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National
AssnsMt
The Middle East Connection
Intelligence
Research/or this report was4 FebruaryI
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Thit paper was preparedJand
Economic ResestenTuTiaaflornCo^ with :'| Ihe Office of Politica: Analysis, the Office of Strategic Research, end with the National InteHifBnee l Officer for Near East and South Asia. Commons and queries are welcome and should be directed lo the
Pakistan:
Tbe Middle East Connection I
In many respects PakisUn has bad more-ttcnsive relations with the Middle East than with any other ! I
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The Middle East accounts for aboutercentillion last year)total foreign exchange receipts (aid. trade, and laborExports to the Middle East account for one-fourth ofand Middle Fast economic aid was aboutercent of totalMoreakistani military personnel serve in Middleespecially in Libya and Saudi Arabia, and there arc alsoworkers throughout the region,niI V, hi'
The external relationship between Pakistan and the Middle Eastern Islamic nations nas strengthened and taken on new importance since the Soviet invasion of Afghanistan.
In particular, Pakistan has sought to enhance and protect its links with Saudi Arabia, its most important aid and trade partner in the Middle East.
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In the past, Pakistan's search for friends among the Western nations, the USSR, and China has frequently caused its Middle East ties to loosen. General Zia will no doubt tread carefully, trying to exploit Western interest in Pakistan's security but avoiding too close an identification with any policy that might jeopardize his connections wjthlthe Middle Eaatl
Policy Siace] .fitlf-J' '
From iu beginnlrs:ationakUun his
sought close ties with the Middle East Muslim nations.
Pakistan's longstanding, luted foreign policy goaloen the building of an Islamic bloc. Iu unstated aim
has been to use whatever friendship and support itcould obtaiii from tbe Middle East against itsnemy, India. Pakistan quickly found, however,be other Muslim states with histories of secular
government did not view Islamic;orceheir own national concerns and refused to become
embroiled in Indc-Pakistani disputes.
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The disappointment of iu failed policy of Islamic unitya key factor in Pakistan's turning to the West for Isupport in. Citing Ihe need for protection against India, Pakistan joined the Baghdad Pactestern powers (CENTO) and later thesia Treaty Organizationoves which Middle East nations interpretediub in thef Arab and Muslim states" and which gained Pakistan the label "camp follcmer of WesternDuring8 Middle East crisis, Pakistan further incensed Arabmuch otakistani pop. la ibacking USand UKact ien in Jordan and Leb.ir.cn. |
DisilluslonnKtit with Iu Western alllea duringed Pakistan to seek support from bothnd the Soviet Union, withoui severing lu ties with tbe
United States. Once again Indlin-Pakisuni relations
wjre the crwas disappointed by thef Western support duringdc-Pakistani 'war. In addition, Pakistan renewed efforts toetter relations throughout tho Middle East, which
paid off with Arab supporting1 separation
of West and East Pakisun.
It was not until the charismatic Prime Minister Bhutto gained officeowever, that Pakistancemented closer ties with the Middle East. Bhutto aggressively rcfocused Pakistan's foreign policy on the Middle East by sending technicians throughout the
Persian Gulf states and by reaffirming support for Arab causes. The extent to which Bhutto succeeded in rebuilding Middle East relations is evident inS billion in aid disbursements that Pakisun has received from Middle East OPEC nations
General Zia's relationship With the Middle East has been more tenuous. Initially, Zia moved quickly after assuming power in7 to nourish theseaid connections by nuking personalhroughout the area. He also reaffirmed support for the Arab position against Israel and for recognition of Palestinian independence. Pakisun was njxlerately critical of Egypt's peace overtures toward Israel but, since the Camp David accords, has avoidedof President Sadat and mainuined good relations with Cairo. On the other hand, considerableremains among Middle East countries over the execution of Bhutto, especially after Zia indicated to many Arabs that the well-liked leader might be spired.
