Monday, November 20, 2006
VIEW FROM PAKISTAN: Peace trade-off?
By — Moeed Yusuf
The liberal-humanitarian viewpoint is appealing but ignores hard realities; nowhere has trade flourished without a political consensus preceding it, and structural anomalies within the trade ambit cannot be automatically reversed
In his op-ed, “Give trade a chance” (Daily Times, November 16), Sandeep Banerjee has argued in favour of trade between Pakistan and India. Three points are worth looking at: with trade, ‘the rest’ (read peace) will follow; there are tremendous complementarities between the two countries and thus the potential for trade is present; Islamabad is reluctant to open up (SAFTA is quoted as an example).
Before considering these points, let me state up-front that this article does not contend the merits of opening up trade. It seeks to point to the structural anomalies that have hampered trade and intends to argue that while trade may have attendant economic benefits, it is unlikely to ensure peace — i.e., it is erroneously optimistic to present trade as the key ‘peace-maker’ between Pakistan and India.
The theory of economic interdependence — which suggests that interdependence would lead to peace — in no way implies that peace is an automatic outcome of enhanced trade relations between two or more states.
Instead, it postulates three pre-requisites.
First, the trade volume has to cross an unspecified ‘critical’ point without which the positive spin-offs from it are unlikely. Second, simply trading goods or services is not enough. What is required is economic interaction, which leads to an inherent integration of the two economies, thus increasing dependability on each other (the structure of interaction should ensure component production, joint production, etc). Third, both countries should view trade ties from the liberal perspective — i.e. the macro benefit of trade rather than narrowly focusing on the relative gains between them.
The absence of even one of these conditions would lead to the economic interdependence à peace link to fail.
The first point brings us to the issue of trade complementarities. There is unanimity of opinion that the trade potential is huge (estimates range from US$5 to 15 billion). None of the studies, however, has actually conducted a careful analysis of the strong structural similarities in production patterns and consumer preferences on both sides. The quantification of gains in terms of trade volumes, and thus any conceivable trade benefits, only offers a narrow framework. The reality is more complex and requires a holistic framework, which includes qualitative assessment. In the India-Pakistan case, for instance, similarities in the trade-production cycles on both sides cannot be ignored.
A supporting point often presented to highlight the high complementarities is the enormous volume of informal trade, believed to be ‘3-4 times’ of the formal trade. These are just guesstimates. There is only one study — conducted by the Islamabad-based Sustainable Development Policy Institute — that has carefully analysed the volume and structure of informal trade. Its findings reveal that the informal trade volume is no more than US$550 million, 95 percent of which flows from India to Pakistan and comprises primary commodities. Moreover, a recent unpublished analysis of the potential for formal trade (conducted by the author) under SAFTA suggests that the volume may not exceed US$3-4 billion.
Is this volume enough to cross the ‘critical’ point? In large part, the answer would depend on the kind of integration trade would allow. Here again, the outlook is not positive: the patterns of trade would lead to primary or manufactured goods being transferred from both sides, but not integration of production, in the sense that a single product is produced by inputs from both the Pakistani and Indian industries.
Finally, the third condition for the economic interdependence theory to work is also absent in the India-Pakistan case. The balance of trade is likely to favour India overwhelmingly (Banerjee acknowledges this). This is clear from the current direction of trade and the fact that informal trade also almost entirely flows uni-directionally. Moreover, while proponents contend that both markets would tailor their production to the other, one has to realise that the Pakistani production is designed to cater to a relatively small market, and the production capacity limits would not allow it to maximize its benefits for the foreseeable future. In other words, Islamabad is sure to view trade from the international theory perspective, where relative and not absolute gains determine whether two countries should develop trade ties.
In short, the message is that trade is unlikely to bring peace between the two sides. The danger of emphasising the liberal theory of economic interdependence is that such an approach would unnecessarily raise hopes of the peace constituencies on both sides, and if the spin-offs are not forthcoming, the process may be reversed for good.
Having said this, one cannot help confess that given the global drive towards free trade, Pakistan and India will have to open up sooner rather than later. While that is true, one must also point out that to ensure trade enhancement in itself is a highly complex task. What is required, as clearly stated by Banerjee is for India ‘to be gracious’. This is important not only because Pakistan remains paranoid about opening up to India but also because India stands to gain disproportionately from such a development. New Delhi has so far faltered on this score.
