Trading for peace

Can Pakistan make the change?

While the crisis in Pakistan’s international and domestic politics gets a lot of attention, arguably the more worrisome one is the one enveloping its economy. To even attempt to address these crises, Pakistanis must change their mindsets towards India. Why, there is resistance to even accord India a most-favoured nation (MFN) trading status because many don’t like the sound of it. So it is good to see the Daily Times go all the way and argue for bilateral free-trade.

After decades of subordinating economics to politics we are now at a crossroads. The primary crisis in Pakistan is economic despite the fact that we keep distracting ourselves with other less relevant issues. The politics that has constantly overridden economics has not succeeded but it persists in our mental attitude. Arguments given above have long been refuted by circumstance; only those whose ideology was thus hurt did not care to take account of it. When the embargo was placed on imports from India under General Zia-ul Haq, the reason was political; and the economic wisdom of Dr Mahbubul Haq was defeated by a federal secretary who put forward the theorem that helping India profit from trade with Pakistan was a “betrayal of the Kashmir cause”.

The theory of not relying on Indian imports has been disproved over time, to the disappointment of the intelligence agencies. From Gen Zia’s 40 items we are now importing 1500, most of them strategic raw materials. And we have not been “let down” or become “dependent” on India in any negative way. On the basis of this experience, in fact, we would be well advised to create an “interest group” in India comprising exporters to Pakistan. (There is already a beginning of it in Punjab, Haryana, and Delhi Chamber of Commerce and Industry.) The intermeshing of economic interests is always more reliable compared to political compacts made when there is little mutual trust. On the other hand, the “profit motive” is blind to politics and endures beyond the alarums of war and finally compels states to allow peace to prevail “for profit”.

Pakistan has signed free trade area (FTA) agreements with Iran, China, Sri Lanka and Malaysia, but no increase in Pakistani exports to these countries has occurred because of the unstable situation in Pakistan. Therefore, it is hardly valid, on the basis of this “trade imbalance theory”, to block trade with India. Imports of Indian raw materials and some other items are attractive because transport costs are relatively low across the border. If the increase in Indian imports is expected to be 30 percent, it will displace the import of the same volume of more expensive imports from elsewhere. This will help Pakistan cut its manufacturing costs and reduce the level of inflation. In fact, the whole theory of trade is built on the notion of comparative advantage and there is much advantage to Pakistan in trading with India. [DT]

10 thoughts on “Trading for peace”

  1. The question is, should we allow Pakistan to benefit from our emerging economy and prosperity? There is no guarantee that if we have bilateral free trade, then there would be no more Kargils nor there is any guarantee that they will abandon their “bleed India” project! We should sideline Pakistan. Let it suffer.

  2. Dhruva,

    There’s also no guarantee that if you don’t have bilateral free trade there would be no more Kargils or bleed India projects.

    Should we allow Pakistan to benefit from our emerging economy and prosperity? Well yes, from a pure economics point of view trade is a positive-sum game, and doing so well benefit India as well. The added advantage is that trading relations will provide India with additional leverage, which can be used for strategically (as this op-ed argues).

    Note that trading relations does not have to be accompanied by unwarranted bonhomies, silly Mahesh Bhatt routines, ill-considered gas pipelines etc.

  3. The final line of the text you quote, “In fact, the whole theory of trade is built on the notion of comparative advantage and there is much advantage to Pakistan in trading with India” is quite funny. Perhaps it is a tongue and cheek play on the word “advantage”. But if it isn’t, I would be willing to bet that the writer does not really understand what comparative advantage means.

    I don’t mean this to be snarky remark but the unfortunate thing is that comparative advantage is an idea that is widely misunderstood and that misunderstanding lies at the heart of many a costly mistake. I think that every educated person should know what it means and what the implications are.

  4. Resistance to free trade is usually not by consumers, but by producers. Just as many Indian companies frown upon new competition, both foreign and domestic, those Pakistani families and companies that have benefited from the status quo would be loathe to change it.

  5. Rohit, in the interests of not putting effort in re-inventing the wheel, I would pass on writing a post on comparative advantage. The wikipedia has a fairly good introduction to the idea. The principle has wide applicability and is good to know because it helps one avoid some basic logical errors when thinking about what trade is (whether interpersonal or intercontinental), what the implications of the idea of opportunity cost are.

    I have explored the idea of opportunity cost on my blog. You may wish to take a look there.

  6. What the article fails to mention is that despite India according MFN status to Pakistan.
    Even during the Kargil war, Vajpayee’s India was importing Sugar from Pakistan.

    Not mention that all food aid from India to Afghanistan, was off loaded from Indian trucks to into Paksitani trucks just so that the Afghanis could be tricked into beleiving that the aid is coming from Pakistan. To the extent that even gunny bags /sacks were also exchanged. A shipment of biscuits had to rot in Paki warehouse, because it was not possible to take the wrapping out of biscuit packing which caried ‘Made in India’ stamping.

  7. I would go for a more nuanced policy. While offering the carrot of increased trade, we should also employ the stick of (localized) insurrection (like in Balochistan). Ideally (as things stand today), we should look at creating a trader lobby inside Pakistan but at the same time promote sufficient internal discord to keep politicians/government occupied.

  8. How long will Pakistan sustain its hatred towards India? Is it possible that in the future Pakistan can again integrate with India? Integrating India and Pakistan will solve the subcontinent’s problems in one go. The Indian government needs to have the foresight to think such a scenario occuring in the next may be 50 years or so and plan accordingly. This may be laughable in the present scenario but seriously thinking there should be a possibility for this considering the shared culture. But the cultural advantage will be lost if the Arabs get a foothold in Pakistan and start imposing their culture there.

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