Over the past three decades, Pakistan has witnessed two major trends in its political economy. The first has been the rise of the services sector as the principal driving force of economic growth in the country, largely on the back of a rapidly expanding retail/wholesale trade component. The second has been a rise in religious fundamentalism, Islamist militancy, and the entrenchment of exclusivist religio-political organisations in the political landscape.

This study shows – by utilising a historical account and drawing on new research in two field locations – that the two trends, while occupying distinct analytical spaces in the existing literature on Pakistan’s political economy, are actually connected through patterns of social and political relationships found in urban centres, especially in the province of Punjab. Collective action and associational trends within the ‘bazaar’ sector are closely linked to the consolidation of mosque and madrassah-based religious organisations, which, in turn, create social norms of exclusion and violence.

The bazaar sector’s position as the single largest in the economy, providing employment to nearly 60% of the urban labour force, and contributing 17% to GDP, has resulted in traders, merchants, and associated businessmen occupying important societal roles in towns and cities. Political parties recruit them for political offices, state officials cultivate rent-seeking relationships with them, while religious social organisations utilise their support for fundraising and patronage purposes.

In the field site 1, Nankana Sahib, bazaar traders and religious actors have forged mutually beneficial relationships that have shaped an urban hierarchy wherein minority sects and communities are kept marginalised. This has happened through exchange of social, economic, and political capital, and is made possible by a weak political party structure, and non-autonomous local administrative apparatus, beholden to socially dominant, ideologically motivated actors. Thus, exclusivist discourse is strong, and everyday acts of discrimination are frequent.

In the field site 2, Lahore, Islamist organisations of the Deobandi denomination have used inter-generational cultural transitions to forge their links with the bazaar class. Protests against government regulation and mass mobilisation on religious causes, along with charitable acts and philanthropy provide sites for the consolidation of this relationship. However, episodes of militancy in and around important commercial sites and the existence of an autonomous political elite have allowed the state to step in and shape the bazaar’s social capital to prevent the emergence of sectarian conflict over the past five years. While exclusivist discourse is still present, and charities known to be linked with militant organisations operate in certain enclaves, the threat of outright violence has diminished.