Opening a new chapter

Published: November 28, 2011

The writer is distinguished Professor of Economics, Beaconhouse National University, and FC College University

After a bilateral meeting during the recent Saarc summit in the Maldives, Prime Minister Manmohan Singh and Prime Minister Yousaf Raza Gilani resolved to “open a new chapter” in the relations between the two countries. Presumably, catalysing economic relations is the leading edge of this process. The commerce secretaries have also met and seemed to mean business by setting specific timelines for the first time, to initially reduce tariff barriers sharply as envisaged in the Safta agreement, and then addressing the issue of non-tariff barriers. Pakistan has also finally granted MFN status to India to reciprocate the MFN status already granted to Pakistan by it.

The declarations together signify a renewed determination by the political leadership of the two countries to pursue economic logic as a means of improving the material conditions of their respective citizens. That the pressure of the ‘hawks’ on both sides has been successfully resisted, manifests the maturity of the political leadership in both countries. That the forward step in economic relations is subject to reversals, indicates that progress is vulnerable to internal pressures in each country from those who seek conflict rather than cooperation. Let us identify the elements of the substantive content of this ‘new chapter’ that may be about to open.

Available evidence over the last hundred years shows that when two countries engage in free trade, both gain, even in the extreme case where one country is initially more efficient in producing all the tradable goods: the gains from trade for both countries flow from specialisation on the basis of goods in which a country is relatively more efficient.

Furthermore, recent evidence shows that when a smaller country engages in free trade with a bigger country, the smaller country gains relatively more.

Beyond this is the question of trade where one country has no particular comparative advantage on an inter-industry basis. In this case, the evidence shows that intra-industry specialisation can become the basis of trade gains. Thus Pakistan, for example, can reap the economies of specialisation in particular types of apparel in the case of the textile industry; and production of spare parts and components in the case of automobile, light engineering and electrical industries.

Thus Pakistan can get substantial economic benefits from a free trade relationship with India and, indeed, South Asia as a whole.

Investment is inseparable from trade. Investment not only enlarges the volume of goods traded but also plays a significant role in compensating for a possible trade imbalance through improving the capital account of the receiving country.

Trade along with investment from India can have three strategic advantages for Pakistan: (a) It could pull Pakistan out of its current recession and place Pakistan on a high growth trajectory. (b) Cheaper imports from India, compared to imports from the rest of the world, could reduce inflation rates, particularly those of food inflation which is a major factor in currently rising poverty. (c) Lower inflation rates in goods consumed by the middle class could improve the distribution of real income in Pakistan.

The choice before Pakistan and India is clear: either remain mired in hostility and underutilised economic potential; or through economic relations build a better future for their peoples and be part of a resurgent South Asia that could lead the world.

Published in The Express Tribune, November 29th, 2011.

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Reader Comments (8)

  • Meekal Ahmed
    Nov 28, 2011 - 11:40PM

    Very good, Dr Sahib. Could not agree with you more.

    if you cannot reduce food inflation by restraining demand, might as well operate on the supply side through opening up trade.

    But for the benefits to flow, markets must be efficient and competitive and the regulatory authorities (the CCP) should stay vigilant and come down hard of hoarders and market manipulators.

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  • khan jr
    Nov 28, 2011 - 11:55PM

    There has been so much twaddle about the grant of a “Most Favoured nation” (MFN) status to India. I wonder if people really understand what it really means?

    In reality ‘Most Favoured’ (a misnomer, if there ever was one) means very little, other than Pakistan giving the same treatment to imports from India as it does to imports from a host of other MFN countries – the United States, China, Sri Lanka, Thailand, Malaysia, etc. Clearly, granting a MFN to India does not mean that it will have preferential treatment over any other country.

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  • 007stalwart
    Nov 29, 2011 - 3:44AM

    I dont know where is the evidence of last hundred years ! Even if this is so, the developed countries of today have not developed over last hundred years. Rather during last hundred years they started exploiting the resources on a global scale to satisfy the high levels of development they acquired during last 200 years. In other words, they developed during the 100 years preceding the 100 years of pseudo free trade. Pseudo free trade because uptill WW II most of the developed countries of today have not opted or advocated for free trade except UK.

    Secondly, consider the following names: USA, Japan, UK, France, S Korea, Malaysia, India, China, Germany, and Finland, not one of these countries has adopted free trade as a means of economic development. Rather they first set an industrial base, nurture and mature it enough, and then went out for free trade.

    It requires a full study to determine whether Pak industry is mature enough to bear the cometitive pressure of relatively mature indian industry ? Simple articles based on fuzzy economic logic must not be the basis to play with the livelihoods of the millions.
    [PhD Student in Economics]

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  • You Said It
    Nov 29, 2011 - 4:25AM

    Sounds good, until the next 26/11 like episode gets us back to square one.

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  • PT
    Nov 29, 2011 - 3:57PM

    Shah ji
    When it comes to trade in the region, one has to keep one’s fingers crossed. I have attended countless SAARC and ECO meetings on intraregional trade with most participants half asleep. Remember RCD!

    And shall I say Haj mubarak.

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  • Meekal Ahmed
    Nov 29, 2011 - 5:16PM

    @007stalwart:

    After 64 years, we are still not “mature”?

    Must be a case of stunted development.

    Pakistan industry is still highly “concentrated”. Other sectors are concentrated as well. They earn excess profits especially in the still-protected domestic market while the share of wage income in valued added has moved towards profits.

    These are well-documented emprirical findings. As a PhD student, in whatever filed, you should have this information on your finger-tips. Also go visit the CCP and ask to see their studies.

    My point is that the sharp winds of competition are good. Good for the country and good for the exploited consumer. Provided both sides stick to the rules of the game (no dumping and so on), this opening up to India could add 1-1.5% to our annual growth rate. That is just a guess but the impact is not likely to be trivial.

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  • SaudiRules
    Nov 29, 2011 - 7:49PM

    As long as we have leaders and cadre of LeT and JuD,openly roaming around in Lahore spewing venom and hatred, there is not going to be any india-pak trade peace dividend. One more 26/11 mumbai like strikes by the LeT and JuD and we will be back to square one. For the betterment of our awam we should get rid of LeTs and other lashkars. Recommend

  • Diogenes
    Nov 30, 2011 - 11:06AM

    @007stalwart

    “a full study to determine whether Pak industry is mature enough to bear the cometitive pressure of relatively mature indian industry”

    Are you trying to say that Pakistan’s industry can survive despite there being a Free Trade Agreement between Pakistan and China but that it cannot survive a non-Free Trade Agreement relationship with India, despite the fact that Pakistan has the same relationship with every single other country in the world?

    Are you trying to praise Indian industry?

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