Will Pakistan-India trade bolster peace possibilities?

Map of Pakistan

Map of Pakistan (Photo credit: Omer Wazir)


By Ali Imran


“There was a time when I used to evaluate Pakistan and I thought the best way for it to really develop is to relocate.  I used to think that the best place for us to take Pakistan would be somewhere between Italy and Switzerland, and now I’ve changed my mind …. because the parts that I thought we should be located in aren’t doing that great in terms of growth, and where we are is the most dynamic part of the world. 

“So I think we should stay there, we should work, and be good neighbors with each other, and that’s where the energy is. That’s where the growth is, that’s where the dynamism is, and that’s where the world is looking at.”

(Pakistan Finance Minister Hafeez Shaikh, Washington, April 18, 2012)

That somewhat longish quote from the Pakistani Finance Minister’s interaction at the Brookings Institution last month summed up a little-noticed but potentially far-reaching change in Pakistan’s trade policy.

The tale of Islamabad’s quest for commercial links is like a continuing odyssey of mind, which began at home in South Asia, went West, particularly after the 1965 war, and still continues but with a difference – exploration of and diversification in new markets and simultaneous recognition of regional trade benefits. 

Reviewed realistically, the Westward focus was not a decades-long useless detour but probably the only smart strategic option Pakistan had at that time to step up the export momentum. Exports to rich Western countries including the United States and Europe helped the local private sector flourish and compete in the broader international arena. Around fifty years ago, the Middle East was not a thriving place yet and China had not even started taking economic strides. Therefore, exports to rich industrialized nations provided a much-needed boost to the economy.

 Picture: Wikipedia Kamran Ali

 The West-centered trade approach during much of the time in last seven decades and a brief Look East policy of the 1990s, is now anchored in the region amidst global contraction, European and American economic recessions.

Pakistan has expanded it trade manifold with both China, the rising global economic giant and Afghanistan, its war-torn neighbor. The trade with oil-rich Iran has also grown. Over the past year, Islamabad has been negotiating improved commercial linkages with its eastern neighbor and longtime rival India.

Concurrently, Islamabad has been diversifying its export markets, reaching Latin American and African countries. It’s share of exports to West has dropped from 60 percent to 40 during the past decade while the volume of exports has been increasing steadily.

But it is the potential of Pakistan-India trade – and its effect on bilateral and regional political and security environment – that has excited economists and businesses alike. A series of developments including Islamabad’s announcement of granting most favored nation status to India, New Delhi’s hosting an exhibition of Pakistani products and avowed mutual commitment to stay the trade course point to immense possibilities.

Robert Hathaway, Asia Director at Woodrow Wilson International Center for Scholars, feels enhanced trade between the South Asian nations could be a building block to broader relationship. 

 “This is good news from the region—- this is a story of hope and possibilities — it would appear that both India and Pakistan have made fundamental decisions to expand their trade relations. I think  that they would not be interested in expanding trade if they weren’t interested in moving beyond the hostility of the past and in the broader sense in improving their overall relationship,”  he told My Global Community Today.

The classic dilemma facing India and Pakistan – the two largest South Asian economies – for decades since their independence from Britain in 1947 – has been two-fold: how to defy and bypass the natural inter-dependence between the two neighbors; and how to overtake the other in terms of achieving prosperity.

This mutual economic exclusion stemmed largely from the bitterness of several low-intensity conflicts and three full-blown wars that have also held back the entire region’s economic growth potential.

How far the two countries went with that flawed approach? Not much, until New Delhi opened up its huge market with some landmark economic reforms that put India on the highway to development.

Over the years, India, however, developed its industry, practicing a strict form of protectionism until two decades ago. But Pakistan saw its intermittent economic ups and downs dependent on international strategic environment.  

Aid packages and Western investment flows into Pakistan related directly to the changing geo-political scenarios.

Now almost 70 years after independence the two-way annual commerce between India and Pakistan has shrunk from 70 percent in the initial period to just 3.5 percent.     

As a result of consistently pursued reforms in the last 20 years, embrace of liberal market economy and sustained inflows of investment from all around, India has maintained a steady growth trajectory to emerge as one of the leading economies in Asia and the 11th largest in the world.

