The post-MFN scenario

Pakistan, India need to focus and facilitate upgrades of manufacturing fortunes along with modernising agribusiness.

It does matter whether you export potato chips or computer chips — this phrase of economic wisdom seems more relevant now that traders and economists are rejoicing over the decision of the cabinet to grant Most Favoured Nation (MFN) status to India. The optimism related to trade openness has many reasons, such as the possibility of enormous increase in bilateral trade from the existing two to three billion dollars. The other reasons sprout from possibilities of peace in the region alongside reduction in economic inefficiencies.

Borrowing words from CK Prahalad, both countries are possibly entering into zones of opportunities while departing from zones of comfort. The zones of opportunities are the locales where potentials of rapid and equitable economic development are either realised or forgotten. A major indicator of such realisation lies in unleashing potentials of the productive sectors of both economies as well as creating more and better jobs. The story is not all about tariffs, restrictions and regulations. It is also about the organisation of production and human capital.

In fact, this is where economic capabilities matter and analysis must go deeper than ‘shallow integration’ models of trade flows that are based more on tariff reduction. The ‘deep integration’ models which rope in production networks and value chains help explore enormous opportunities and perhaps are more relevant to bringing peace in the South Asian region. The model helps carve out space for inter-sectoral articulation in economic activity more than just trade or business development.

Practical pathways run across the ideas of developing industrial clusters and facilitating technology transfers to operationalise strategic industrial and trade policies, pushing possibilities of production beyond the existing resource endowments. This is the way in which car manufacturing in Chennai and Pune can source components from Lahore and Karachi and some firms can collaborate to jointly conduct research and development in aviation machinery. This is where designers in Pakistan can source shoes from the Agra footwear cluster. Multiple sectoral articulations can make sure that value additions in textile and garments sectors are not stopped at Karachi and Lahore and enter Ludhiana as well. Perhaps the key lies in using manufacturing as the key driver for product-process innovations to make both economies diverse and complex.

Nothing can emphasise this point more than a recent report “The Atlas of Economic Complexity — Mapping Paths to Prosperity”. The report argues that at the heart of complexity and diversity in economy is knowledge: “Ultimately, what countries make reveals what they know”. This is where Pakistan and India need to focus and facilitate upgrades of manufacturing fortunes along with modernising agribusiness. An important lesson is: what makes economies grow out of potato chips to computer chips is primarily the ability to handle complex techniques of production, management and marketing.

At the same time, Pakistani firms need to understand the internal dynamics of Indian capitalism. The Economist projects in recent reports that a major part of the Indian economy still revolves around families who run major industrial houses and influence policies. A possible way of collaborations might be reactivating the ‘industrial’ components of the chambers of commerce and industry to organise joint manufacturing competitiveness councils. Within Pakistan, the state and the private sector need to improve their diagnostic and strategic governance capabilities. We must remember that shallow integration can be blocked again but deeper integration is more resilient.

Published in The Express Tribune, November 11^th,  2011.