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Promoting Regional Trade to Foster Inclusive Growth in Pakistan

 Focus

The Global Agenda Council for Pakistan has focused on promoting regional trade as a means for enabling inclusive growth. The Council believes that inclusiveness is an essential ingredient of any successful growth strategy as it can lead in the long term to poverty reduction. 1 Trade linked growth can be broad based benefiting a wide sector of economic stake holders and society as a whole.

One of the main ingredients for sustainable and inclusive growth is productive employment which generates new jobs and income either from wages in all types of firms or from self-employment, usually in micro firms. Given the size of the regional market and requirements for a broad variety of products and services, together with the geographical proximity of the countries in the region, which would allow export through land routes, it was felt that regional trade would benefit not just the large players but smaller segments such as female entrepreneurs.

The South Asian Region remains the least integrated from a political and economic perspective. Businesses within this region are therefore distanced from economic opportunities. Though a legal framework for trade exists through the South Asian Association for Regional Cooperation (SAARC) and the South Asian Free Trade Agreement (SAFTA), there continues to be big trade barriers particularly between India and Pakistan. Though analysis and research is limited an increased level of inter-regional trade would promote growth in Pakistan and the region. This growth would benefit not just the large players in the market but the SME and mid level sector as well.

A key element for enhancing regional trade is the promotion and liberalization of trade between the two largest economies in SAARC – India and Pakistan. The Council has, therefore, focused largely on this issue.

This initiative is timely as it coincides with work at a political level by the Governments of India and Pakistan to harmonize political and economic relations. After visits by the Foreign Ministers of the two countries there have been reciprocal visits between each country’s Commerce Ministers. This has been followed by statements by the Governments of both countries that the visa regime for businessmen would be liberalized.

In both India and Pakistan there is a certain amount of trepidation about the impact of trade liberalization on industry which has generally become used to a protectionist regime. In addition, there is also a certain hesitance which is to be expected after such a long period of disrupted political ties. This Council and The Global Agenda Council on India are undertaking local initiatives to influence public opinion to support the liberalization process. These include newspaper articles, interviews and increased focus on people to people contact.

Issue overview

India and Pakistan are geographically contiguous and were historically interdependent. Despite this, due to political animosity, trade between these two countries remains limited. This situation also impacts on trade under SAFTA and intraregional trade remains around 5% of the total trade of the countries in South Asia.2  Bilateral trade is, however, conducted through informal means and experts estimate that unofficial trade between India and Pakistan is around US$ 2.0 billion per year3  not including trade via the Dubai route where the port of origin of products is re-labelled. This is not only an inefficient method of undertaking trade but also deprives Governments of tax and customs revenues.

Trade within the region could unleash new technology, lower domestic prices and usher in economies of scale as the effective market size expands.4  There would be opportunities for large and medium size industries to export their products to India and other parts of South Asia. This would include specialized products for which Pakistan has internationally renown, such as sports goods, carpets and handicrafts. There is also potential for Pakistani students to access better higher education opportunities in India if the visa regime changes. On a small scale, Pakistani businesses have already started moving to Bangladesh and Sri Lanka to set up textile manufacturing units.

Whilst the likely benefits are great the Council also recognized that certain industries in Pakistan may be negatively impacted by a liberalization of trade. On balance, however, liberalization of trade, particularly with India, will benefit Pakistan as it is a smaller economy; trade liberalization will provide economic opportunities to a broad segment of industry beyond just the high end.

Implications of improved trade relations

Improvement in trade relations between India and Pakistan would likely achieve the following benefits:

  • Trade through official means would strengthen the economies of both countries and bring in customs and taxation revenue.
  • As these are the largest economies within the South Asian Region, liberalization of trade between India and Pakistan would also have a beneficial impact on intraregional trade.
  • Whilst currently the debate is focusing on liberalizing bilateral trade, there is potential for large investment flows between the two countries.
  • Cross border investment can result in joint ventures and should be accompanied by an exchange of workers and managers.
  • In a world where economic opportunities are shrinking and intraregional linkages are being strengthened, by focusing on opportunities within the region, India and Pakistan would be able to harness the inherent economic strength of the region to support growth and prosperity in their own countries.
  • This is particularly important in order to provide the jobs and opportunities necessitated by rapid population growth.
  • Economic cooperation will impact positively on political relations as countries that trade are unlikely to wage war with each other.

Some concrete examples of the benefit which Indo Pakistan economic cooperation would bring to the two economies and the region are as follows:

  • India has a middle class of about 300 million people with rising purchasing power that matches that of South Eastern Europe, while Pakistan’s middle class is approximately 30 million. A 10% penetration into the Indian middle class market would double the market size for Pakistani companies and businesses.5
  • A State Bank of Pakistan study in 2005 estimated that the volume of trade could rise 5-fold from US$ 1.0 billion to US$ 5.0 billion. A study by the Indian Council for Research on International Economic Relations (ICRIER) showed a much higher potential volume of about US$ 10 to 11.0 billion.6
  • Bilateral trade potential has been estimated to be in the region of US$ 25.2 billion which is ten times larger than the current actual trade figure of US$ 2.5 billion.7
  • Of the top 50 potential export items from Pakistan, India is importing 45 from the rest of the world but not from Pakistan. Similarly, of the top 50 items having export potential from India, only 22 items were on the positive list for Pakistan.8
  • The potential for transfer of technology from India to Pakistan and bilateral cultural exchange for fashion, music and films is enormous. Collaboration in film making is already taking place.
  • India has become a centre for medical treatment and is encouraging “medical tourism”. Recently, four doctors from New Delhi collaborated with doctors in Lahore for liver transplants from live donors to two patients suffering from complete liver failure.
  • There is potential within the region for joint ventures in pharmaceutical, chemical, petrochemicals, automotive, agro-processing, technology-transfer arrangement amongst IT firms and joint gas pipelines projects which can take place within SAFTA if there is trade harmonization.9