From the Middle Eastern perspective,hat ifterears Pakisun has yeta credible nallon-sutc out of iu collectionfactions indart of the probleminstability. Nonetheless, the presencetroops on Pakistan's border has improvedfor cikhkc Middle East support,Sa.di
emerged from the Arabian Peninsulaean ago; Pakisun wu created is in Islamic state onlyears ago when Muslim-dominated areas of India separated into West and East Pakisun, Despite the common bond of Islam, Paklsun's aspirations to leadership In the Muslim world have it limes led lo friction between it'nnd Middle East countries Out of lu split from Hindu India, Pakisun7 declared it intended to forge worldwide Muslim unity. Pi.kisuni officials grandiouily referred to their nstioit is the largest Muslim wintry ind hence the natural leader of
all Muilims. Pakistan proposed an "Islamistsn" pad extending from Pakistan to Turkey, ostensibly with Pakistan st the head ^
Non-Arab Pakistan's pretentions of leadership did not sit well with tl* Arab states because of their centuries of Islamic history and tradition. Middle East countries feared that Pakistan's close ties with Britainestern plot against theld. Nonetheless, the underlying Islamic connection between Pakistan and the Middle East has remained strong for three decades even though suie-to-sutc relations may have wavered in deference to Pakistan's search for iu own secure place in the world. ^
The recent Islamic Foreisn Ministers' Conference held inabad demonstrates the significance Pakistan places on its Muslim ties.anuaryency meeting attended by representatives of 1 Islamic states and several Muslim organisation* was Pakistani
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clmcly allied with the Sovietnot send
Islamabad initially hoped to restrict the discussions to tbe Soviet invasion of Afghanistan. The government reportedly sought to use this international forumtrongly condemn Moscow's actions, garner additional [economic assistance and moral support in the face of !the Soviet threal. androad consensus on Pakistan's renewed need to improve its ties with the United Slates and the West. The divisive, often conflicting interests of the member states, however, resulted in an expanded agenda.H
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Th^ conference did condemn theltary1 Intervention, suspend Afghanistan's membership In; the organization, and declare "complete solidarityj jjiine Islamic countries neighboringn |l| addition, it encouraged member stales to denyion'of the new regime in Kabul and stop all aid io Afghanistan. Other Humes were also discussedocus on the US role in the Middle East andenied Pakistan the public mandate it sought foe codiicration with tne United States. |
ith which Pakistan has close bilateral relations, vrillprobsblyupportive role snd be more forthcoming In their economic assistance.!
Economic Ties: Aid
Pakistanajor recipient of aid from the Middle East afterPEC price increase seriously degraded iis economic performance.st OPEC nations have provided Pakistan with roughly S2 billion in economic aid commitments since the beginningn addition. Pakbtan has0 million from the Islamic Development Bank and the OPEC Special Fund, some of which was used for petroleum purchases.11
/mat. Iran under the Shah was Pakistan's major benefactor. The Shah viewed Pakistanotential market for Iranian goods andource of important agricultural rawne of the Shah'swas to link Pakistan, Afghanistan. India, endTurkeyegional common market, To that end, he fostered the Regional Cooperation for Development (RCD) organization comprising Iran, Pakistan, and Turkey. Although little progress was made, we believe that tbe new government of Iran wants to maintain or expand the RCD formal and improve economic elationskistan :
' TV Islamic DrwfeomeM oUWiihcdmo*Mnlun (amino to promoteinoni Mutlim ccwMnca by financialandrade Tha bona it dominated by Sauditbe United Arab Emiraieu. and Kuwait. Tha OPECji ei tit hoiIS io financeand
foreignall, lucllcnii include all but ihe richcaiet* the leaa developed reunifies. Saudi Arabia, Iran, and Vcweracta hove been ihe major contributor* MM} |
' In manyPakiitan Ii clotcr to Iran than the Arab Middle Eail For example, the Urdu and Ptnitn alphadentical, and Persian li Ihe dominant aeeond Uniuare in Pakiitan.
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received about one-quarter of allaid com mil menu in the4 tor
bahincc-of-paymenu support. Krp.;mi:t'i of thescheduled to beginy the Shah when Pakisun failed toinitial repayment.7 Iranian aidhas dropped off sharply. An appeal madelast year for more0 million inapparently been held up by the chaoticI
Saudi Arabia. Saudi Arabia now ranks as the leading Arab source of economic aid and is likely to emerge as Pakistan's major source of funds during the next few years. Saudi aid goes mainly to Muslim countries, and primarily to the confrontation it ilea. Riyadh has been especially aggressive in using aid in an effort lo maintain regional subility and to forestall Communist and other radical movements in tbe area. One of Zia's first reactions to the Soviel troop presence In Afghani* Stan was to travel to Jaudi Arabiaeeting withKing Khalid in late December.
