ifthiswasthecase,thenPakistanshouldnot

betradingwiththeUSorGermanyorindeedwithChina.Ifwehavemanagedtokeepourindustryintactwhiletradingwiththem,tradingwithIndiaisnotabouttoeffectfurtherdamagetoourindustry.’(anonymous,onrespondent'srequest).

(36).Forinstance,ShaukatAziz,thePrimeMinisterofPakistanfrom2004–7,wasreportedtohave‘underlinedtheneedforresolutionoftheJammuandKashmirdisputetocreate[the]prerequisitepoliticalframeworkconducivetoclosereconomiccooperationbetweenPakistanandIndia.Awaz,Daily,2008.

(37).SeeE.Sridharan,‘ImprovingIndo-PakistanRelations:InternationalRelationsTheory,NuclearDeterrenceandPossibilitiesforEconomicCooperation’,ContemporarySouthAsia,14(3),September2005,pp.321–39.

(38).Virtuallyallotherregionshavedevelopedtradingblocsandregionaltradeisalargepartofindividualcountries'overalltradeprofile.TheEuropeanUnion(EU)isthelargestandthemostrobustofsuchblocs.ASEANinSouthEastAsia,NAFTAinNorthAmerica,MERCOSURinSouthAmerica,andtheAfricanUnioninAfricacovermostofthecontiguousregionsoftheworld.

(39).Thischaracterizationofthestateabstractsfromtherichandvarieddebateonthe‘state’intheliteratureandismerelyemployingsomeconvenienttypologiestodemonstratedifferencesinstatetypes.

(40).Thisdoesnotmeanthatotherclassesorgroupsdonotmatterinthisscheme.Developedcapitalistcountriesarecharacterizedbyapoliticalsettlementofprogressivetaxation,whichenablesothergroupsandclassestoenjoybenefitsintermsoftheprovisionofpublicgoodsandwelfaretransfers.Surplusesgeneratedfromcapitalistenterpriseareinextricablylinkedtothewelfareofsocietyasawhole.

(41).PeterB.Evans,EmbeddedAutonomy:StatesandIndustrialTransformation(Princeton,NJ:PrincetonUniversityPress,1995),p.249.Anothercharacteristicofthe‘developmentalstate’isthecreationofeffectivestatecapacitythroughaninstitutionalizedbureaucracy.

(42).AyeshaJalal,ContemporarySouthAsia—DemocracyandAuthoritarianisminSouthAsia:AComparativeandHistoricalPerspective(Cambridge:CambridgeUniversityPress,1995).

(43).HamzaAlavi,‘AuthoritarianismandLegitimationofStatePowerinPakistan’,inSubrataKumarMitra(ed.),ThePost-ColonialStateinAsia:DialecticsofPoliticsandCulture(Lahore:Sang-e-MeelPublications,1998).

(44).Theterm‘relativeautonomy’impliesthatthestatehasdegreesofautonomyfromsocietyandfromtherestoftheworld.Thisshouldbeconceptualizedonacontinuumratherthanatdiscretepointsintime.

(45).Thebureaucracyasaninstitutionhasweakenedovertime.Thisprocessbeganin

1973whenthefirstBhuttogovernmentdidawaywithconstitutionalprotectionsprevalentearlier.Subsequently,successivemartiallawgovernmentshavefurtherweakenedthecorporatestructureofthecivilbureaucracy.SeeAliCheemaandAsadSayeed,‘BureaucracyandPro-poorChange’,WorkingPaper(Islamabad:PakistanInstituteofDevelopmentEconomics,2006),forfurtherdetails.

(46).HarisGazdar,‘TheEconomicsofAccommodation’,HimalSouthAsia,19(4),July2006,pp.20–1.

(47).HusainHaqqani,Pakistan:BetweenMosqueandMilitary(Lahore:VanguardBooks,2005).

(48).Since9/11,thecontoursofPakistan'scovertwarfarestrategyhavebeenthesubjectofintensejournalisticandacademicscrutiny.See,forinstance,Haqqani,Pakistan;HassanAbbas,Pakistan'sDriftIntoExtremism:Allah,theArmy,andAmerica'sWaronTerror(NewDelhi:PentagonPress,2005);ZahidHussain,FrontlinePakistan:TheStrugglewithMilitantIslam(Lahore:VanguardBooks,2007);andFredericGrare,‘RethinkingWesternStrategiesTowardPakistan:AnActionAgendafortheUnitedStatesandEurope’(WashingtonDC:CarnegieEndowmentforInternationalPeaceReport,2007).Theevidenceproducedandtheconclusionsreachedinthisliteratureallpointtocollusionbetweenthereligiousrightwingandthemilitaryinconductingcovertwarfare.

(49).PranabBardhan,ThePoliticalEconomyofDevelopmentinIndia(Oxford:BasilBlackwell,1984);and‘TheIntermediateRegime:AnySignofGraduation?’,inP.Bardhan,M.Datta-ChaudhuriandT.N.Krishnan(eds),DevelopmentandChange:EssaysinHonourofK.N.Raj(NewDelhi:OxfordUniversityPress,2000).

