March 2, 2012EconomyForeign Affairs

Trading across the Partition

The liberalisation of India-Pakistan bilateral trade is a good thing. Now leave it to market forces

This is an archived blog post from The Acorn.

This blog has been a longtime advocate of India liberalising bilateral trade with Pakistan. The very first op-ed essay I wrote, for Mint in 2007, argued that the real peace process’ lay in free trade. The argument is based on creating political economies in Pakistan that have something to lose if bilateral relations worsen.

Far more than civil society, trade—more than culture—will benefit Pakistan’s elite society. To the extent that it does, and further, to the extent that this creates vested interests among Pakistan’s rich and powerful to prefer stable bilateral relations, better trading relations will be good for India.

Since there is no direct empirical evidence, this is only a hypothesis. But it is verifiable, involves modest risks and is reversible. Which is why I have argued that India should consider unilaterally dropping trade restrictions. Cultural exchanges might not work the same way because they won’t fatten up the Pakistani elite as commerce is likely to.

So you do not need to believe that a Pakistani civil society will rise, will challenge extremism and dismantle the military-jihadi complex to consider the merits of the trade argument. But it’s important to recognise that better trading relations will, at best, reduce Pakistani attacks against India. Destroying the military-jihadi complex is an entirely different and a much more important project. [Fattening the elite]

But why weren’t the Pakistani elite interested in trying to benefit from India’s growth process?

Pakistan—perhaps because its unaccountable elite are buttressed by liberal Western aid—is unconcerned with improving the lot of its own people. That is its own problem. This does not mean it is not in India’s interests to improve trade with its crisis-ridden neighbour. It only means that it won’t hurt the Indian economy much if it doesn’t happen.[Double talk on double digit]

Things changed this week. The Zardari government deserves praise for political imagination in pushing through bilateral trade liberalisation while stepping back from the semantic trip-wire of according India the most favoured nation” status. It is too early to tell, but if the trade deal moves ahead and creates vested interests in its continuation, it might become difficult to roll back.

The timing of the deal, however, suggests that it came about not only because of the Zardari government’s commitment and political skills. With US-Pakistan relations still in tailspin, the prospects of the Pakistani economy ticking along on the back of external assistance are weak, and unlikely to improve in the medium term. A good indication is the direct, overt, total economic-related aid Washington gives. According to the latest figures compiled by Alan Kronstadt of the Congressional Research Service, from a peak of $1.727 billion in 2010 it has been reduced to an estimated $874 million for 2012, with a modest increase for 2013. Total direct, overt aid—which includes military aid—has fallen from $4.46 billion in 2010 to $2.11 billion for 2012, with a modest increase for 2013. To get a sense of these numbers, $2 billion is approximately 1 percent of Pakistan’s GDP (2011 figure).

So to some extent, trade with India allows the Pakistani elite to compensate for the loss of external aid to the economy. Bilateral trade could reach levels of $6 billion within a couple of years. However lopsided it might be in India’s favour, the Pakistani economy stands to gain.

Even as he celebrates this achievement, C Raja Mohan worries that a trade surplus in India’s favour would strengthen opponents in Pakistan. He suggests India must consciously facilitate imports from Pakistan. This is advisable to the extent that it is limited to rhetorical facilitation. The best India can do, and ought to, is the removal of barriers. Leave the rest to the laws of competitive advantage.

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