Time to accelerate economic ties

Business Line, December 16, 2006

History provides ample evidence that no neighbouring countries have ever survived and progressed in the background of prolonged belligerent relations.

By Pradeep S Mehta & Huma Fakhar

A recent action by the Pakistani government to increase the positive list of tradeable products from 773 to 1075 under the South Asian Free Trade Agreement (SAFTA) could result in the doubling of formal trade from $1 billion to $2 billion. But this exchange can quadruple if only there is closer economic cooperation and that could set the pace for normalisation of relations.

Whenever one speaks about the peace-promoting economic relations between India and Pakistan, sceptics opine that the relations between the two are marred by the border dispute and cross-border terrorism. Hence, to expect more peaceful relations between the two fast growing economies through trade is a dream. We do not agree.

Until recently, it was not known that to promote peace in West Asia, the US hadadopted a similar scheme. In 1996, US Congress authorised designation of qualifying industrial zones (QIZs) between Israel and Jordan (1999) and Israel and Egypt (2004). The QIZs allow Jordan and Egypt to export to the US duty-free if the products contain a minimum level of inputs from Israel. The purpose of this trade initiative was to support the prosperity and stability in the region by encouraging economic cooperation. It has worked well.

India, Pakistan entering PTAs

Since both India and Pakistan are preparing to or are entering into various preferential trade agreements (PTAs, bilateral as well as regional) with other countries and regions (both with developed and developing countries) it would be sensible to include QIZ-type of arrangement in some of the agreements particularly with the EU, the US and China and even within SAFTA and the proposed ASEAN-India FTA. Such arrangements would help both Indian and Pakistani exporters/importers reap the benefits of free trade as well as promote greater cooperation.

Among other ways to promote economic cooperation is to look at cross-border infrastructure projects, which have opened prospects for economic benefits through cooperation. Regional cooperation projects have the potential to improve the well-being of all parties involved because of the scale of economies they permit, the complementarities between the economies, and the externalities they induce (multiplier effects, attraction of foreign investment, diminution of gaps, etc… ).

The East-West Economic Corridor (EWEC), a 1,500-km highway project crossing six Greater Mekong Sub-region countries in South-East Asia connecting South China Sea to the Indian Ocean, and the Middle-East Regional Cooperation Projects are some good examples.

Regional trading blocs may be an instrument for peace and prosperity. As Keynes observed, “A Free Trade Union, comprising the whole of Central, Eastern and South-Eastern Europe, Siberia, Turkey, and (I should hope) the United Kingdom, Egypt and India, might do as much for the peace and prosperity of the world as the League of Nations itself.”

Tools for peace, prosperity

Keynes said that trade and commerce have been the most effective way of establishing peace between rival nations. The formation of the European Union most effectively united the Continent that for long was divided and warring. The EU has led to higher levels of economic well-being resulting from enhanced economic cooperation amongst the member states.

History provides ample evidence that no neighbouring countries have ever survived and progressed on prolonged belligerent relations. “History repeats itself” is the saying going around time and again. The famous economist, Mr Wilfred Pareto (1889) wrote, “customs unions and other systems of closer commercial relations (could serve) as means to the improvement of political relations and the maintenance of peace”.

Conflict resolution

The Southern African Development Community originated in the 1980s as a coalition opposed to apartheid in South Africa and, more recently, turned to creating a free trade area. Some observers note that African Customs unions and free trade areas are as active in areas such as conflict resolution as in trade liberalisation. Finally, many see relaxed tensions between India and Pakistan as the real payoff of SAFTA (World Bank, Global Economic Prospects, 2005).

Many studies also point out that RTAs that expand trade flows appear to have a substantial dampening impact on conflict. Mansfield and Pevehouse (2000) attempt to identify empirically the role of RTAs in ameliorating conflict. They found that, on an average, the likelihood of the outbreak of a militarised inter-state dispute declines by around 50 per cent if both belong to the same RTA. However, only RTAs that expand trade flows appear to have a substantial impact on conflict.

In Africa, for example, RTAs that address the management of cross-border resource issues (such as water) are more effective in reducing military conflict than other RTAs.

Though both India and Pakistan are moving closer, it is at a snail’s pace and constantly encountering hurdles. Some of the above measures could divert attention from sticky matters and accelerate economic cooperation between the two nations by reducing (if not eliminating) tensions and mistrust and bringing peace and tranquility to the region.

Pradeep S Mehta is General of CUTS international, a research, advocacy and networking group board in Jaipur, India and Human Fakhar is partner, Fakhar law international and Market Access Promotion, Lahore, Pakistan

This article can also be viewed at: