US Aid To Pakistan; Bless or Curse

Since Osama bin Laden was discovered and killed in Abbottabad last year, there is an increasing pressure on Obama to justify by Congress to justify US aid being given to Pakistan. Although military assistance is currently the only form of US aid to Pakistan to be withheld, Congress is also considering the stoppage of US economic aid and civilian aid to Pakistan (Guardian, 1). It is very important to investigate that to what extent this decision of stoppage of aid will hurt Pakistan’s economy. This paper will try to analyze the impact of US foreign aid on the economic development as well as the economic growth in Pakistan. US aid due to its unreliability, inconsistency, and more importantly, its relation to the conditionality of the continuing War on Terror holds a special attention. In this paper it will be argued that, although US economic aid has positively affected economic growth in 1980s, yet it is unsustainable and has not contributed in economic growth of Pakistan in general. This paper will then specifically analyze the effectiveness of US aid to Pakistan after 9/11. It will be argued that US military aid after 9/11 proved to be disastrous due to its condition of the War on Terror. There is a huge indirect cost for Pakistan for continuing to assist US on its War on Terror, in terms of loss of lives, destruction of infrastructure and internal migration of people. Such costs and unreliability of US aid to Pakistan in near future, implies that policy makers should go towards more sustainable aid in place of military aid from US.  Instead of relying on US military aid, preference should be given to attract foreign direct investment (FDI), and exports to compensate for the trade and saving gap. Both the FDI and exports are linked to capacity utilization, research and development (R&D), They increase market access and technological spillover. These benefits are expected to be more stable than the temporary benefits of foreign aid.

This paper is divided into two sections. In section 1, the literature review for the relations between Foreign Aid and economic development will be discussed. In section 2, a brief history of US aid and its effect on economy will be discussed, followed by an extensive analysis of US foreign aid in post 9/11 scenario. In the end, conclusions will be drawn with policy recommendations; For example, after 9/11, military aid from US has severe indirect costs which should be considered in policy making process. Moreover, Pakistan should divert its attention from military to economic development from US. Furthermore, the main concern of Pakistan should be to promote sustainable inflows; foreign direct investment, and remittances from abroad.

1)   Literature Review:

Foreign aid may be defined as the transfers of governmental resources from one country to another country. According to the traditional two-gap theory, aid is necessary to bridge both the savings-investment gap and the trade gap in developing countries and was thus considered necessary. It however, has been mainly criticized because of one strong assumption common to both, that foreign assistance provides a one-to-one increment to the capital stock. It is also criticized due to the reason that there are ranges of mechanisms through which domestic capital formations of the recipient countries may be affected by incoming foreign aid. Also, the aid may be enhancing domestic consumption in these countries. In the neoclassical growth framework the benefits of foreign capital inflows are of temporary nature (Khan; Ahmed, 1). That is why the impact of foreign aid on economic development has always been a controversial issue. Some would argue that there is a positive correlation between the foreign aid and the economic development due to the Two Gap-Theory (Rostow, 1960). At the same time some would argue that the aid has a deteriorating effect on the economic development (Mosley (1980). Aid represents a package including policy parameters such as prescriptions about fiscal, trade and exchange rate policy. Due to which it distorts domestic economic distribution and hinders domestic savings and thus has an adverse effect on overall economic growth (Griffin and Enos, 1970).

Many economists assert that the foreign aid is necessary and sufficient condition for the economic growth in developing countries. They claim that there exist a positive correlation between foreign aid and economic growth because it complements domestic resources and also augments domestic savings to bridge saving-investment gap. Khan and Ahmed (2007) have quoted Easterly who asserts that the selective foreign aid has helped to lower the infant mortality rate and improve per capita income in the developing countries (Easterly, 2003). According to Easterly, selective foreign aid means that the donor nations put some conditions in the form of low inflation, no interferences in market prices, privatization and free trade (Easterly (2003). It provides additional financial resources which helps to achieve the short-term growth targets. It is also held that, foreign aid assists to close the foreign exchange gap, provide excess to modern technology and managerial skills and allow easier excess to world (Papenek, 1973). Chenery and Strout (1966) observed a positive relationship between foreign aid and economic growth. According to them there is positive growth rate for UK aided countries and negative for Scandinavian aided countries. Hansen and Tarp (2001) conclude that aid increases growth via capital accumulation and it does not depend on a good policy. Cassen (1994) argues that the relationship between aid and growth is rather weak, and it can be either positive or negative, depending on the country's absorption capacity of aid, and its economic as well as political structure. Studies based on time series data conclude that foreign aid has been an important determinant of economic growth. Khan and Ahmed (2007) quote Stevenson (1999) who says that foreign aid has a positive impact on the economic growth in democratic countries but it has a negative impact on authoritarian regimes.

Another alternative strand of literature asserts that the foreign aid has a significant negative effect on the economic growth and development of the recipient countries. Mosley (1980) asserts that the aid could not improve the economic conditions in Bangladesh, India, Korea and Milawi. The foreign aid is fully consumed and substitutes domestic resources. It is argued that the foreign aid is used to import inappropriate technology, encourages an inefficient and corrupt government in developing countries, and thus distorts domestic income distribution. The foreign aid is also thought to displace domestic savings, which in turn retards investment and economic growth [Griffin and Enos (1970). Khan quoted, Boone (1996) who finds that the aid has no effect on investment and growth—his estimates show that the marginal propensity to consume from the foreign aid is insignificant and marginal propensity to investment is also zero. Singh (1985) concludes that slate intervention in the economy generate negative impact on the economic growth and makes the aid-growth relationship statistically insignificant. Khan quoted Mavrotas (2002) who finds that the policies affect aid effectiveness in case of India. Lensink and Morrissey (2000) analyze the impact of the aid’s uncertainty on the economic growth in developing countries. They find that the impact of the foreign aid on the economic growth depends on the level and the stability of the flow of the aid into the recipient country. The empirical studies also suggest that the foreign aid has not contributed profoundly to the economic growth and development of recipient countries and it has the tendency towards increasing the inequalities among different groups [Rana and Dowling (1990) and Griffin (1991)].