Thus far. Saudi Arabia has generally concentratedto Pakisun on specificfertilizerplants and various project* associated withbillion Tarbcla Dam. In addition, the Saudis
center and
Conditions are ripe for massive Saudi Arabian support of Pakistanf
, The Saudi financial poaii'on could hardly beith tbe recent escalation of oil prices, Saudi Arabia
faces unprecedented earning* and growingurpluses over tbe neat few years. Tbe surplusor example, easilyillion. Moreover,evenue stream comesime when tbeevelopment program is headedlowdown and
coincides with an evolving disenchantment forccumulation of foreign assets. The Saudis arend have few rational options to dispose of their
income
Saudi Arabia supplies one-half of Pakistan's crude cil import needs (no^ running0 barrels perraq and the Uniled Arab Emirates supply the bulk of the remainder. Kuwait suppliesf refined products. Despite official denials to the contrary last December, rumors persist that Pakisun isI-pcr-barrel discount on some of its oil contract
Libya. Among the more radical Middle East countries, only Libya has presided significant aid to Pakistan, Despite considerable friction and reservations about dealing with Tripoli. Islamabad continues thebecause of the economiccurrency from the services of Pakisun miliury personnel, civilian worker remittances, and continued Libyan aid that hasanxMjniedhe beginning of Igaanagj
One of the links between Libya and Pakisun has been in the nuclear field.
support for Pakistan's nuclear program dales back torime Minister Bhutto, who aoJght substantialcial assistance from
Economic Tk* Trade
: Pakisun has developed extensive trade rvktlons with Ihe Middle East region, andh thenembers. Betweenndercent ofmports come from the Middle East; almost all are purchases of crude oil and refined petroleum products, iiPEC price hikes, leas thanercent of Pakistan's total Imports were of Middle East
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tlUnt with ihc growth of imports from the Middle East hasteady increase in Pakisun's dependence on the Middle East for export markets since the first export surgehe Middle Easi now accounu for about one-fourth of Pakistan's export sales, compared with only lOpercentThe Middle East is the major market for about one-half of Pakistan's exporu of expensive, high-quality Basmati rice'averaging SIillion annually since the. The Middle East also accounts for one-quarter of Pakisun's sales of cotton textiles and related products, which are the country's most important exports. Rice and textiles together constitute about two-thirds of Pakisun's exports to the Middle East, although the region isinor market for other foodstuffs, chemicals, and clothing. M
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Since the, Saudi Arabia has been the most consistent market for Pakistani exports. Saudi(largely rice and textiles)illion annually. Iraq also purchasesillion annually of the same commodities. J
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Pakisun's export sales to its neighbor. Iran, are considerably more volatile. From an aveiageofonlyillion, Iranian purchases jumpedillion4 owing to large imports of rice valued at tefi viillion. While rice sales to Iran fell offne purchaseillion of Pakistani textiles boosted total exports to Iran toillioniThe Iranian market has since fallen off to probably lessillion9 because of the Revolutior-.ry Government's policy of encouraging Iranian self-sufficiencyinnd other products. ftjpf|
' Smithicetor0 per ion fo International markeu. cvmpara] wiih mail othtrof rice priced iter ton.
