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TRADE, PEACE AND DEMOCRACY IN SOUTH ASIA
GAUTHAM ADHIKARI
Asian Center for Democratic Governance
INTRODUCTION
South Asia is one of the few remaining parts of the world where the region’s nations do not have a mutual “free trade” arrangement. Nor are they separately members of other free trade agreements of the world,
except the World Trade Organization (WTO). This situation could lead to increasing trade difficulties for many of the region’s countries and cause increasing economic isolation in a world already carved up into so
many competing free trade areas. But, more importantly, the absence of open and free trade robs the region of a useful plank for stabilizing relations among nations. Freer trade among the region’s economies can help
create promising conditions for sustainable peace and stability.
The late President Zia-ur Rahman of Bangladesh first proposed the idea of South Asian regional cooperation in 1978 and the first summit of
South Asian heads of government took place in Dhaka in December 1985. Fostering stronger economic linkages among the participating nations was an expressed goal of the summit. Seventeen years down the road, the
South Asian Association for Regional Cooperation (SAARC) has yet to forge a comprehensive agreement for free trade among member states even though bilateral commercial agreements between some member countries have
been working reasonably well. The main hurdle in the way of creating a region-wide trade agreement is the same one that holds up prospects of SAARC’s success in a number of other areas, i.e., the India-Pakistan
relationship of mutual suspicion and hostility.
SAARC AND SAPTA
During the past decade and a half, India’s trade with other members of SAARC has grown by leaps and bounds. This has been possible not
only because of the many bilateral trade agreements forged among the region’s nations; SAARC too has adopted some measures of help liberalize trade. Following recommendations of SAARC’s Committee on Economic
Cooperation, members signed an agreement on April 11, 1993, for the creation of a South Asia Preferential Trading Arrangement (SAPTA), which would aim to achieve liberalized trade and economic cooperation by
initially reducing customs tariffs and then gradually removing all non-tariff barriers within the region. SAPTA’s goal would be to convert itself into a South Asia Free Trade Area (SAFTA) by the year 2000, if
possible, but no later than 2005.
Progress was made in various rounds of SAPTA negotiations. Members had agreed progressively on tariff concessions on over 2,000 items by the end of the first two rounds. They
also decided to establish an arbitration board for the settlement of trade disputes, took steps to streamline customs procedures, began to hold workshops for standardizing manufacturing specifications of export
goods, evolved agreements on avoidance of double taxation, began to hold regular trade fairs, and so on.
But SAPTA cannot be fully credited for such measures. Many of these steps — the lowering of tariff
barriers to cite an important one — were taken anyway because of the membership of South Asian nations in the WTO. In countries like India and Pakistan earlier programs of general trade liberalization as part of a
broader effort at economic reform were already being implemented by the time SAPTA began operating. Bilateral trade agreements between member nations also predate SAPTA by several years and a few of these agreements
— such as the trade and transit treaty between Nepal and India — come close to the spirit of free trade agreements by allowing unrestricted or minimally regulated movements of goods, currency and people.
BARRIERS TO FREE TRADE
The toughest barrier, however, to setting up a free trade area in South Asia is the psychological gulf between India and Pakistan. Bureaucrats and politicians on both sides are hesitant
to take any steps that look like a concession to the other side, though the reluctance appears to be far higher in Islamabad than in New Delhi, for reasons we shall presently discuss. There are enough indications
that business groups and the middle classes on both sides of the border would like to bypass the standoff in order to develop open commercial relations. But official Islamabad and, to a lesser extent, official New
Delhi, have to overcome time hardened attitudes that are governed more by conventional strategic considerations and an overriding concern to save face than by economic logic.
A wide disparity exists, however,
between official attitudes and commercial reality.
Investigations by think tanks on both sides, and by the press and chambers of commerce — notably the Punjab Haryana and Delhi Chamber of Commerce and Industry — reveal a volume of trade far in excess of the official total of a couple of hundred million dollars, probably five or six times as much. Research by Aurangzeb Khan of the Islamabad-based Institute of Strategic Studies shows that trade between India and Pakistan takes place through three unofficial channels. One is across the border through smuggling; a second is on the high seas, where goods are clandestinely transferred from ship to ship; and third, through other countries, such as Singapore and some Gulf states. Both governments lose a substantial amount of revenue because this trade bypasses official channels.
Increased official trade between India and Pakistan would make sound business sense. In the words of Pakistani industrialist S.M. Inam, founding president of the SAARC Chamber of Commerce and Industry:
“Transport costs would be reduced because of the short distances. Quick deliveries would lead to small inventories and less damage to goods in transit. Besides, there are advantages of having no language problem
between the two countries and familiarity with each other’s trade practices, fashions and trends.”
But if trade volumes jump and economic ties expand with the still doubtful establishment of a free trade area
in South Asia in 2005, would that directly improve the overall security situation on the subcontinent? A simple answer would be: Not necessarily. There have been enough instances in history of trading partners going
to war, as Britain and Germany did in the 20th century. Nevertheless, in the South Asian context a cautiously positive answer to the question might be appropriate, for at least three reasons.
First, while
trade is not a sufficient condition for hostilities to cease, in the case of India and Pakistan — which have barely experienced non-confrontational periods in their half a century of existence as independent nations
— significantly expanded economic ties would be a necessary condition for better interaction between their peoples, who might then develop a growing stake in peace and try to avoid sudden disruptions of normality.
