The economic costs of conflict The cost of conflict-IV
By Semu Bhatt
India and Pakistan were a single entity pre-independence and thus have naturally complementing markets. Yet neither country falls in the category of the top ten partners for the other. Indo-Pak trade takes place through three channels - official trade, which is marginal; illegal trade by smuggling; and indirect trade, carried out via third countries. With a long land border stretching 1900 miles and shared culture, habits and tastes, the opportunities for cross-border trade and investment are enormous. However, official trade, fraught with tariff barriers and quota problems, has largely remained dependent upon the political climate prevailing in the region. Restrictive government policies are circumvented by economic forces through illegal and indirect channels of trade - thereby underlining the potential of bilateral trade between the two neighbours.

Commerce Sense
An economic partnership between India and Pakistan makes common sense, enabling consumers and companies on both sides to benefit from lower prices and larger markets. The opening up of official trade will end smuggling, thereby filling the government coffers with greater revenues. However, economics remains subjected to politics. Currently, trade restrictions compel both the countries to import certain goods from far off sources, which they can easily import from each other. For example, Pakistan imports items like tea, coal, steel, iron etc from remote countries, although these items could be easily imported from India at half the cost. Pakistanis favour Indian tyres, textile machinery, coffee, chemicals and drugs but have to pay inflated prices for these goods coming through indirect routes. The bilateral conflict also depresses the investment climate to undermine GDP growth rate of both countries by two per cent.

There are many potential sectors of enterprise in which both the countries can jointly produce cost-effective, quality goods - like agricultural products, tyres, auto spare parts, minerals, chemicals, pharmaceuticals, leather, textile, IT and telecommunications. Joint development of infrastructure, transportation and tourism between India and Pakistan would be attractive proposals for foreign investors. However, joint ventures between the two countries are non-existent, and so is direct investment.

India and Pakistan account for approximately 80 per cent of the gross domestic product (GDP) of SAARC (South Asian Association for Regional Cooperation) countries. The hostility between its two largest members has hijacked the possibility of creation of a Free Trade Zone and economic integration of the SAARC. It has also undermined the prospect of turning SAARC into a big economic zone and development of trans-national transportation network.

If India and Pakistan aspire to join the league of developed nations, they have to focus on economic reforms and social development. Unless they have peaceful relation with their neighbours, they will not be able to give undivided attention to internal issues. Only a long lasting peace between India and Pakistan can allow them to concentrate on internal political and economic reforms and to achieve high economic growth rates.


The Deal Clinchers
The greatest potential for cooperation for India and Pakistan lies in the energy sector. Both countries, with huge demands for natural gas, can utilise the economically viable option of importing gas from Central Asia and Iran through joint pipelines. However, poor relations have hampered the pipeline projects. India has to import natural gas through more expensive routes, while Pakistan loses nearly $500million per year in transit fees. Similarly, lack of trade transit rights prevents both countries from exploiting huge markets for India in Central Asia and for Pakistan in the South Asian countries.

India and Pakistan are both water-starved, agrarian economies, and thus water is of utmost importance to them and one of the core issues of contention. Pakistan depends largely on the rivers of the Indus Basin for irrigation; so do the northern states of India, which are termed the granaries of the country. Integrated water development of the Indus Basin can help increase the water availability for household and irrigation use in both countries, decreasing risks of floods. Together they could develop joint hydropower projects and an Indo-Pakistan electric grid system for intra-country transmitting of electricity. Also, Pakistan, which has not exploited the solar energy technology on large scale due to high costs and institutional problems, can benefit from India, which has world's largest solar energy programme.

The changed economic dynamics of both the countries in the 21st century spells hope for improved ties. While Pakistan's status as an important ally in the US war on terror has saved it from a severe economic crisis, this is a temporary breather. Given India's emergence as a strong economic player, improved bilateral trade with India can strongly help in Pakistan's economic recovery. Though the economic gains from access to Pakistan and Central Asian markets and Iranian gas are significant, India's greatest gain from Indo-Pak peace would be an improved international standing.


Conclusion
Much has been written about peace dividends, yet large sections of population and politicians prefer primacy of politics over economics. Media needs to highlight that greater economic cooperation would create mutual economic benefits like lower prices for consumers, wider markets for companies, greater revenues for governments, more employment, more foreign direct investment (FDI) and better growth rates. More significantly, it would promote people-to-people contact, create stakes in cooperation and nurture constituencies for peace in the region - which may help to reduce hostilities. Reduced hostilities will create an amiable atmosphere, which will give political leaders the liberty to proffer the concessions needed to resolve more contentious political issues.

Tuesday, November 23, 2010

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