Sitrtt
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Anakistani civilre working in the Persian Gulf andarge portion of their earnings lo their homeland. The largcn number of Pakistanis,. are in Saurj; Arabia.0 are ia the UAE and 0 in Bahrain: the rest are In Kuwait, Libra, Oman. Qataran. J
Pakistani workers migrate without their familiesange from common laborers to moderately skilled technicians. The migration to the Gulf state* laI I .io six yearsenewal contractualsustained by economic incentives.an unskilled worker in the Gulf earns about SI0 per month, comparedn most Pakistani cities and considerably less in rural areas. Annual remittances from workers have grown5 million3 tothe current level ofl.cn. At this level, remittances sre equal toercent of Pakistan's rnerchandlse export earnings. Given the sizable and worsening foreign trade deficit, thehave been crucial In alleviating the pressure on Pakiitan'* external account!-
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the growth oflowing sharply and over Ihc next several yean lhe number of Pakistani worker* employed abroad could turn down. For both political and economic reasons, many Middle East states have scaled down their development plans and cut back the number or size of projects using foreign labor. Iran, since the fall of the Shah, has gone to the extreme and expelled most foreign workers. Pakistani laborers in the Middle East are also meeting increased competition from Indian, South Korean, and Philippine firms, which tend to use their own nationals as workers. Moreover, as the Middle Eastern stales place more emphasis on sophisticated and highly skilled jobs the share of employment going to the less skilled Pakistanis and other foreign nationals will decline.lt.it - iitelii WM foil'
Because of the importance of the remittances toIslamabad has taken steps lo guideproductive channels. Pakistanis and theiruse lhe higher Incomes earned abroadluxuries such as lavish wedding andceremonies, and to buy real estate andLast year lilamabad eliminated many ofand administrative obstacles io domesi cby expatriates. Workers abroad now havethrough Pakistani banks ci allocating partforeign earnings toward shares Inwhen the earnings arc repatriated.are offered for invesiment In small-industries In underdeveloped areasand the North West Frontier Province. 'i ,
US s
OPEC Military Financiil
Ihe beginning o
aiistan has purchased Siillion of foreign miliury equipment from moreozenetter thanercent of the orders were placed in France, the United States, and West Germany, wilh most if the remainder going to China.
Adthtn. The Middle Easttales draw heavily on Parisian's highlyAsianestablishment. India's British colonial heritage left Pakistan with an appreciation for formal military training. Pakjstrn has an extensive system of military service schools, and hu sent ofilcers for training to the United States, the United Kingdom, Australia, lha USSR, and China. Moraakistani military advisers are scattered throughout ihe Middle East. The bulk of these Pakistanis are providing military instruction and technical services such asaintenance.! 'ni$
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Pakistan's Call for a
Islamic Economy
lam (life according to the teachingi of theProphet Muhammad) his .been the byword oftani politicians since independence more thanears ago. Nlzam-Mslam lay dormantolicy issue
the death of Pakistan's founder, Muhammadinnah,ost independence problems ofdevelopment that faced Western-educated
, Pakistani leaders overshadowed tbe religious and
needs of Pakistan's Muslim community, which constitutesercent of tbeillion
lli'ii
i The idea of an Islamic state resurfaced inlection campaign of President Zulfiqar Alilthoughslam at first was usedhutto by opposition religious leaders and devout j. Muslims, Bhutto expediently committed histo "Islamicweeping eiection victory. Popular doubts about the seriousness with whica Bhutto practiced Islam nonethelessand his fsilure to move the promise of an Islamic stale beyond political symbolism partlyhis overthrow by General ZiaM
ZU and ItassakUfa^fi' MMevout orthodox Muslim,sed his martial law powers to try to move the Pakistani economy closer to the Mamienia announced, with much fanfare, the Imposition of two basic Islamic fiscal measures slated to go into effect at the start of1ax on wcslth) snd uihrag on agriculturaloth taxes are traditional Islamic tools for tha1 edistribution of wealth snd for the discouragement of
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Zokat, as one of the "five pillars ofs on indispensable requirement for an Islamics
specified in the Koran, xakatoluntary annual levy on personalccording to Islamic law, it can be used only for the benefit of the poor and the promotion of MtirLZakat clearly fits in with Islamic vof.cepts of state and individual social responsibility for the basic human needs of disadvantaged Muslims. Zia, however, hasokat that is more Ihan voluntary.ercent self-assessed tax on personal properly, the government willercent lax collected at the source on bank deposits, stock holdings, insurance policies, and retirement funds.