India is quick to point out that Pakistan has refused to reciprocate its move of granting MFN status. But it fails to mention that the move is without any substance. India’s NTBs (non-tariff barriers) are the highest in the region. An IMF study puts the restrictiveness of its economy at 8 (on a scale of 1 to 10). The result is that even in commodities where Pakistan has a clear comparative advantage, export levels have been minuscule. In fact, extensive interviews with those involved in India-Pakistan trade reveal that Indian customs and provincial tax authorities use their subjective discretion to inject additional bureaucratic conditionalities for Pakistani consignments.
In reality, the above is partly a result of structural inefficiencies in the Indian trade protocols. But more importantly, it is a consequence of the overall environment in which India-Pakistan trade takes place. Until and unless there is political will on both sides, and the drive towards facilitation of trade is implemented in spirit (which in itself flows from the political situation), trade ties are unlikely to take off in a way that leads to economic integration. In such a scenario then, Pakistan’s stance of not granting MFN is arguably more sensible than doing so on paper and then creating artificial hindrances. The latter is bound to happen unless political consensus precedes such a move.
The situation is much the same on SAFTA. Pakistan continues to be blamed for creating stumbling blocks, but the fact is that much of SAFTA’s delay until recently was caused by political tensions and not trade-related issues. Currently, the trade-related issues that are at the forefront include sensitive lists and rules of origin and all parties are equally vehemently trying to protect their interests. In fact, the biggest difference of opinion is on the issue of rules of origin where members have been unable to accommodate India’s demands.
This is not an attempt to argue against trade. Rather, I have contested the fact that lack of trade is a result of Pakistan’s reluctance and that trade will ensue peace in the region. The liberal-humanitarian viewpoint presented by Banerjee is appealing but ignores hard realities with regard to both the fact that nowhere has trade flourished without a political consensus preceding it, and the reality that structural anomalies within the trade ambit cannot be automatically reversed.
The writer is a Consultant on Economic Policy at SDPI, Islamabad, and a regular analyst for The Friday Times. He wrote this piece exclusively for Daily Times
http://www.dailytimes.com.pk/default.asp?page=2006\11\20\story_20-11-2006_pg3_2
VIEW FROM PAKISTAN: Peace trade-off?
By — Moeed Yusuf
The liberal-humanitarian viewpoint is appealing but ignores hard realities; nowhere has trade flourished without a political consensus preceding it, and structural anomalies within the trade ambit cannot be automatically reversed
In his op-ed, “Give trade a chance” (Daily Times, November 16), Sandeep Banerjee has argued in favour of trade between Pakistan and India. Three points are worth looking at: with trade, ‘the rest’ (read peace) will follow; there are tremendous complementarities between the two countries and thus the potential for trade is present; Islamabad is reluctant to open up (SAFTA is quoted as an example).
Before considering these points, let me state up-front that this article does not contend the merits of opening up trade. It seeks to point to the structural anomalies that have hampered trade and intends to argue that while trade may have attendant economic benefits, it is unlikely to ensure peace — i.e., it is erroneously optimistic to present trade as the key ‘peace-maker’ between Pakistan and India.
The theory of economic interdependence — which suggests that interdependence would lead to peace — in no way implies that peace is an automatic outcome of enhanced trade relations between two or more states.
Instead, it postulates three pre-requisites.
First, the trade volume has to cross an unspecified ‘critical’ point without which the positive spin-offs from it are unlikely. Second, simply trading goods or services is not enough. What is required is economic interaction, which leads to an inherent integration of the two economies, thus increasing dependability on each other (the structure of interaction should ensure component production, joint production, etc). Third, both countries should view trade ties from the liberal perspective — i.e. the macro benefit of trade rather than narrowly focusing on the relative gains between them.
The absence of even one of these conditions would lead to the economic interdependence à peace link to fail.
The first point brings us to the issue of trade complementarities. There is unanimity of opinion that the trade potential is huge (estimates range from US$5 to 15 billion). None of the studies, however, has actually conducted a careful analysis of the strong structural similarities in production patterns and consumer preferences on both sides. The quantification of gains in terms of trade volumes, and thus any conceivable trade benefits, only offers a narrow framework. The reality is more complex and requires a holistic framework, which includes qualitative assessment. In the India-Pakistan case, for instance, similarities in the trade-production cycles on both sides cannot be ignored.