Khan quoted Pack (1994) who asserts that the foreign aid is fungible. According to them due to the exchangeability of foreign aid, the government income is crowded out. It is argued that the foreign aid represents a side payment to elites in recipient countries, so it is designed to buy allegiance in maintaining the economic and political dominance of the industrialized (developed) countries (Frank, 1966). Similarly Khan and Ahmed (2007) quoted Wolfensohn, the president of World Bank in 2002 who says that "we have learned that corruption; bad policies and weak governance will make aid ineffective" (Khan: Ahmed, 3). Khan (2007) says that foreign aid has negative impacts on the economic growth and inequality and richer recipient countries are worse off than poorer ones.

The bulk of the theoretical and empirical literature has so far produced inconsistent, divergent and elusive results regarding the relationship between foreign aid and the economic growth. Empirical findings are also mixed with respect to the impact of foreign aid in Pakistan. Iqbal concludes that in Pakistan, foreign assistance caused a strong shift of public domestic resources from development projects to social and non-development expenditures. Khan (2007) quoted Chishti and Hassan (1992) who concluded that 28 percent of the domestic borrowings go towards financing the non-development expenditures. Khan (1997) says that ineffectiveness of aid is attributed to diversion of the aid funds to non-productive activities and inefficiency in resource allocation especially in the public sector. Chishti and Hasan (1992) concluded that 28 percent of the domestic borrowings go towards financing the non-development expenditures.

Regarding US foreign aid, Khan (1997) says that it is ineffective and this ineffectiveness of aid is attributed to the diversion of aid funds to non-productive activities and inefficiency in resource allocation especially in the public sector. Khan on the basis of data on US foreign aid from 1972-1993 concluded that a ten percent increase in aid is associated with a 0.4 percent decline in GDP. On the other hand Haider Mullick study asserts that there was positive impact of US foreign aid on GDP growth during the period of 1980-2003. However his study also concludes that the economic cost of becoming a pioneer in the war against terrorism has exceeded the benefits during the period 2001-2003. On the basis of this and above conflicting views about the impact of foreign aid; it is very important to reinvestigate the role of US foreign aid in the case of Pakistan. According to Haider Mullick, the benefits of US aid in the period 2001-2003 are lower than costs so the emphasize of this paper will to analyze the benefits and costs of US aid after 2003.

2) US Aid to Pakistan:

  The United States and Pakistan established diplomatic relations in 1947. The U.S. agreement to provide the economic and military assistance to Pakistan and the latter's partnership in the Baghdad Pact/CENTO and SEATO strengthened relations between the nations and there was a consistent flow of economic aid till 1965. However, the U.S. suspension of economic assistance after the 1965 Indo-Pakistan war had led to huge losses in Pakistan, the economic aid was dropped to .8 billion in 1966 as compared to about 2 billion in 1965, but after that the relation between the two developed and the aid continued (Table 1, Appendix) . In 1979, under the Symington amendment, US decreased the economic aid due to nuclear proliferation allegation, but after the Soviet invasion of Afghanistan in December 1979 the interests of Pakistan and US converged. In 1981, the United States and Pakistan agreed on a $3.2 billion military and economic assistance program aimed at helping Pakistan to deal with the heightened threat to security in the region and its economic development needs. After the approval of $7.4 billion aid (1982-90), Pakistan become the second largest taker of US aid after Israel, though this whole 7.4 billion were not received. Congress waived restrictions (Symington Amendment) on the military assistance to Pakistan and in March 1986, the two countries agreed on $4 billion economic development and security assistance program (Hilali, 7). On October 1, 1990, however, the United States suspended all military assistance and economic aid to Pakistan. Pakistan had only received about $600 million in economic aid in the period between 1990-2000, as opposed to about $5.5 billion as an economic aid in the previous decade, and about 8 billion in the next decade (2001-2011).

                                                                                         

            Graph 1          

Pakistan has historically been among the top recipients of US aid - since 1948, the US has sent more than $40bn in economic aid to Pakistan (Table 1. Appendix), but the benefits of this aid vary significantly between different periods. Above graph shows that the US assistance (both economic and military) to Pakistan has fluctuated considerably but it was high in two decades; 1980-1990, and 1990-2000. US assistance in these two periods is 5.5 and 8 billion respectively. In both of these periods, Pakistan was an ally of US, but the benefits of this alignment and getting aid differs very much. The above graph shows that the military aid has exceeded economic aid in the period of 2000-2010. In 1980-90, 5.5 billion economic aids to Pakistan had contributed much to GDP growth. (Mullick, 1). Pakistan had increased nuclear proliferation in this period, due to the aid (Huggert, 82). There was a significant economic growth due to the aid from US. The US aid has not contributed to economic growth in post 9/11 scenario.