L
! , fic importance than zakat. Nonetheless, itong historyource of revenue for Islamic treasuries. Traditionally, ushr was collected from Muslim farmers at harvest time on crop output in excess of production costs. The levy was based on the kind of crop, productivity of the land, and cost oftion. j"
Zia's versions of ushrercenl mandatory tax on all farmers. The tax will apply to eacharmer grows; for example,armer grows wheat, beans,and millet, each crop will be separately taxed to the extent its'outputilograms of wheat or its equivalent. Landowners, tenants, and sharecroppers are all subject to the tax. Farmers of rain-fed land will be required to pay anercenl land tax since they are now exempt from paying water taxes.
Wrestling With Interest ia so far has been unable to formulate the most difficult and contentious reform proposedully Islamic ecimomy-^the abolition of all interest charges and associated reform of the banking system Thus far, Zia has only implemented interest-free housing issns 'servants and interest-free loans for bicycle purchases. Although both programs are touted as Interest]free,'ia practice they are not. As is common inside Saudi Arabia, Ihe prohibition against interest is
cicumvented by Ihe borrowerift" when paying back the loangJM
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Serious conceptual problems will complicate the achievement of Zia's goal of an interest-free economy
Islamic scholars are divided on theof the Prophet Muhammad'sinst interest payments. Some interpret the Prophet'son the financial abuses of his age as rohibiting all charges that even remotely resemble
. interest; others interpret the doctrine more loosely,rohon on usurious cha rges
Even ifagreemeut can be reachedundard interprctaiion of Islamic law, officials would then face the problem of restructuring the banking system without seriously disrupting production and trade. Under the Islamic model of an interest-free banking
" ^system, depositors would purchase equity shares In1 their bank: the bank would both invest in productive enlsrprises and offer shoe-term, interest-free credit repayable on demand Depositors would share in theproportion to iheir equity.
' Pakistani economists have yet to work out theof adoptingystem in an economy already
tingestern-siyl- commercialEven if they succeed in doing so, Pakistanin integrating art interest-free systemconventional international financial community,Ihe country depends for much of its
Impact of ta*slamabad had expected that tbe new taxesenerate0 million in' Land and wealth taxes now yieldillion annually! The current low yield reflects extensive exemptions land widespread tax evasion. Under Zia's Islamic tax
Pakistani Muslims will be expected to volutarily meet their religious require men is of zakal,id .
' Toul oratral lownawni uu immi am bow uproabr'tftiS] Si, let aMMllr. aa amount5 parent of ONP. ajSJg
Nonetheless, Zia has setommitiee witho enforce collection. For example, governmentwill have authority to order bank accounts opened for examination. Tbe new tax revenues, in conjunction witb an initial contribution5 million from Saudi Arabia and the United Arab Emirates earmarked for Ihe zakal fund, would be used to improve education and health care for the most destitute of Pakistan's poor. Even if zakal revenues reach tbe levelby Islamabad, they will be stretched thin. Al present, the poorestercent of ibe population amounts to roughlyillion people.5 million ro*afefficiently and equitablytranslate into per capita outlays of lessor Ihe
Neither Ihe zakal program nor ushr taxes have gotten off the ground. The business community has criticized Zia harshly on the zakal issue because of the compulsory nature of what shouldoluntary program. Shortly after Ihc takai was seriouslymany businessmen withdrew their potentially taxable funds from the banking system. On the other hand, the poor have been highly critical of Zia for failing toorkable welfare program. Local religious leaders complained of the centralized zakal fund's high administrative costs which left little for distribution to the needy, arid of the government's use of the Saudi contribution to ti" fund for balance-of-paymenls support
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Uskr will have an adverse but as yet unmeasurable impact on farm output. The agricultural sector is now only lightly taxed, yet little margin exists to absorb taxes among most oflhc Pakistani farmers. Wc thus expect the new taxes to reduce incentives, morale, and
purchases of needed inputs to agricultui
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Lowg-Teraa Issjcs
Zia's Islamic measures will do little to solve Pakisun's underlying economic problems, which stemombination of capricious government policies and longstanding institutional barriers to efficientof capital and labor. Among the basic economic problems are the sizable foreign debt and burgeoning debt payments, the low productivity in agriculture (relative lo availableommitmentumber of costly capital-intensive invesiment projects, such2 billion steel complex^
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