(50).IthasbeenestimatedbySudiptoMundleandM.G.Rao,‘VolumeandCompositionofGovernmentSubsidiesinIndia,1987–8’,EconomicandPoliticalWeekly,4May1991,thattotalgovernmentsubsidiesin1987–8amountedtoIndianRs42,324crores,representing15percentofGNPthatyear.Bardhan,‘TheIntermediateRegime’,p.343.

(51).RashidAmjad,PrivateIndustrialInvestmentinPakistan:1960–70(Cambridge:CambridgeUniversityPress,1982),advancedthisargumentwhichgainedmuchcurrencyinthelate1960sandthe1970s.

(52).StanleyA.Kochanek,InterestGroupsandDevelopment:BusinessandPoliticsinPakistan(Karachi:OxfordUniversityPress,1983),p.242.ForfurtherdetailsonthegovernmentretainingexclusivecontroloverpolicymakingintheAyubperiod,seeKochanek,InterestGroupsandDevelopment,pp.240–9.

(53).StanleyA.Kochanek,‘EthnicConflictandthePoliticisationofPakistanBusiness’,inPakistanBusinessReport,August1994.KochanekdescribesthemannerinwhichtheZiaregimecreatedawedgebetweenthePunjabiandUrdu/Gujaratispeakingbusinessmen,bothintheFederalandKarachiChambersofCommerce.

(54).Itmaybearguedthatasthemilitaryisinthebusinessofconductingbusiness,the

gainsfromtradewithIndiathataccruewillbenefitmilitaryenterprisestoo.Whilethismaybeapossibilityinthedistantfuture,intheshortormediumtermthisappearsunlikelyfortworeasons.First,militarycapitalisprimarilyinvolvedinproducing‘non-tradeable’goodsandservices.Second,militarycapitalisnotboundbytheefficiencycriteriathatapplytoprivatesectorenterprisesasitfacesa‘softbudgetconstraint’,withthestateconsistentlypickingupitsbillswhenmilitaryenterprisesmakelosses(seeAyeshaSiddiqa,MilitaryInc.:InsidePakistan'sMilitaryEconomy[Karachi:OxfordUniversityPress,2007];andAsadSayeed,‘Army'sBusiness’,EconomicandPoliticalWeekly,42(41),13October2007,pp.4112–13,foranelaborationofthisargument).

(55).Fordetails,seeSiddiqa,MilitaryInc.

(56).KCCI,‘FreerTradewithIndia’.

(57).LinksofindividualbusinessmenwiththeIndianNationalCongressdatebacktothe1920s(seeDwijendraTripathi,TheOxfordHistoryofIndianBusiness(NewDelhi:OxfordUniversityPress,2004).Bothcollectivelyandindividually,theleadinglightsofIndianbusinessforgedcloserelationshipswiththeCongressleadership.SeeTripathi,TheOxfordHistoryofIndianBusiness;GitaPiramal,BusinessMaharajas(NewDelhi:PenguinBooks,1996);andR.M.Lala,BeyondtheLastBlueMountain:ALifeofJ.R.D.Tata(NewDelhi:PenguinBooks,1993).ThoughtheycouldnotpreventtheCongressleadershipfromadoptingalargelypublicsectorledgrowthmodel,theprotectivetraderegimewentlargelyintheirfavour.

(58).AtulKohli,‘PoliticsofEconomicGrowthinIndia,1980–2005,PartI:The1980s’,EconomicandPoliticalWeekly,1April2006;and‘PoliticsofEconomicGrowthinIndia,1980–2005,PartII:The1990sandBeyond’,EconomicandPoliticalWeekly,8April2006.

(59).AseemaSinha,‘UnderstandingtheRiseandTransformationofBusinessCollectiveActioninIndia’,BusinessandPolitics,7(2),2005.RobertJenkins,DemocraticPoliticsandEconomicReforminIndia(London:CambridgeUniversityPress,1999),p.113,arguesthatthisdidnotmeanthattheprotectionistlobbylostitsinfluenceentirely.Rather,theychangedtheirdemandsfromprotectiontoa‘moreselectiveintegrationwiththeglobaleconomy’.

(60).Kohli,‘PoliticsofEconomicGrowth’.SeeJenkins,DemocraticandPolitics;andSinha‘UnderstandingtheRiseandTransformation’forfurtherdetails.

(61).SeeE.Sridharan,‘TheGrowthandSectoralCompositionofIndia'sMiddleClass:ItsImpactonthePoliticsofEconomicLiberalization’,IndiaReview,3(4),2004,pp.405–28.

(62).ItisimportanttorecallthatunlikePakistan,restrictedregionaltradeislesseconomicallyproblematicforIndia.ItwillbeadifferentmatterifstatepolicyflewinthefaceofthecoreinterestsofIndia'seconomicgrowthifitdidnottradewithPakistantopreciselygaugetheactualinfluenceofbigbusinessonstatepolicy.

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