In the period of 2000 to 2010, Pakistan has received more economic aid than in the period of 1980 to 90. The economic assistance has increased since 2001, and it helped in poverty reduction from 34% to 24% in 1st 4-5 years after 2001(Nabi, 17). Poverty was reduced after 4-5 years due to clustering effect: as more people were on poverty line so this aid has raised their income temporarily and reduced the poverty figure (Nabi, 17). Apart from it no one can deny that this dependence on US aid has also caused more long term damage to the Pakistan's economy (Guardian, 1). It is due to reason that with the economic aid, rhe military aid has also increased the cost of which are unbearable for Pakistan (Graph1).  The benefits from this aid has not contributed to economic growth due to indirect costs, associated with about $12 billion military aid in the same period and due to the reason that during Soviet invasion of Afghanistan (1980-1990), the interests of both countries were same but in 2000-2010 period it was not the case. Afghanistan government was also an ally of Pakistan and there was no internal insurgency in Pakistan in 1980-90.  But in the period 2000-10 Pakistan’s support of war in Afghanistan proved to be counterproductive as compared to the similar support in 1980-90 periods.  The military aid has compelled Pakistan to do some unpopular actions like drone attacks within its own territory. These attacks are a threat to Pakistan’s internal security. No doubt these attacks kill many innocent people, the rage of which is highlighted by attacking government and carrying out suicide bombings.

After 9/11, Pakistan had to assume the role of a frontline state in the War against Terror. The onset of the war disrupted Pakistan’s normal trading activities. Decline in tax collection and inflows of foreign investment were naturally adversely affected, accentuated by the travel bans issued by western governments to its entrepreneurs. Pakistan continued to pay a heavy price in terms of both the economic and security terms. A large portion of its resources, both men and material are being consumed by this war for the last several years. The economy was subjected to enormous direct and indirect costs which continued to rise from $ 2.669 billion in 2001-02 to $ 13.6 billion by 2009-10, projected to rise to $ 17.8 billion in the current financial year (2010-11) and moving forward (Economic survey 2011-12). The direct and indirect costs to the economy are most likely to rise further. The comparison of cost for 2001-02 and 2010-11 is given in Table-1. The year-wise cost of war on terror is documented in Table-2.

Pakistan’s economy is under pressure of the War on Terror intensifying for ten years in Afghanistan. Since 2001, the War has spread into settled areas of Pakistan. It has so far, cost the country more than 35,000 citizens, 3500 security personnel, destruction of infrastructure, internal migration of millions of people from parts of northwestern Pakistan(Economic Survey 2009-10). The attrition of investment climate, nose diving of production and growing unemployment and above all brought economic activity to a virtual standstill in many part of the country. Pakistan had never witnessed such devastating social and economic catastrophe in its industry (Economic Survey 2009-10). Pakistan cannot afford loss of more lives and associated indirect cost, which has disturbing effects on economy of Pakistan.

This war has disrupted Pakistan’s normal trading activities, as the cost of trading increased significantly because of higher insurance barriers. Consequently, the economic growth has slowed, demands for imports has reduced. In addition to it there is a consequential decline in tax collection. The inflows of foreign investment were naturally adversely affected. Travel bans issued by western governments to the Pakistan’s entrepreneurs have augmented the costs. Moreover there are many sanctions by US on Pakistan due to this dependency on the US aid. Pakistan is being criticized by US for negotiating with Iran regarding Pak-Iran Gas pipeline.

Pakistan internal insecurity is due to the military aid from US. Pakistan army did not want the Afghan war to have an end, because it was benefitting from it due to the US aid. Pakistan army is sponsoring Afghan Taliban, because it did not want the conflict between NATO/US and Afghan Taliban to end, because in that case the whole military aid will be stopped (Secret Pakistan). Pakistan army is benefitting from this aid at the cost of erosion of economic development because this sponsored Afghan Taliban by Pakistan’s Army is indirectly a threat to Pakistan’s economic development.  

Conclusion and Policy Applications:

On the basis of above discussion it can be asserted that the costs of war against terrorism is exceeding the benefits in post 9/11 period. In 1980-90 US aid had augmented growth but in 2000-2010 aid is not a blessing, because major proportion of it has gone to military, which is in favor of war for its own benefits.  Pakistan has got only $8 billion aid, but has faced the cost of $16 billion by being a part of the US War on Terror. Moreover, the aid also has no reliability of continuity. On the basis of this, it is the right time for Pakistan to divert its attention from this costly and unreliable military aid to more sustainable aid. The most important policy implication derived from the discussions will be to reduce dependency on US foreign aid and focus on those external financing resources that are much stable, sustainable and have positive impacts on growth rather than depending on the volatile and unstable sources like the US aid. Pakistan should focus more on FDI. It has direct impacts on overall development and it is also sustainable. During the 2001-2006, in addition to the economic and military aid, there was significant FDI which has augmented growth rate during this period. To improve the growth prospects in the country which provides supporting environment for domestic investment, expansion of export-oriented industries and foreign direct investments (FDI) should be encouraged, and for that Pakistan needs to enhance its internal security.

Furthermore, internal security is the pre-requisite for FDI. So the Pakistan’s immediate concern should be to eliminate this internal insurgency. The reason for this internal insurgency is the military aid. The Pakistan Army does not want to stop this aid and is augmenting this internal war. So the stoppage of this military aid can decrease Pakistan Army’s role in increasing internal as well as the external insurgency. The two variables, i.e., exports and FDI have not only exerted positive impact on growth but have also generated spillover effects (Khan,Ahmed, 2007). Hence, there is intense need to focus on these sectors.

