Indo-Pak Conflict Overshadows Economic Cooperation

Dr. Saroj Bishoyi

Research Associate

 YC- National Center of International Security & Defense Analysis,

University of Pune

CAN trade improve relations between hostile nations? Can economic benefits and cooperation overtake political conflicts? Are better trade relations between two nations possible only after a settlement of all conflicts? According to the Classical Trade Theory, international trade serves to reduce political conflicts.

Trade between two nations accrue gains to both while the loss of existing trade ties, resulting from a political conflict between the two nations, implies a loss of economic benefits. Two countries trading with each other, therefore, make an effort to avoid conflicts in order not to suffer such a loss.

For instance, China and Japan have shown they can have good trade relations despite having differences over important political issues.

In the case of India and Pakistan, the political conflict over Jammu and Kashmir (J&K) seems to be holding free trade hostage.

Greater economic cooperation could, however, provide mutual economic benefits, such as lower prices for consumers, much-needed revenue for the governments, and cost-effective gas import to India via Pakistan.

Indo-Pakistan relations are grounded in the historical, geographic, demographic and economic links between India and Pakistan, two of the largest and fastest-developing countries in South Asia.

The two countries share much of their common geographic location, and religion (most notably Sikhism, Hinduism, Islam, and Buddhism), yet diplomatic relations between the two are defined by numerous military conflicts and territorial disputes.

Peace talks with Pakistan reached at the lowest point in their five-year history after a spate of bombings at the country’s embassy in Kabul and the Mumbai blasts. The blasts had “affected the future” of negotiations between the nuclear-armed neighbors.

While the Kabul and the 26/11 Mumbai attacks have been the main reason for the diplomatic downturn in the peace process, however, Indian concerns over its relations with Pakistan have predated the deadly bombings. Several times, India has conveyed its concerns over ceasefire violations on the LoC, and the sudden and quite public resurgence of banned militant groups in Pakistan to the new government in Islamabad through diplomatic channels. They were also communicated at the political level to Islamabad.

At present, two problems confront the peace process that makes the coming months a very crucial period for India-Pakistan relations: a weak government in Pakistan that is unable to assert its political will for peace with India over the “establishment”.

The newly elected Indian officials who have started interacting with the government in Pakistan too say the main worry now is that the set-up is too weak and unstable to give any assurances that it can rein in “the elements” which have been chipping away at the peace process, whether it is on the LoC, the attack in Kabul or Mumbai.

Therefore, these recent developments have further raised questions about the ongoing peace process between the two countries and the prospects of their bilateral economic cooperation.

Even though India and Pakistan are currently entangled in political and economic deadlock, the Associated Chambers of Commerce and Industry of India (ASSOCHAM) has recently suggested measures, i.e. increasing bilateral trade in the fields of banking, freight transport and goods like tea and rice, promoting people-to-people contact and raising businessmen’s stake, etc to achieve the target of Indo-Pak two-way trade to $9 billion in the next few years.

Their trade, as per current estimates, has touched around $2 billion and its potential will grow manifold as their interdependence on the economic and trade-related issues leapfrogs in future, thereby burying deep down Indo-Pak political differences, says ASSOCHAM president Sajjan Jindal.

The Indian Council of Research on International Economic Relations (ICRIER), New Delhi, in its recent study also said that India and Pakistan have a trade potential of Rs 46,098 crore, but the two neighbours need to take proactive measures to exploit untapped areas of economic cooperation.

Once the two countries’ leaders decide to start a political dialogue, however, expanding trade could become a useful adjunct to the political process, instead of being hamstrung by it.

With an improved security and political environment and a resolution of the long-standing Kashmir conflict, citizens of both countries would be able to reap a large peace dividend.

It would come not only through more trade in goods and services, but also from joint ventures and investments in each other’s country, improved coordination of economic and financial policies and from financing investments in human capital and economic infrastructure by releasing budget resources that are now committed to defence and security.

Both countries, therefore, need to make an effort to avoid conflicts in order not to suffer such a welfare loss. The development of trade relations between India and Pakistan will serve to resolve their political conflicts.

It is strategically more prudent for the two leading states of South Asia to move forward to take advantage of the opportunities and take on the challenges.

The Tribune, Online Edition, 12/June/2009