A supporting point often presented to highlight the high complementarities is the enormous volume of informal trade, believed to be ‘3-4 times’ of the formal trade. These are just guesstimates. There is only one study — conducted by the Islamabad-based Sustainable Development Policy Institute — that has carefully analysed the volume and structure of informal trade. Its findings reveal that the informal trade volume is no more than US$550 million, 95 percent of which flows from India to Pakistan and comprises primary commodities. Moreover, a recent unpublished analysis of the potential for formal trade (conducted by the author) under SAFTA suggests that the volume may not exceed US$3-4 billion.
Is this volume enough to cross the ‘critical’ point? In large part, the answer would depend on the kind of integration trade would allow. Here again, the outlook is not positive: the patterns of trade would lead to primary or manufactured goods being transferred from both sides, but not integration of production, in the sense that a single product is produced by inputs from both the Pakistani and Indian industries.
Finally, the third condition for the economic interdependence theory to work is also absent in the India-Pakistan case. The balance of trade is likely to favour India overwhelmingly (Banerjee acknowledges this). This is clear from the current direction of trade and the fact that informal trade also almost entirely flows uni-directionally. Moreover, while proponents contend that both markets would tailor their production to the other, one has to realise that the Pakistani production is designed to cater to a relatively small market, and the production capacity limits would not allow it to maximize its benefits for the foreseeable future. In other words, Islamabad is sure to view trade from the international theory perspective, where relative and not absolute gains determine whether two countries should develop trade ties.
In short, the message is that trade is unlikely to bring peace between the two sides. The danger of emphasising the liberal theory of economic interdependence is that such an approach would unnecessarily raise hopes of the peace constituencies on both sides, and if the spin-offs are not forthcoming, the process may be reversed for good.
Having said this, one cannot help confess that given the global drive towards free trade, Pakistan and India will have to open up sooner rather than later. While that is true, one must also point out that to ensure trade enhancement in itself is a highly complex task. What is required, as clearly stated by Banerjee is for India ‘to be gracious’. This is important not only because Pakistan remains paranoid about opening up to India but also because India stands to gain disproportionately from such a development. New Delhi has so far faltered on this score.
India is quick to point out that Pakistan has refused to reciprocate its move of granting MFN status. But it fails to mention that the move is without any substance. India’s NTBs (non-tariff barriers) are the highest in the region. An IMF study puts the restrictiveness of its economy at 8 (on a scale of 1 to 10). The result is that even in commodities where Pakistan has a clear comparative advantage, export levels have been minuscule. In fact, extensive interviews with those involved in India-Pakistan trade reveal that Indian customs and provincial tax authorities use their subjective discretion to inject additional bureaucratic conditionalities for Pakistani consignments.
In reality, the above is partly a result of structural inefficiencies in the Indian trade protocols. But more importantly, it is a consequence of the overall environment in which India-Pakistan trade takes place. Until and unless there is political will on both sides, and the drive towards facilitation of trade is implemented in spirit (which in itself flows from the political situation), trade ties are unlikely to take off in a way that leads to economic integration. In such a scenario then, Pakistan’s stance of not granting MFN is arguably more sensible than doing so on paper and then creating artificial hindrances. The latter is bound to happen unless political consensus precedes such a move.
The situation is much the same on SAFTA. Pakistan continues to be blamed for creating stumbling blocks, but the fact is that much of SAFTA’s delay until recently was caused by political tensions and not trade-related issues. Currently, the trade-related issues that are at the forefront include sensitive lists and rules of origin and all parties are equally vehemently trying to protect their interests. In fact, the biggest difference of opinion is on the issue of rules of origin where members have been unable to accommodate India’s demands.
This is not an attempt to argue against trade. Rather, I have contested the fact that lack of trade is a result of Pakistan’s reluctance and that trade will ensue peace in the region. The liberal-humanitarian viewpoint presented by Banerjee is appealing but ignores hard realities with regard to both the fact that nowhere has trade flourished without a political consensus preceding it, and the reality that structural anomalies within the trade ambit cannot be automatically reversed.
The writer is a Consultant on Economic Policy at SDPI, Islamabad, and a regular analyst for The Friday Times. He wrote this piece exclusively for Daily Times
http://www.dailytimes.com.pk/default.asp?page=2006\11\20\story_20-11-2006_pg3_2