Limitations of Federalism in Pakistan

Introduction;

The term “federalism” describes a system of government in which sovereignty or power is constitutionally divided between a central governing authority and provinces/constituent units. According to some scholars it is considered as a significant part of democracy. Jai Prakash Sharma writes in his book, “….Again, also there were Gandhians wedded to decentralization, who thought democracy and federalism (decentralization) as synonyms” (Sharma, 1987, 24). Similarly Katharine Adney quotes Daniel Elazar who argues that “federalism exists to promote democracy, and therefore the two cannot be separated” (Adney, 2009, 88). It is a recipe in heterogeneous societies to promote cooperation and agreement in the social, political, economic and administrative fields. Federalism maintains a balance of power between the two units; their powers do overlap or collide, rather the two works for the mutual benefit of each other. Looking at the historical account of federal states, one would come to know that federalism arose out of a mutual bargain between different states in order to defend the country from an enemy attack. However post-colonial nations decided to be a federal state not for such defense purposes, rather because of colonial legacies. Post-colonial states such as Pakistan are multi-ethnic, multi-lingual and multi-cultural societies, where federalism adopted as an alien system of governance produced ethnic conflicts and ethnic divisions.

Few consider federalism as a panacea for ethnic conflicts in heterogeneous societies, while other argue that it exacerbates ethno-linguistic conflicts within a province due to neglect of minorities (Unpublished,Khan,6). Due to less power given to central/national government, it may also lead to hindrance in nation building (Mengisteab, 1997, 114). One of the assumed advantages of federalism is “fiscal federalism theory” which states that this system of governance gives maximum financial autonomy to constituent units. Contrary to this theory, Wibbels mentions that federalism leads to difficulties for economic reforms in the developing countries (Wibbels, 2000, 687).

Above discussion shows that there are positive (decreasing ethno-national conflicts) as well as negative (increasing ethno-linguistic conflicts) consequences of federalism and the use of federalism as a mechanism of ethno-national conflict resolution and economic performance regulation is controversial. Being a significant part of democracy and having controversial consequences it is important to explore whether any limitations exists on the smooth running of federalism in Pakistan. The focus of this paper will be to find structurally imbedded limiting factors and hindrances which for the last 60 years have made federalism a failed system of governance in Pakistan. Breaking away of East Pakistan, ethnic conflicts in NWFP and Sindh are evident of the fact that federalism has failed to take roots in this country. Moreover this paper will also argue that federalism also becomes a hindrance for economic reforms within the country.

The paper will analytically discuss literature review regarding positive and negative aspects of federalism. It will analyze that amongst both the perspectives, the negative aspects of federalism has affected Pakistan more, making it a failed system. In first section, this paper will discuss the case of Sindh and hold the preposition that federalism has led to more ethno-linguistic conflicts within the province. The mobilization of minority group (Muhajirs in Sindh) is due to constitutionally protected ethnic policies of the dominant groups (Sindhis in Sindh). Protection of dominant groups in a province has been facilitated by federal structure of 1973 constitution, and this eventually results in exacerbation of ethno-linguistic conflicts within the province. Later it will be argued that federalism has led to demand of more provinces, and fulfilling that demand is very costly in present situation. In second section it will be argued that federalism has led to difficulty in economic reforms since the division of power between the center and constituent units make decision making ineffective. At the end it will be concluded that due to economic inefficiencies and ethno-linguistic conflicts, complete implementation of federalism is not desirable for Pakistan.

Methodology;

This paper is based on secondary research. It will help me to do extensive research. However the problem with secondary sources is that most of the articles and books are based on external scholarly work. There can also be over-stated arguments (biasness) in their work. That is why I am also using some (quantitative study) statistical findings.

Literature review;

The outcome of federalism on welfare of a country is ambiguous. There has been a lot of literature written on positive as well as negative aspects of federalism. Kidane Mengisteab says that the process of state building through federalism have been widely resisted by many African leaders and scholars (Mengisteab, 1997, 114). She (qtd Nkrto conceive economic development and democratization without a viable and active centre. Majority African leaders viewed federalism as a divisive arrangement that would lead to secessions. As a result, a unitary centralizing strategy of state building was widely adopted in the continent (Mengisteab, 1997, 120). He himself concludes that it is hard to visualize that solutions to the wide spread ethnic conflicts and crisis of state building would be fulfilled in the continent (Africa) without some type of decentralization (Mengisteab, 1997, 129).  

Discussing relationship between federalism and economic performance, Erik Wibbels says that federalism has negative impact on economic performance and reform. He mentions that to accommodate interests of individual provinces, it becomes very difficult for center to implement unpopular policies. Wibbels argues that the macroeconomic and fiscal imbalances experienced in federal nations are due to devolved political and fiscal institutions that create incentives for sub-national (provincial) governments to avoid the political costs of fiscal adjustment (Wibbels, 2000, 687). Contrary to fiscal federalism theory, however, empirical findings suggest that decentralization (federalism) has led to higher inflation and larger deficits in developing nations (Wibbels, 2000, 687). Attached Table 1(Wibbels, 2000) shows that there is negative relationship between federalism and economic performance.

On the contrary Robert P. Inman concluded that decentralization has a unique contribution “to make to a society's ability to enforce property rights, to protect political and civil rights, and then because of such rights protection, to enhance private sector economic performance” (Inman, 522). He says that due to protection of rights thorough federalism, economic performance of an individual increases, which eventually led to welfare of a country. Similarly it is also argued that in Pakistan provincial governments are better able and efficient to collect small taxes. Central government has a good infrastructure but they are inefficient in collecting small taxes (Jaffaray; Sadaqat, 2006, 210). The responsibility of tax collection should be in hands of provincial governments.

