Untapped potential

As the global power pendulum slowly begins to swing away from the western-dominated order, all eyes are on the new ‘centre of gravity’ in international politics – Asia. While China has taken the lead in defining this new Asian order, India too has embarked on a path of accelerated economic growth. Despite formidable cracks in the development models of the world’s fastest growing economies, the potential gains from closer economic integration with India and China are unequivocal in the coming decade. Pakistan is left surrounded by these two Asian giants, yet has struggled to formulate a robust economic policy vis-a-vis India. Admittedly, India-Pakistan ties have been scarred by decades of mistrust, rivalry and war. Impasse over the future of Kashmir, Siachen and Sir Creek continue to plague diplomatic and political efforts aimed at establishing peace. Terrorism has further denied the two sides from reaching a political consensus on outstanding disputes. But perhaps a new approach is required – one which relies principally on building a stronger, mutually beneficial economic relationship from which political stalemates could later be manoeuvred.
India accounts for a little over one per cent of Pakistan’s total trade while Pakistan struggles to account for a negligible 0.5 per cent of India’s trade. Total trade (exports minus imports) between the two neighbours in 2008 amounted to a little over $2 billion, up from a meager $500 million in 2000. The level of trade is therefore not only unnaturally miniscule, but also embarrassing. The Sino-Japanese relationship, despite centuries of friction, war and territorial claims, remains mutually advantageous with economic integration bringing trade levels to $266.4 billion in 2008. As a result, China is now Japan’s top two-way trade partner. The point is not to draw parallels between these two distinct bilateral relationships, but rather to suggest that there exists tremendous scope for trade between countries despite lingering political disputes.
According to various studies including one using the Peterson Institute for International Economics (PIIE) gravity model, total trade between India and Pakistan could expand from its current diminutive level to as much as $42 billion if certain roadblocks were sincerely addressed. So what is standing between Pakistan, India and $42 billion worth of trade flows? High tariff and non-tariff barriers, poor and inadequate infrastructure, excessive red tape, political opposition, lack of trust and bureaucratic inertia all remain conspicuous obstacles hindering economic integration. Overcoming these may be arduous, but certainly not impossible.
The security establishments of India and Pakistan remain bitter archrivals – relying on them to forge a new economically resilient relationship would deem futile. This presents an opportunity for our civilian leaders to take the lead in devising a new long-term partnership, provided they are sincere and up for the challenge. A three-phase approach could be used, with each phase a step forward towards greater economic integration between the two neighbours.
The first phase must look at short-term measures to directly facilitate trade. These could include: relaxing restrictions on visas, particularly for businessmen and industrialists; increasing air links between the two countries, especially between high-traffic routes; removing the requirement that rail wagons carrying goods across the border return empty; eliminating the need for ships to touch a third country port before bringing in imports; increasing the number of customs posts; and opening up additional bus routes and road border crossings. These steps will allow greater mobility of people, goods and services between India and Pakistan. This phase must also initiate genuine multi-lateral dialogue on the long-term pursuit of the gas pipeline not only from Iran (IPI), but also from Turkmenistan. The latter, formally known as the Trans-Afghanistan Pipeline would transport Caspian Sea natural gas from Turkmenistan through Afghanistan into Pakistan and then to India, Turkmenistan-Afghanistan-Pakistan-India (TAPI). The pipelines, despite American reservations, would go a long way in facilitating energy trade between Pakistan and India. Ultimately, they could help carve a closely-knit region with countries sharing a collective view on security, peace and economic prosperity.
Despite promises made earlier this year, Pakistan is yet to reciprocate most-favoured nation (MFN) status to India. Instead it maintains an exclusive list of goods India may export to Pakistan, limiting the gains from the 2004 SAFTA agreement. Similarly, India has kept high tariffs on goods of particular value to Pakistan, including textiles, leather and the mineral onyx. Non-tariff restrictions too remain substantial. The second-phase of collaboration would accordingly work towards achieving these medium-term goals of Pakistan granting MFN status to India, and in return, India significantly reducing tariff rates on Pakistan’s bread-and-butter, particularly textiles and agricultural products. Other specific medium-term measures could include: allowing branches of Indian and Pakistani banks to operate in the other country; commencing trade in information technology; pledging to strengthen and enhance cross-border infrastructure as well as reducing unnecessary regulatory obstacles to the movement of goods and services between the two countries. Finally, with Foreign Direct Investment (FDI) virtually non-existent in the Pak-India equation, steps could be taken to encourage joint-ventures and mutually beneficial investments.
Finally, the third-phase would attempt to lock in an evolutionary partnership between the two countries, one which is built around continuous innovation, knowledge, research and discovery. In this phase, assuming uninterrupted dialogue was vigorously pursued from day one, the gas pipelines would be underway and new projects would be sought. Disputes may still exist, but trade, GDP and household incomes would have increased enormously. Pakistan and India aren’t impervious to the possibilities of shared and mutual gains. These prospects do exist. Whether they are realised just depends on when and if we decide to break this pseudo-strategic policy of mutual containment and perpetual hatred.

The writer works at the Research School of Economics at the Australian National University.