Source: www.asiaecon.org |

Forging an India-Pakistan Economic Partnership

Forever tied by a shared history but broken apart by fate, India and Pakistan are like a divorced couple seeking retribution. The conflict has gone on for over half a century with the situation getting direr by the day. India and Pakistan need to look beyond their religious and political…

Forever tied by a shared history but broken apart by fate, India and Pakistan are like a divorced couple seeking retribution. The conflict has gone on for over half a century with the situation getting direr by the day. India and Pakistan need to look beyond their religious and political differences and open their eyes to the economic growth that could accrue through partnership.

Once Upon A Time…

When India and Pakistan were unified under British rule, there were great flows of trade between the two nations. Just as sound economic theory predicts, each specialized at which they had a comparative advantage. Pakistan exported their surpluses in jute, cotton, spices, food grains, dry fruits and condiments for Indian raw materials such as iron and coal and finished consumer products. There was strong bilateral trade, up to twenty years after independence, a period in which more than 70 percent of Pakistan’s trade was with India.

India-Pakistan Economic Relations Today

The economic relationship between India and Pakistan dissipated quickly with disputes such as the one over ownership of Kashmir.  In 1996, India granted Pakistan Most Favored Nation (MFN) status in a gesture of peace but India still heavily subsidizes exports that put Pakistan at a disadvantage. As itstands today, India-Pakistan official bilateral trade accounts for only 1 percent of their respective global trade because of restrictions on the types of goods that can be traded. This restriction on traded goods has forced both countries to rely on trade with far off countries for important raw materials leading to high transportation costs. However, there is great potential for trade since contraband trade between the two regions accounts for five to eight times official trade.1

Bilateral Trade Makes Sense

Economically speaking, India and Pakistan are a perfect match. Because of shared land borders, transportation costs would be minimal. The goods in which each has a comparative advantage complement each other and could lead to economies of scale and greater efficiency. For example, India is the largest producer of tea and Pakistan is the second largest consumer of tea. Yet less than 1 percent of Pakistan’s tea is imported from India while 60 percent is imported from Kenya, a location much farther away.2 Pakistan has to import coal, steel, and iron from the West, China, and South Korea when it could get it at half the price from India. Likewise, India has had to convert areas that are best suited for paddy cultivation to jute cropping when Pakistan banned the export of jute to India.3 Lessening trade restrictions would not only expose consumers to a wider variety of goods at cheaper prices but manufacturers would have access to larger markets. Governments would also benefit through greater revenue generated in the form of taxes currently lost to contraband trade. Currently, there are no joint ventures or direct investments between India and Pakistan and official bilateral trade between the two countries accounts for only $200-$250 million annually. According to the Strategic Foresight Group, if peace prevails and real synergies are formed between the two countries, bilateral trade can potentially reach $3-4 billion a year.4

Policy Prescriptions

In order to reap the full benefits of trade liberalization, major goods should receive attention.  India needs to lower its export subsidies so Pakistan does not feel threatened by Indian hegemony. In return, Pakistan needs to reciprocate the Most Favored Nation standing to India. Common tastes and cultures should help create a regional market for goods.

If targeted right, joint ventures in certain industries could provide huge benefits. Collaboration on technology enhancement is one such benefit.  Pakistan could see great benefits from access to the Indian Council of Scientific and Industrial Research and its 2000 industrial technologies. India would benefit from the Pakistan Council of Scientific and Industrial Research and its improved techniques in food and fermentation technology, ore processing, metallurgy, fine chemicals, and polymers. Cooperative technology in agriculture, the industry that employs the most people in both countries, would be cost effective and give way to greater yields through improved pest control and seed breeding.5

A lack of water accessibility in Pakistan has been a real threat to economic growth and floods have hampered the region for centuries. One solution is creating a joint venture with India in water management that would effectively streamline their hydropower resources. This would create stability and lead to irrigation benefits and decreasing risks of floods. Energy is another formidable area of partnership. Pakistan has an advantage in the production of electric power while India has strength in the engineering industries. Creating a continuous natural gas pipeline that extends across Pakistan and India would be more economically feasible than if each respective country built their own pipeline independently.

Consumers benefit from lower prices, companies benefit from larger markets and exposure to best practices and other efficiencies, and the government benefits from greater revenue from official trade. Perhaps most importantly, such linkages of interdependence would raise the stakes and go a long way in reducing hostilities. An economic partnership makes sense.

Source: www.asiaecon.org |