Katherine Adney argues that in Pakistan, ethnic conflicts can be resolved even in a non-democratic setting if there is representation of the provinces in the bureaucracy and the army. She says that for resolution of ethnic conflicts, democracy or federalism; which ensures provincial participation and devolution of subjects from centre to provinces, is not necessary. Equal representation in army and bureaucracy is necessary to accommodate interests of provinces (Adney, 2009, 4). In other article Adney says that federalism is not able to resolve ethnic conflicts in heterogeneous province; a province in which there is significant amount of minority group beside ethno-national group (Adney, 1997, 6). Presence of minorities with in a province leads to serious conflicts and it is almost impossible without genocide and forced population transfers to avoid the existence of some peoples who do not belong to the dominant ethno-national group within the heterogeneous province (Adney, 1997, 6). She (qtd Berans) says that national and ethnic groups should not be allowed to govern themselves unless interests of minorities within a province are secured (Adney, 1997, 6). He also discusses limitations of federalism in a country of homogenous provinces. It is argued that federalism leads to ethno-nationalistic conflicts in a country of homogenous province due to resources, legitimacy and dominancy that some ethnic groups attain; a major cause of secessions (Adney, 1997, 7). It shows that there are limitations of federalism in both the homogenous as well as heterogeneous provinces countries. This argument of heterogeneous province can be applied against implementation of federalism in Pakistan, as table 1 (attached) show that there are many ethnic and linguistic divisions within every province.

FEDERALISM IN PAKISTAN;

Pakistan is a multiethnic, multi-cultural and multi-lingual state. Its provinces are associated with particular ethnicities; Punjab with Punjabis; Sindh with Sindhis; Baluchistan with Balochs; and Khyber Pakhtunkhwa with Pashtuns. There are ethnic and linguistic divisions within every province. Sindh is the most ethnically diverse province of Pakistan. Muhajirs form the majority in urban Sindh. Sindhis dominate the rural Sindh. Baluchistan is the home province of Balochs and Pashtuns. Punjab and NWFP are also no more homogenous provinces. Southern part of Punjab also contain considerable amount of Siraiki speaking people and NWFP hosts Hindko and Siraiki speaking populations as well. Statistics, which show percentage of linguistic groups, are given in attached table 1). Table 1 (Mushtaq, 2009) shows that there are different linguistic groups present within a province; hence the Adney argument of limitation of federalism applies to Pakistan.

Pakistan has been a federating state since independence due to the constitutional legacy of British India. It experienced different constitutional arrangements (Parliamentary and Presidential) but it maintained federalism throughout its constitutional history. All of its constitutions (1956, 1962 & 1973) have federal order but there is variation in the extent of federalization. To understand the limitations of federalism, we need to see the two phases of (1947-71) and (1973---). The first phase was characterized by centralization of authority, 1 unit plan (West Pakistan is 1 unit), and elimination of the federal structure within West Pakistan (Waseem, 2010, 5). It is not considered as truly federal era. Non-implementation of federalism was to counter the demands of East Pakistan and to justify the need of unity in newly established state. In the second phase (after the succession of East Pakistan) to avoid another division and to abandon high representation of certain dominant ethnic groups in civil bureaucracy and in military, federalism bounced in 1973 constitution back

       1)      Federalism and ethno-linguistic conflicts;

Although 1973 constitution is considered as truly federal as it initiated a senate in which equal representation of all four provinces was there but it brings despair in Muhajirs (Urdu speaking people of Urban Sindh). It brings ethnic quotas in civil services and in education. These arrangements bring grievances in Muhajirs because previously they were better represented in civil bureaucracy but now they are not (Khan, Unpublished, 12). So Bhutto’s ethnic preference policies effectively closed the door for Muhajirs in civil services and in educational institutions.

Quota and language policies of Bhutto lead to ethnicization of Muhajirs, and Sindhi-Muhajir conflicts increased due to this. Muhajirs were actually nationalist but ethnic based policies of Bhutto lead them to formation of MQM (Muhajir Qoumi Movement) in 1984 (Khan, Unpublished, 14). According to Khan:

The mobilization of separate Muhajir identity began in the early 1970s not as a direct response to relative economic deprivation, but in anticipation of loss of political and economic dominance that the new federal structure portends for the Muhajirs (Khan, Unpublished, 14).

The Sindhis-Muhajirs polarization worsened dramatically with the emergence of the MQM. The increasing violence between Muhajirs and other ethnic groups (Sindhis, Pathans) in Sindh had finally brought the MQM in to hostile confrontation with the Pakistan army itself. The army operation Cleanup, as it was called, took the form of an urban guerilla war in Karachi, killing thousands of Muhajirs and exposing the army to accusation of genocide (Khan, Unpublished, 10).

Discussing causes of ethnic conflicts Khan quoted Chua, who says that ethnic conflicts are not only due to economic backwardness of one province as compared to other, which can be solved by federalism. It is due to the antagonism against numerically weaker but dominated group within a province (Khan, Unpublished, 24). It can be implied that that, Chua's argument of ethnic conflicts applies to Pakistan, as numerically weaker but dominant group are present in Sindh, and also in other provinces (Appendix, Table 1). Federalism has led to emergence of new ethnicity and exacerbation of conflicts.

Federalism has also led to further demand of provinces. Renaming of NWFP and passing of 18^th amendment laid out the ground for a demand for new provinces on the basis of language. Several political parties asked the federation to create new provinces, such as four out of Punjab, two out of Khyber Pakhtunkhwa, two out of Sindh and three out of Baluchistan (Waseem,2010 20). Federalism (18^th amendments) gives an incentive to demand for new provinces on the basis of language. Language as an instrument of federalization is not desirable in Pakistan, because creation of more provinces may lead to more administrative costs and hence more corruption. Moreover it will lead to disunity, which will hinder nation building.