Barriers

Certain practical steps are necessary to open up bilateral and regional economic cooperation:

There is an acute need to revisit the visa issuing regime to facilitate easy movement of Indian and Pakistani business people. The problem is not only the speed with which visas are granted but also the type of visas and their tenure. What is needed is a business visa granting multiple entries valid for between two to five years.

  • Studies show that trade flows are often substantially hampered by information costs (e.g. buyers and sellers being unaware of specification and prices). Information exchange through visits, joint industrial fairs and online portals would be helpful.
  • In 2006 joint talks outlined the requirement for efficient rail and road transportation links between the two countries.
  • There is a requirement for a new shipping protocol and deregulation of air services.
  • Rules for enabling expeditious border crossings, opening new border points for trade, spacious loading zones for ease of truck and rail movement and simplified customs clearances are required.
  • Technical barriers to trade should be rationalized and simplified. This includes joint certification of products and materials.
  • Opening of bank branches in both countries. The Governors of the Central Bank of India and of State Bank of Pakistan had signed an agreement for opening of branches by two Indian banks in Pakistan and two Pakistani banks in India in 2005. This agreement has not yet been implemented.
  • Domestic tax, tariff and subsidy policies that distort incentives for production and trade should be substituted in both countries by more neutral policies.
  • Harmonization in legal regulations for investor protection and enforcement of intellectual property rights are also emphasized.

Steps taken by the Global Agenda Council on Pakistan

The Council has undertaken the following initiatives:

  • The Council has worked with the business community in Pakistan to articulate the barriers identified and lobby the Government of Pakistan in this regard. Advocacy from the platform of a Global Agenda Council is more effective as it brings an international and regional dimension to the need to normalize economic relations between India and Pakistan.
  • A dialogue was facilitated between business leaders from India and Pakistan under the aegis of the Global Agenda Council of the World Economic Forum.
  • The Council and the Global Agenda Council on India strongly supported trade and investment activities between the two countries and agreed to undertake advocacy initiatives in their respective jurisdictions.
  • To this end, a joint op-ed has been written for newspapers in India and Pakistan.
  • The Council and The Global Agenda Council on India have agreed to foster relationships through an exchange of students and interns. This will have far reaching effects on normalization of relationships between the two countries.
  • At an individual level the members of the Council have participated in Government trade delegations, most recently during the bilateral visits of the two countries’ Commerce Ministers.
  • Members have also worked on shaping of public opinion in favour of harmonizing trade relations between the two countries through individual articles, interviews and other advocacy initiatives. Reference has been made to co-chair, Dr. Ishrat Hussain’s article presented in March 2011 in this regard.
  • The Council and the Global Agenda Council on India will also undertake research to determine practical measures toward making SAARC and SAFTA more meaningful and promote integration within the South Asian Region.

Impact

While it is difficult to measure impact of only 12 months Council work on an over 60-year relationship between intractable neighbours, certain positive developments took place in 2011 which will help to make the Councils efforts more effective:

  • Pakistan has approved Most Favoured Nation (MFN) status for India and is switching over to a small negative list of non tradable items and discarding the positive list which allowed trade in less than 200 items.
  • The Pakistani Commerce Minister visited India accompanied by Pakistani businessmen and in response the Indian Commerce Minister came to Pakistan accompanied by 120 top Indian business leaders.
  • The Pakistan Business Council, a representative trade body has strongly supported the ongoing dialogue with India and stressed the importance of increasing regional commerce.
  • Supported by a media group in Pakistan, people to people contact using various forums continues.

Next steps

  • The Council and the Global Agenda Council on India have agreed to initiate an exchange student programme.
  • The two Councils have agreed to lobby the Governments in India and Pakistan to address structural issues standing in the way of greater cooperation.
  • The Council will foster information exchange through trade fairs, on line exchange portals and person to person contact, focusing not just on large industry but also on SMEs.
  • The Council will look at setting up specific Trade Councils with other South Asian partners to prepare a practical blueprint to facilitate regional trade.
  • In furtherance of this, the Council will study other Regional Trade Bodies e.g. in Africa, in order to determine an optimal model. This contact can be facilitated through the Global Agenda Council on the Global Trade System.
  • The Council will study in particular how trade ties can be harnessed in favour of marginalized sections of society (youth, women, the poor) to strengthen the process of inclusive growth.

Conclusion

Enhanced trade relations would create a more benign political environment leading to greater regional stability. Friendly, peaceful and irritant–free neighbours would especially aid the larger economies in this region. South Asia as a region has the highest number of people living below the poverty line. Its leaders therefore have a duty to access any opportunity available to improve the economic condition of its people. With greater economic cooperation, the narrative around some of the seemingly intractable political issues will change.

Disclaimer

The opinions expressed here are those of the individual members of the Council and not of the World Economic Forum or any institutions to which they are affiliated.