Column Beggar thy neighbour

Written by Dhiraj Nayyar | Updated: Aug 29 2008, 02:59am hrs
The recent economic blockade of the Kashmir valley and the subsequent demand from some people in the valley for the government to allow trade across the LoC has brought economics to the fore of what is considered a largely political problem. The trouble in Kashmir can be used as an effective springboard to spur greater economic integration between India and Pakistan and in South Asia more generally.

Consider this: Indias total exports in 2007-08 were worth $159 billion. Of this, a large share of $61 billion goes to OECD countries. Interestingly enough, a slightly larger share goes to other developing countries: $67 billion. Rather dismally, Indias exports to Saarc countries were a mere $8.9 billion. If one disaggregates the export figures within Saarc, the numbers reveal something more interesting: India exports more (in value terms) to Bangladesh ($2.5 billion) and to Sri Lanka ($2.7billion) than to the much larger and faster growing Pakistan ($1.8 billion).

The numbers are similar on the imports side. Indias total imports were worth $239 billion in 2007-08. Of this, some $75.8 billion comes from OECD countries and $80.6 billion comes from developing countries. Imports from Saarc countries were a mere $2.1 billion. Again, disaggregated figures for Saarc show that India imports more from stagnant Nepal ($628 million) and from tiny Sri Lanka ($631 million) than from Pakistan ($287 million).

Politics, then, clearlyand to the detriment of the peoples of South Asia and India and Pakistan, in particulardominates economics. Indias trade with another troublesome neighbour, China, however, shows much better health. Indias exports to China were worth $10.7 billion in 2007-08 and imports were worth some $27 billion. Despite numerous disputes, politics has taken a seat behind economics in Sino-Indian relations.

Given the dismally low trade between countries of South Asia, it is difficult to argue against lowering of trade barriers between these countries. Regional free trade areas, of course, create trade (through lower barriers between members) but they may also divert trade (because of comparatively higher barriers for non-members who may have earlier been the partners of choice). If trade creation is more than trade diversion then it is in global interest that the free trade area exists. Research suggests that those free trade areas which have a more encompassing membership and those with low barriers to trade with non-members are likely to be superior. In South Asia, any free trade area will cover at least one-fourth of the worlds population, which is large and encompassing enough. Most of the potential member countries do not have very high tariff or non-tariff barriers to the rest of the world (because of WTO commitments). Absurdly enough, it may just be the case that they have higher barriers towards their neighbouring countries than to the rest of the worldPakistans refusal to grant India most-favoured nation (MFN) status is a case in point. Given this scenario, a move towards a free trade area can correct some of the imbalances and enhance trade and well being in one of the poorest regions in the world.

Cross-border investment could be as important as trade in boosting the economies of the region. According to the Unctad World Investment Report 2007, India is the only significant exporter of capital (investment) in the Saarc region (Pakistan at second place had an FDI outflow of just $107 million). Outflows of FDI from India in 2006 were close to $10 billion. Government estimates peg the number at $17 billion for 2007-08. Significantly, most of these outflowsaround 80%are directed towards developed countries. This is somewhat counter-intuitive because theoretically capital should flow to resource scarce countriesit is also very different from the experience of Brazil and China whose outward FDI flows are more to developing countries. There are fewer regions and countries as resource-scarce as members of Saarc other than India. Pakistans receipt of FDI inflows, second highest in the region to India $16 billion, was just $4 billion in 2006. Bangladesh received only $625 million and Sri Lanka received $480 million, all Unctad figures for 2006. Surely, some of the capital going out of India should go into these countries which are registering good rates of economic growth and present economic opportunitybut FDI flows from India to other Saarc countries are near zero. Pakistan, of course, deliberately kept Indian FDI out of the country. Now for the first time in the trade policy of 2008, the government of Pakistan has opened talks with Indian investorsfor the manufacture of CNG buses and for building power generation capacity. Bangladesh, due to petty politicking and bureaucratic inertia, also lost out on Tatas proposed investment of $3 billion in power, steel and fertilisers.

The fundamental problem of much of South Asia (and this includes India) is that politics much too often disrupts the best laid economic plans. India has done more than its neighbours to reform its domestic economy. As the largest country in the region, it must take the initiative to liberalise regional barriers to trade and investment. Unilateral liberalisation with Saarc countries is in Indias economic interest. Also, some of the regions most vexed political problems, often based on economic isolation or deprivationincluding Kashmir and the Tamil Eelamcan be solved using economic initiatives. South Asia needs to urgently awake to the great economic promise of this otherwise impoverished region.