       2)      Federalism and economic reforms;

There is also a relation between federalism and economic performance in Pakistan. Federalism has led to poor economic reforms. Wibbels has shown in his regression results that in developing countries federalism has negatively affected the capacity of national government to implement economic reforms (Wibbels, 2000, 698). His sample also included Pakistan and results of his regression were statistically significant (attached, table 2). However inclusion of Pakistan in his sample does not necessarily means that this negative correlation also applies to Pakistan. But Wibbels (qtd World Bank report 1996a, 1996b; Sato 1994) argues that in nations such as Argentina, Pakistan, and India, decentralization designed to cover provincial fiscal imbalances led to provincial deficits (Wibbels, 2000, 698). He (qtd Sato) says that federalism is a threat to national reform efforts in these countries (Wibbels, 2000, 698). According to Shoaib A.Ghias, economic growth depends upon the degree to which a regime is capable to implement its unpopular policies (Shoaib, 2009 3). A regime is capable to implement its policies if the centre is powerful and gives less consideration to the interests of individual provinces. Although devaluation of currency is unpopular along masses, especially for agriculture sector in Pakistan but Ayub Khan was able to implement it to promote industrialization. Devaluation of currency was harmful for exporters of agriculture (masses), but Ayub was able to implement it to pursue long term goals, because there were no political motives at provincial level at that time. Due to industrialization overall growth rate of GDP was 9.8% and GNP as 9.9%, which is highest in the entire history of Pakistan. If provinces were fully protected and federalism was there, then it may not have been possible for Ayub to promote industrialization, because that policy badly affected the agriculture sector of the masses. Members of provincial assembles could have political motives in not implementing it, but as there was no direct role of provincial assemblies at that time, it is possible that they couldn’t have care much. It seems that Wibbels argument of affects of federalism on economic performance applies to Pakistan.

Presently, due to federalism it becomes very difficult for centre to initiate mega projects. The provincial governments are opposed to the development of various projects such as Makran Coastal highway, Gawadar Port in Baluchistan, etc. The provincial governments often state that such projects should be their prerogative. Center on the other hand has been unwilling to stick to their demand, which leads to conflict and failures of developmental projects.

Provincial banks in Pakistan lack the capacity to finance the projects and provinces also lack the infrastructure to carry out many functions, which centre can. Wibbels says that provincial governments in developing countries have limited capability to borrow money from international financial institutions. They can only borrow from local, national and provincial banks (Wibbels, 2000, 698). In Pakistan also there is very limited capability for provincial banks to finance and maintain the projects (Jaffaray; Sadaqat, 2006, 211). Provinces also lack the infrastructure to carry out the function of devolved subject from centre. A case in hand is the devolution of Higher education commission to provinces. Since HEC is a centralized authority with controls and checks on quality of higher education, its devolution to provinces may disrupt the quality and standardization of higher education. That is why recent devolution of HEC has led to mass protests. This protest shows limitations of federalism (incapability of provinces in carrying out certain functions.

Conclusion;

Federalism has led to serious conflicts between Muhajirs and Sindhis. Although affect of decentralization on conflicts in other provinces has not been covered in this paper, but the presence of heterogeneous groups shown in table 1, indicate that there is a potential that can lead to severe conflicts in other provinces also. For example discontent among Hazara people (minority) emerged due to federalism and protecting the rights of Pashtoons (dominant majority). Muhajirs-Sindhis conflicts prove the Adney’s (1997) argument of exacerbation of conflicts in heterogeneous provinces.

Following Wibbels (2000) federalism has also led to poor economic performance because of political motives in provincial developmental projects, incapability of provincial banks to borrow from financial institutions and lack of infrastructure in provinces to carry out the functions of devolved subjects. It proves the Wibbel's argument of presence of constraints in provinces of developing countries. Imam's argument of increasing efficiency due to protection of property rights does not apply to Pakistan significantly, which may be due to poor legal enforcement.

The argument of exacerbation of ethnic conflicts cannot be generalized to Punjab, because it is a homogenous province. Moreover it cannot be said that severity of conflicts between Hazare people and Pashtoons is comparable to that of Muhajirs and Sindhis. It also cannot be said that same limitations of federalism apply to every multi-ethnic country because unlike Pakistan, India was reorganized on the basis of language. Pakistan at this point, due to economic constraint is not able to reorganize it on the basis of language.

Pakistan is going to be in severe financial crises, so it needs strong center to implement politically un-popular policies and projects in provinces. Promoting federalism and making more provinces will incur huge cost which will lead to more economic crises. The devolution of subjects and their transfer to provinces must be carefully planned and executed. Political motives in this process would be likely to destroy any improvements. It must be thoroughly assessed before devolution that weather a province has the required structural framework to handle the devolved subject. Transfer of subjects just for the sake of transfer without a careful analysis risks the further deterioration of subjects for example HEC devolution was not a favorable step.

Following Adney (2009) instead of full implementation of federalism (devolution of every subject and making of provinces on basis of language), representation of provinces in army and bureaucracy (consociational federalism) will be more desirable, and to know the effectiveness of it needs more research. However it will not need devolution of subjects, and will not lead to despair in minorities due to protection of majorities. 1^st preference should be economic reforms, which is only possible thorough strong centre. Once economic reforms are taken then we will be able to bear the cost of making provinces on the basis of federalism.

Appendix 

Table 2; The linguistic composition of the states in Pakistan.                 