Second, the current fulcrum of India-Pakistan relations — the status of Jammu & Kashmir — might be possible to replace by a focus on trade interests and expanding business deals. Over time, it is
conceivable that with Kashmir becoming less central in the India-Pakistan equation, it might actually become more amenable to a negotiated settlement. This, however, is precisely what is feared by the ruling elites
of Islamabad, especially the military, which sees any effort to take the focus away from Kashmir to be an Indian ploy.
Third, SAARC’s announced goal is to establish a free trade area spanning the subcontinent
by 2005, and that would free a lot of exchange and movement along with trade. It would involve the more or less unhindered access of each economy to the manufactured and agricultural goods as well as services of the
others, it would mean people moving freely across more flexible national boundaries, it would mean freely convertible currencies within the region, and it would mean greatly enhanced cultural cross-flows given the
shared cultural history of the countries of South Asia.
But, of course, there are major hurdles on the way to such ambitions being realized and none of them can be easily surmounted.
One is the
asymmetry in the sizes of the various economies within SAARC. India looms large in economic and financial strength over the region, with an economy that in 2015 is slated to become the world’s fourth largest in
purchasing power terms. Pakistan is not the only anxious nation in South Asia on account of this. References to the success of the North American Free Trade Area (NAFTA), where the US economy is even more dominant
over its partners in relative terms, would not easily ameliorate those fears.
Another area of asymmetry exists in living conditions and the relative availability of economic opportunities among the member
nations of SAARC. If unrestricted movement of people became a reality in the region, what is today’s vexing illegal migration issue could explode into a crisis, with consequences for inter-ethnic relations.
Migrations into India from Bangladesh and Nepal, and from Nepal into Bhutan, are cases in point.
Crucial, however, to the success of any attempt at creating a free trade zone in South Asia would be finding
ways to replace the India-Pakistan political and military confrontation with expanding economic ties that would generate interests on both sides in stability and develop a stake for peace. That will be difficult to
achieve unless a way can be found to persuade Pakistan’s military to return to the barracks and make way for democracy.
The biggest obstacle to significantly expanded economic ties between Pakistan and India
may be Pakistan’s military establishment. There are Indian bureaucrats, as well as fringe political groups and hard line politicians, who might not like closer trade relations between these traditional antagonists,
but India’s political and bureaucratic elite is ultimately answerable to the democratic process and to the popular pressures it generates.
Business interests on both sides of the border are keen to trade and
the fewer barriers there are to making that possible, the better it is for them. Indians in recent years have come to appreciate this reality and, despite some lingering bureaucratic reluctance, are amenable to
going ahead with expanded and liberalized economic ties with Pakistan. The Lahore peace process of 1999, had it been allowed to continue, might indeed have led to such an outcome. At the time, the ruling Indian
coalition was sensitive to the interests of traders and businessmen while Pakistan had a prime minister who came from a business background. Both sides, for all too brief a moment, seemed prepared to look
comprehensively at bilateral relations instead of hinging everything on the Kashmir issue. But that was clearly not to the liking of the real power brokers in Pakistan, its military.
Pakistan’s army is a
strong, professional institution, one that still enjoys wide respect in the country. It, however, sees itself as so critical to Pakistan’s stability, both domestic and external, that it has, over the decades,
developed a political and economic stake in leading the nation’s power structure, whether it is in visible power or not. It has steadily consolidated its position in society and its institutional presence affects
almost all aspects of public life. While its obvious strength is an asset for Pakistan, its self-perceived indispensability has become a serious impediment to the nurturing and sustainability of a sound civil
institutional structure in Pakistan.
In the field of external relations, the military not only has a say in security policy, it also plays the leading role in making foreign policy, with the ministry of
foreign affairs playing a secondary role. It sees external economic relations also through the security lens as well as in terms of its own power interests. Defense expenditure, including military pensions, accounts
for 38 percent of the annual budget, one of the highest in the world. Added to the burden on the budget created by debt servicing, the cost of keeping the military well funded severely restricts the federal
government’s ability to shift resources away from defense to under funded social sectors. And the army has developed some key economic interests making it, by some estimates, the largest industrial concern in the
country. Retired military personnel occupy senior positions in government and, according to one recent calculation, retired senior officers — the rank of brigadier general onwards — hold 76 important public
positions under the present military regime. This is to say nothing of other, unofficial channels of income and access that come with power.
Given its situation, the army necessarily has to cite various
security threats, domestic and external, which would continue to justify its central role in directing public policy. The relationship with India, if broadened too far to include burgeoning trade and economic ties
that have the potential of diverting the focus away from the central issue of Kashmir, might become less immediately threatening for Pakistan’s security than it is today and therefore would not be in the military’s
interest in remaining the center of power.
CONCLUSION
Closer, liberalized economic ties between India and Pakistan, therefore, are unlikely to develop unless Pakistan’s military steps down in
Islamabad. A civilian regime would be better positioned to pursue external economic policymaking, especially with India. A return to democracy in Pakistan, therefore, would seem to be a prerequisite for the future
development of trade and economic ties between India and Pakistan, without which any prospect for creating a free trade area in the South Asian region would remain bleak.
BIOGRAPHY:
Gautam
Adhikari, is a Senior Consultant at the Asian Center for Democratic Governance, a partnership between the National Endowment for Democracy in Washington DC, and the Confederation of Indian Industry in New Delhi,
India. Mr. Adhikari participates in regional workshops as well as larger international conferences on leading themes related to the development and strengthening of democracy in market economies. The conferences are
designed to introduce participants to the latest thinking on the subject through panel presentations by leading scholars and practitioners from India and the region’s other democracies, both new and established.
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