Wednesday, May 18, 2011




Eating grass and denying people prosperity for the sake of national dignity and honour is the prerogative not of the elite who make these statements but of the ordinary people who suffer the consequences of the bloody minded policies of the ruling class which never ever gets to eat grass and is always prosperous. It is precisely this attitude that has denied the people of India and Pakistan the fruits of mutually beneficial trade and closer economic cooperation. Cutting your nose to spite your neighbours face seems to be a congenital problem in the ruling classes of South Asia, particularly in India and Pakistan. While most other countries of South Asia have understood the benefit of regional trade and transit agreements – Bangladesh's pitch for becoming the transit hub for India, Nepal and Bhutan is a shining example of the changing attitude in other countries of the region – a sort of beggar-thy-neighbour policy continues to dictate the economic relationship between the two largest countries in South Asia.

It was no surprise then that despite the buzz surrounding the latest meeting between the commerce secretaries of India and Pakistan, there was no real breakthrough in promoting trade and economic interaction between the two countries. All that was achieved was some incremental progress and a lot of assurances that will probably never be fulfilled because of the greatest non-tariff barrier (NTB) – troubled political relations. In a sense, this NTB is a bit of a chicken-and-egg sort of conundrum: will improved political relations pave the way for trade between India and Pakistan or will lifting the trade barriers create a constituency for peace that will help in settling the political ties between them.

Clearly, trade and politics don't make for a good cocktail. But the problem is that it is not easy to separate trade and politics. Ideally, trade should not be seen as a political concession, much less a pressure point for achieving political objectives. Trade has its own intrinsic value and should be left to businessmen, who will trade not out of altruism but because there is profit to be made. And profit is generally a two way street, or to put it differently, mutually beneficial. Otherwise there is no incentive to trade. This truism is however often lost on bureaucrats, and even more on generals. In the statist model of trade, babus and not businessmen decide what trade is profitable and what is prohibited, which is why we have a positive list of tradable items. What instead needs to be done is to create an enabling environment in which businessmen of the two countries can decide what they want to buy and sell to each other.

The scepticism among many bureaucrats, and even some economists, on the potential of trade between India and Pakistan because many of the product lines of both countries are quite similar, doesn't really stand to scrutiny when we look at examples from other parts of the world. Take for instance the EU. Most European countries manufacture similar products and yet intra-EU trade outscores EU's trade with its other trading partners. Why can't the same happen in South Asia? If barriers to trade are lifted, comparative and competitive advantage will determine the direction and composition of trade and not some SRO or administrative fiat. What is more, the lifting of trade barriers will enable cheaper sourcing of raw material from the natural hinterlands that were rent asunder in 1947. Add to it the availability of markets and the benefits of trade are an absolute no-brainer.

To be sure, there is a need to harmonise tariffs, rules and regulations and standards in South Asia. This lack of harmonisation is often considered (one daresay wrongly) as a major non-tariff barrier. When goods manufactured in one country do not conform to standards laid down in another country, trade will obviously not be possible. But before such differential standards are called NTB's two things need to be checked: one, are these standards country specific or are they applied to all countries equally; and two, are not similar standards also imposed in other countries. For instance, how is it that the same standard when imposed in the US or EU is not considered a NTB but becomes a NTB when imposed by India?

While these so-called NTB's which include trading facilities or the lack of them on the borders are more easily tackled, there are some real barriers to trade which are again more a function of the state of bilateral relationship than anything else. For example, the difficulties faced by businessmen in obtaining visas. In the current climate of distrust, visas are a major problem area. But to use this as an excuse to not move forward with trade is silly because this can be easily worked around by meeting in third countries. Yes, this increases the cost of doing business but if routing goods through a third country is profitable with all the additional expenses it entails, then surely business meetings won't add so much to the transaction cost as to make trade unprofitable. Of course, this is not an ideal situation, but it is better than not doing any business. A similar tactic can be followed on issues of goods inspection. Third party inspectors can be hired in each country to inspect the goods before they are despatched. In fact many western companies are already hiring such third party inspectors to do this sort of work. The point is that many of the imagined barriers can be easily worked around if there is no major penalty imposed on direct buying or selling between the two countries. And if relations improve, then many of these barriers will automatically get lifted. In the meantime, the business can continue to profit themselves, their consumers and their country.

Alongside trade, there is enormous potential for opening up investment and tourism travel between the two countries. It might be a controversial thing to say, but Pakistan stands to gain far more than India if it were to open itself to Indian investments, tourism and allow India transit rights to Afghanistan and Central Asia. The spin-offs of these three things for the Pakistani economy will be quite impressive and will allow Pakistan to cash in on its strategic location as a bridge between South Asia and Central Asia. But guess what, since we revel in cutting our noses to spite the other person, the protectors of sovereignty and ideological frontiers will never allow this to happen. After all, isn't honour and dignity more important than prosperity especially when you are not the one paying the price. But a more fundamental question is whether there honour and dignity in mutually beneficial trade (even if it is with an adversary) or is it in the begging bowl (even if it is spread before a friend)?


    <1150 Words>                        12th May, 2011



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