State of Pakistan	Linguistic Breakdown of State
Baluchistan	Baluchi 34%, Pushtu 23%, Sindh 16%, Punjabi 7%, Urdu 1%, Others 18%
East Bengal	Bengali 98%, Urdu 0.6%, Other 1%
Federal Capital Area	Urdu 50%, Sindhi 14%, Punjabi 9%, Baluchi 9%, Pushtu 3%, Bengali 0.2%, Other 14%
NWFP	Pushtu 79%, Punjabi 17%, Urdu 0.8%, Other 3%
Punjab	Punjabi 94%, Urdu 5%, Pushtu 0.2%
Sind	Sindhi 74%, Urdu 10%, Baluchi 9%, Punjabi 3%, Other 4%

1951 census from (Mushtaq, 2009)

Written By: Shiraz Hassan (LUMS)

The Protestant Ethic And The Rise Of Capitalism

Weber’s  mother was a Protestant and a Calvinist and her moral absolutist ideas influenced him a great deal in his writing. Since Weber was a liberal, he became vastly impressed by the System of American Democracy on his short trip to the United States in 1904.Thus,Politics also played a significant role in shaping up his ideas regarding Capitalism.

     

He wrote about Protestant ethic after recovering from a psychological depression that had kept him away from his writing  for four years. His prolonged illness helped him to develop great insights into the connection between Calvinism and compulsive labor and religious ethics and economic processes.

             

Weber studied society from the context of historical culture and was amongst the first people to study Marxism objectively.Hence, the influence of Marx in Weber’s writing is quite evident. Contrary to Marx’s views, Weber focused on the role of  religion in the economic structure of society. In this book he explains that the development of capitalism is influenced by Puritan ethics and he traces its origins to the Reformation which introduced the notion of calling. It says that the greatest moral duty of human beings is to full fill their obligations in this world.

 

He studied the doctrines  of John Calvin.  According to Calvinism and its idea of Predestination, God has predetermined the salvation and damnation of individuals on his will. This created anxiety amongst the   Protestants and they tried to attain success in economic activities with the belief that God signifies his favor by giving prosperity to humans. Thus protestant ethic is a term coined  by Weber which signifies that value attached to hard work and efficiency in worldly dealings is a sign of  being  one of  the elect.

                  

 So instead of engaging in frivolous activities, the  Protestants invested   all of their profit back into the business to make more profit. Even donations to the poor were discouraged because lack of money was seen   as a sign of laziness and  divine  disfavour. Thus, according to Weber, the fervour for economic success achieved through hard work and the  idea  of living a frugal life gave birth to the spirit of capitalism: the rational reinvestment of Profits.

              

Weber distinguishes the capitalistic enterprise from the pursuit of  money.  Profit in capitalism is gained through continual reinvestment therefore; accumulation of wealth for its own sake rather than for material gains is according to Weber, the spirit of modern Capitalism.

        The concept of Rationalism was also introduced for the first time by Weber in this book. The idea of religious pursuit of wealth was taken as a rational means of spending life. He used  several quotes from Ben  franklin   which were infused with rationality and logic. From Franklin’s work “Necessary Hints to Those That Would be Rich” Weber quotes: “For six pounds a year you may have the use of one hundred pounds, provided you are a man of known prudence and honesty… He that loses five shillings, not only loses that sum, but all the advantages that might be made by turning it in dealing, which by the time that a young man becomes old, will amount of a considerable amount of money.” Thus, Weber’s “Spirit of Capitalism” is also the “Spirit of Rationalization.”

              

This spirit is a test of one’s own moral worth. In light of this view, Durkheim states that the entrepreneur performs his tasks with an eagerness of purpose that gives him a sense of dignity. Monetary gain with this agenda of calling washes away all feelings of greed attached to it and prevent him from becoming self absorbed because the divine purpose of accumulating wealth constantly demands his attention

                                                              

Amintore Fanfani disagrees  with Weber in his book “Catholicism,   Protestantism, and Capitalism.” He argues  that capitalism was prevalent   in Europe before the protestant revolt so religion was  not  the backbone   of Capitalism. According to him, the general revolution of thought characterized by art, economy, philosophy and morals during the Renaissance and Reformation brought the change in economic system.

  

However,   it is important to note that it was Reformation  that   released   the individuals from  the chains  of catholic beliefs  and  rituals. The   removal of priest required the Protestants to search for a higher level of learning, which would bring divine salvation. Fanfani’s argument about capitalism existing before reformation is valid but he is more interested   in its definition while Weber  is discussing  the  role of religion as a driving force.

                                                  

The most important  factor of Weber’s  theory is that it basically provided   a rational explanation for the existence  of capitalism. Why it existed in some places and not in others. The act of money hoarding and a fixed mind set towards accumulation of wealth was given moral significance and its practitioners were given an ideological meaning as opposed to Marx’s strict (“vulgar” in Weber’s terms) materialistic explanation.

                        

 What is also significant about this theory is that it gave rise to the causal effect of an idea. It explained how an idea could initiate a whole movement that it does not necessarily have to be a single man’s initiative as was common to believe at that time. As Gianfranco Poggi puts it, the Calvinist theological idea led to the salvation anxiety which gave rise to worldly asceticism, the “protestant ethic”, finally leading to the “spirit of capitalism”.

