Make Trade, Not War
If you haven’t kept watch on the cold war between India and Pakistan, you haven’t missed much. The two countries are locked in a depressingly familiar stasis whose roots trace back to the Aug. 15, 1947, partition of British India. Several weeks of massacres claimed the lives of anywhere from 200,000 to 1 million Hindus, Muslims, and Sikhs, while 14 million more were uprooted from their homes. Rancor and mistrust have lasted seven decades: Tentative moves toward rapprochement are regularly followed by provocations, threats of retaliation, and exchanges of fire along the disputed border in Kashmir.
The pattern has changed little under current leaders Nawaz Sharif in Pakistan and Narendra Modi in India, though their governments are at least giving talks another chance. On Aug. 23-24, the two countries’ national security advisers plan to meet in New Delhi to discuss “all issues connected to terrorism,” including the Pakistan Army’s links to militant groups who’ve conducted attacks inside India. But if both sides truly want to improve relations, the first item on their agenda should be trade, not terror.
South Asia is one of the world’s least integrated regions, with trade among neighbors accounting for only 5 percent of the total. (In Southeast Asia, the figure is 25 percent.) The irony is that before partition these countries formed more or less a single market, knit together not just by commerce but also by a network of British-designed roads, canals, and railroads.
The subcontinent’s economies wouldn’t necessarily have been better off had they remained united. Under the British, the areas that would become Pakistan and later Bangladesh served mostly as sources of raw material to the rest of India. That changed after 1949, when India devalued its rupee and its Muslim neighbor refused to follow suit. The stronger currency, combined with a commodity boom sparked by the Korean War, allowed Pakistan to accumulate the surpluses needed to industrialize. For three decades, its economy averaged annual growth around 6 percent—nearly double what socialist India could manage. Once India began to liberalize its economy in 1991, though, the fortunes of the two nations reversed.
Today, the cost of continued fragmentation is clear. Official bilateral trade between the nuclear-armed rivals totaled less than $3 billion last year—a tenth of its potential, according to the Indian Council for Research on International Economic Relations (ICRIER). And both governments lose out on millions in customs revenue due to a thriving unofficial trade that escapes formal scrutiny.
While some businesses might struggle to compete if the borders were opened, many more would benefit. Technology transfers from India would help make Pakistan’s farmers more productive and its factories more competitive. Indian outsourcing firms could tap cheaper Pakistani labor, while Indian pharmaceuticals, auto components, tires, and chemicals could find new customers. Consumers on both sides would enjoy lower prices. The rewards could grow exponentially if both countries were able to smooth out impediments to trade—untangling red tape, improving roads and railways, upgrading logistics. A study by World Bank researchers estimated that easing such roadblocks could increase Pakistani exports to India more than 200 percent.
For Pakistan, gains from transit could dwarf even those from trade. Historically, the northwestern corner of the subcontinent served as a gateway to Central Asia and the Middle East. If security concerns could be ameliorated and infrastructure improved—two huge ifs—Pakistan could again take its place as a thriving regional hub, linking a rapidly growing India to the resource-rich ’Stans and the Middle East’s petro-states. Ijaz Nabi, a former World Bank official and economics professor at the Lahore University of Management Sciences, says containers could eventually travel overland from India to Europe in a week—twice as fast as the sea journey.
Not surprisingly, each side blames the other for the lack of progress. While India granted Pakistan most-favored-nation status in 1996 after both countries joined the World Trade Organization, the latter has yet to reciprocate, despite pledging to do so nearly four years ago. (Although it has greatly reduced the number of Indian items subject to high duties or outright bans.) Pakistani negotiators say India needs to lower so-called nontariff barriers that disadvantage Pakistani producers: everything from stifling licensing and inspection rules to subsidies for Indian farmers. India reasonably (if not quite helpfully) points out that all exporters face the same barriers to entry. In return, New Delhi blames Pakistan’s powerful military for sinking a potential deal last year that would have opened up road and rail traffic throughout the subcontinent. Accusations, like opportunities, run at a surplus in this relationship.
While direct transit through Pakistan would be the most efficient means for India to reach countries to the north and west, intractable suspicions are leading both Islamabad and New Delhi to favor other options. Pakistan is working with China on a $46 billion “economic corridor” from the Chinese province of Xinjiang to the Pakistani port of Gwadar. This network, which makes India extremely wary, will include energy and telecommunications projects as well as road, rail, and pipeline infrastructure; it is meant to complement China’s ambitious initiative to knit together the Eurasian landmass.
For its part, India is reviving efforts to develop the Iranian port at Chabahar, which promises an alternate means of reaching Afghanistan and Central Asia, not to mention of importing more oil and gas from Iran once sanctions are lifted. On its other border, India is partnering with Bangladesh, Bhutan, and Nepal to allow the free movement of cars and trucks across their borders—effectively moving ahead without Pakistan. Improved connectivity could expand India’s access to a Southeast Asian common market with a combined gross domestic product of $2.5 trillion.
All this geopolitical jockeying undermines what should be shared goals for the region: to enhance stability and to shrink the space for Islamic militancy. Rather than trying to circumvent the Pakistan-China corridor, Modi’s government would be wise to coordinate its own huge infrastructure plans with Beijing’s to take advantage of the new trade routes opening up. Pakistan should shed its own suspicions about Indian intentions, lift remaining trade barriers, and actively pursue closer infrastructure links throughout the region. “What we’re blocking is 20 countries potentially getting interconnected,” says ICRIER’s Nisha Taneja.
Improving the trade climate will demand more than lower tariffs. If businessmen are to create new and vibrant supply chains, they have to be allowed to invest freely across the border, form joint ventures, and send remittances home. They need to be able to obtain visas easily and travel widely. Both countries urgently have to improve their ports, highways, railroads, and border crossings.
Most important, the trade agenda can’t be a hostage of security talks. Businesses require stability and predictability if they’re going to invest—clear rules and clear means of redress. They can’t be expected to make long-term commitments if policies keep changing after every militant attack or artillery exchange in Kashmir.
By contrast, a thriving economic relationship would be a disincentive to taking up arms at the next inevitable crisis. “That would be a very powerful means to conflict resolution,” says Taneja. Closer economic ties have shrunk the likelihood of conflict elsewhere in Asia—between China and Taiwan most notably, but also between the mainland and archrival Japan. A panel sponsored by the Pakistan Business Council has estimated that trade volumes in the range of $10 billion to $15 billion annually would create enough of a lobby on both sides of the border to keep relations steady. Even the Pakistan Army, which benefits from ongoing tensions, could look forward to fatter defense budgets if GDP growth picks up. Trade alone won’t heal the divide carved out by the 1947 partition. But it’s a salve surely worth applying.
Hajari, a member of Bloomberg’s editorial board, is the author of Midnight’s Furies: The Deadly Legacy of India’s Partition.