Pakistan, on the other hand, has seen its economic momentum (over 7 percent growth in 2005-06) suffer from combination of Afghan war blowback, natural disasters, dwindling, power shortages, slow pace of reforms, mismanagement and a woeful lack of revenue generation.

Still the country has shown some upbeat signs of resilience:  growth rate is expected to touch a decent 4 percent this year; exports continue the upward trajectory ; the massive human capital and particularly the youth explore new fields like information technology ; remittances by overseas Pakistan provide a forex cushion more than ever before and the private sector continues to thrive in several industrial, agrarian and services areas, fulfilling gaps left by the absence of effective governance.

Inflation, fiscal gap and repayment of heavy loan tranches add to challenges, exacerbated by serious strains in Pakistan-U.S. relations which have seen a halt in inflow of large U.S. assistance and reimbursement of war on terror expenditures to Pakistan.

Yet, the size of Pakistan’s economy at $ 300 billion GDP and India’s $ 1.6 trillion GDP give rise to hopes that the two neighbors would be able to work through issues to make the most of their hard-earned progress since increased economic and trade ties would be mutually beneficial.

Pakistan can open up a whole new world to its West for India that includes mineral-filled Afghanistan and energy-rich Central Asian states.

But make no mistake! Some longstanding political and security issues including UN-recognized Kashmir dispute and the Indian rule of repression in the Himalayan territory, the possibility of terrorist attacks emanating from Pakistan-based militants, water issues and domestic political opposition to incumbent government’s policies will continue to hang over Pakistan-India relations as sword of Damocles.

For instance,  New Delhi’s intelligence faux pas in early May that some Pakistanis belonging to a banned militant outfit Lashkar-e-Taiba (also blamed for 2008 Mumbai terrorist attacks) had entered India to carry out attacks and the India media’s jingoistic coverage of the event enraged Islamabad.

As it turned out, the Pakistani individuals named by RAW never left their country and therefore, they protested the Indian false alarm at the expense of their reputation. Providing fodder to anti-Pakistan constituency in India eroded a measure of goodwill the two sides are seeking to produce.

The unsavory episode served as a timely reminder to all those who feel that things will straighten out automatically, once the trade grows between the two countries. Skeptics would, in fact, argue that that is not going to be the case at least in the near future.

Islamabad has done well by not overreacting to New Delhi’s faux pas. Next month’s talks between the two countries on Siachen glacier – the highest battleground in the world – bode well in the context of a concurrent approach to security and economic issues.

Apart from working out the devil in details like striking down negative lists, assuring some industries facing risks of being edged out,  and curbing smuggling , New Delhi and Islamabad will have a lot to do, given the history of past six decades.  Adhering to political maturity will be key to mutual accommodation and help make the trade process irreversible.

While Islamabad will have to rein in militant groups from disrupting the process and ensure that there is no immunity for militants, India will have to ease its stifling rule in the disputed Kashmir region, and assure Pakistan that in the post-2014 regional scenario, it would not use the Afghan soil for activities inimical to Pakistani interests, particularly in restive parts of Balochistan. 

Afghanistan,  wrecked by decades of major powers’ wars and invasion, internal conflicts and insurgencies, stands to gain enormously from both its own trading ties like full implementation of the transit trade agreement with Pakistan and the promotion of trade between Pakistan and India.

Pakistan’s eastern and western neighbors, India and Afghanistan, have reason to reciprocate Islamabad’s emphasis on regional trade. Neither New Delhi nor Kabul have the luxury to skip Pakistan. Replacing foot-dragging with action and bidding goodbye to a constant cycle of allegations and counter-allegations, would make sense and help the three countries.

 In the larger perspective, growth in trade and economic links between Afghanistan, Pakistan and India is seen by experts as potentially the single most crucial determinant in the realization of the New Silk Road dream.  As it moves to drawdown militarily from Afghanistan by 2014, the United States has been advocating the New Silk Road as the best hope to replace regional rivalries with an economically inter-dependent region connected via a stable Afghanistan. 

Creating mutual economic stakes through greater trade will help the cause of peace but trade expansion in itself will not be a dispute solvent. All countries will have to create a goodwill space to address lingering political and security issues. ‘Better late than never’ could be a bold written template on road to reparation in Pakistan-India ties.

Sources: MGCT, Woodrow Wilson Center, Brookings Institution, 


Categories: Articles, Economy

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