                                                     

But despite its importance, Weber’s paper has been questioned time and again. While on one hand it provides explanations and a break through in sociological thinking process, it has also been criticized for being  incomplete and  faulty. From  claims  like  capitalism existing before Protestantism came about, to the Protestant belief being pitched against industrialization as the cause for the “Protestant work ethic”, to people dismissing it on the basis of the protestant’s high literacy rate as opposed to their ascetic beliefs being the cause of rise in Capitalism, Weber’s thesis has been attacked on all grounds. Yet all these counter arguments miss two basic facts. One, what Weber meant by the terminologies he used, were specific to what they were at that time and not what they have come to mean now. Capitalism then was different than today’s. Where Weber is specific, critics often apply his terms to the general idea as a whole. Second, Weber does not point towards the Protestant   Ethic   as  the source of capitalism.  He rather  proclaims it as a very effective driving force for the capitalist ideas that were already present. It was more of a catalyst rather than an essential source.

            

 Peter L. Berger, in his article, further reestablishes Weber’s thesis by clearly proving it to be still applicable to today’s capitalist  societies.  He   identifies the  particular “traits” of Weber’s Protestant ethic, and then finding them in contemporary societies relates them to the development of Capitalism. Berger talks about Latin American Pentecostal societies, the Chinese Confucianist societies, their adaptation in the Japanese world, the Opus Dei in Spain and even Islam, and he talks about how with the emergence of Protestant traits in these cultures, there was seen a rise in the development of Capitalistic features. Not all of these societies traditionally had “protestant traits” (Opus Dei for instance), hence the lack    of capitalistic development in their areas, but with time their culture   evolved, absorbing “protestant traits” and those then working as “carriers of modern capital culture”.

                      

Controversy apart, Weber’s thesis also managed to open another methodological pathway for the social sciences. Weber believed that the natural science methods could be adopted to see what people did and why they did it, but you had to see the person’s rationale to accurately decide why they did what they did. People could be asked questions and then based on the answers, we could try to get the point of view of individuals in the society. Hence he mixed the hermeneutic approach, with the natural science one with his belief that humans need to  be understood, for  their   actions to be judged. Also, in  Protestant ethic, he incorporated his theory of social action and rationalization by giving a rational meaning to the protestant trait of wealth accumulation and ascetic lifestyle.

                     

  He also believed that how people developed an  idea  or  a how they   acted, depended largely on what was important to them. It was the idea of human agency, where because of individual’s free will and different cultural values, they could choose what they termed as “development”. It could be material or spiritual or social. This way, Weber lay down his “train-track” theory and explained how different societies develop in different ways depending on their values, rather than as Marx suggested that all of society was moving in  one direction.  This also  led to the idea of  how society  chooses  its own path and a sociologist should only describe the best way of achieving the desired end.

  

  Moreover, he combined the more prevalent idealist perspective, with Marx’s materialist approach to argue that while the underlying idea or belief was crucial, it was economics that also played  an  important  role   in  deciding  individual’s  actions  and  shaping  their beliefs.

                     

       Giddens easily summed  up the power of  Weber’s   thesis  claiming   that because of his disregard for traditional subject-boundaries, Weber’s  work can be  approached on different levels: a historical thesis,  explaining  the  correlation  between  capitalism  and Calvinism; a  causal analysis:  the  influence  of  Puritanism  on western  societies;  an interpretation  of  the  origins  of  key  components  of  the  western   society;  and  as  a comparative study to identify divergent courses adopted in rationalization of culture in the East and the West.

It is interesting to note that Weber’s protestant ethic is the only German thesis from the pre world war one era (when Germany was still an important world power) that is still alive and hotly debated.

One thing still stands though. It managed to provide a  solid explanation   to   why some society’s developed as fast as they did, and others got left behind. Given the context, his link makes sense too. Whether critics manage to defeat the thesis, or not, is a different story, but Weber’s      knowledge  and the complex methodological framework  that he worked in has yet to be matched by other scholars.

For us, his theory still stands.

Works Cited:

Mardellat, Patrick."Max Weber's critical response to theoretical   economics" The European Journal of the History of Economic Thought 16.4 (2009).

Berger, Peter L. (2010) 'Max Weber is Alive and Well, and Living in Gautemala: The Protestant Ethic Today’,The Review of Faith & International Affairs,8:4,3—9

<http://dx.doi.org/10.1080/15570274.2010.528964>

Friedman, Jeffrey (2005) 'Popper, Weber, and Hayek: The epistemology and politics of ignorance', Critical Review, 17:1,1—58 <http://dx.doi.org/10.1080/08913810508443623>

Lee, D. and Newby, H. (2000) “The Problem of Sociology”. (Routledge, UK).

Cuff, E et al. (2006) “Perspectives in Sociology” (Routledge, UK 5th Edition).

Weber (Translated by  Talcott  Parsons)   (2001)   “The  Protestant   Ethic  and  the Spirit  of Capitalism” (Routledge, UK)

Lehman,  H.  and  Roth, G. (1993)   “Weber’s Protestant Ethic –   Origins,   Evidence, Contexts” (Cambridge University Press, UK)

Cosandey, David (2011) “The Rise of the West: Max Weber” Web  <http://www.riseofthewest.com/thinkers/weber03.htm>

Hadden, Richard,   W (30  Sept,  1998),   “Sociology 250: Max Weber” <http://uregina.ca/~gingrich/s30f99.htm>

Kilcullen, John (1996), “Max Weber: On Capitalism” (Macquarie University) <http://www.humanities.mq.edu.au/Ockham/y64l10.html>

“The Protestant ethic and the spirit of capitalism”

<http://www.essays.cc/free_essays/g2/dtb56.shtml>

“Capital Disenchantment” (Net Industries)

<http://social.jrank.org/pages/1586/capitalism.html>

Written BY: Zareen Mohsin, Zahra Rashid