Look out for the neighbourhood changes By Shahid Javed Burki

NOW that Pakistan has a new economic team in place – a new finance minister and a new deputy chairman of the Planning Commission – this may be a good time to rethink the way the country should be planning for its future. In doing so it should look at the changing world outside its borders, in particular at the opportunities that are being created in the country’s immediate neighbourhood.

For decades, economic policymaking was focused on domestic issues. The world outside was never factored in to the strategy for development. This has to change in light of the significant developments that are taking place in the structures of the global production and trading systems. There are also important changes in the world of finance.

For a country that remains dependent on external flows in order not only to pay for investment but also to help it meet its external obligations, the restructuring of global finance must be fully understood. In the article in this space last week, I took a look at the emergence of sovereign funds as an important source of finance for the capital-short countries of the world, both developed and developing. The subject today is the development in Pakistan’s immediate neighbourhood. All the countries that share borders with Pakistan are experiencing enormous changes that could have a bearing on the future of its economy. These should be noted by our policymakers, in particular those who now have responsibility for finance and planning. Afghanistan, Iran, India and China are all going though changes, some positive and some negative. All of them matter for Pakistan.

Given its high rate of economic growth and industrial expansion, China’s appetite for natural resources – particularly energy and material – is practically insatiable. It is making massive investments in places such as Afghanistan and the Middle East to import the materials it needs. Some of this could be transported through trade corridors that connect China through Pakistan with these sources of supply

India also has natural resources and consumer goods to export to Pakistan, Afghanistan and points beyond. Those destined for Afghanistan and Central Asia could be transported through Pakistan. Gas from Iran and the Middle East is needed by both China and India, two giant economies that are short of energy. This could flow through Pakistan from the several points of origin to several points of consumption. Pakistan, in other words, could become a major artery of commerce for the fast developing and rapidly changing areas around its many borders.

For that to happen, a major change will be required in Pakistan’s position with respect to the use of its territory for the purpose of transit. Whenever I have discussed this possibility with the senior leaders of Pakistan, I have been told that security and geo-political considerations exclude the possibility of giving transit rights to India for trade with the countries it cannot reach via land.

That is a mistake for several reasons. The first is simply a cost-benefit issue. Before taking such a firm position, Pakistan should carefully study the benefits that would accrue to the economy if India was allowed to use the country’s territory for trade. Once an estimate is available – say the benefit to the Pakistani economy is equivalent to one per cent of the country’s gross domestic product every year – then Islamabad would know what it is sacrificing in terms of potential growth by not granting transit rights to India through its territory.

What kind of benefits Pakistan could expect from the use by India of its territory for international commerce? To begin with it will increase the use of the motorway system that Pakistan has constructed at a great cost to the economy. The system is underused. By charging Indian trucks and buses significant transit fees, the country would not only recoup some of the investments it has made. It will also be able to generate the revenues for expanding the system.

The current system links Lahore with Peshawar with a world-class motorway. This could be extended east to the border with China, northwest to the border with Iran and west to Karachi and Gwadar to provide Afghanistan, China and India access to the resources of the Middle East and the region’s rapidly developing markets.

Pakistan also needs to rethink its international trade strategy. The focus has always been on market access to the world’s developed countries – the United States and the European Union. And when Islamabad talks about market access the reference is to the export of textiles. Both elements of this trade strategy are misplaced. Even though textiles are the largest component of Pakistan’s industrial sector and provide employment to a significant proportion of the workforce engaged in manufacturing, this is not where the future is if the country wishes to build a strong and dynamic economy.

The country has to focus on the development of industries that have a rapidly increasing demand in the global market place, where a large number of new workers can find employment, where Pakistan can accommodate its youth in well paying jobs, and where there are important forward and backward linkages. These objectives won’t be easily realised in the sector of textiles.

Our planners have to concentrate their attention on the development of modern services – the IT and communication sector, the sectors of health and education, the activities related to sports and culture – which could provide employment for millions of skilled and well trained workers. A simple calculation tells us that employing an additional one million people in the IT sector alone can provide additional exports worth $20 billion a year.

The other important adjustment that needs to be made is to find markets closer at home than search for them in the places that are very distant from Pakistan. The gravity model of trade tells us that destinations of exports should be largely the countries in the neighbourhood. Pakistan is uniquely placed in this respect. It has as its immediate neighbours two countries that are the world’s most rapidly growing economies and have rapidly expanding markets. Both China and India should be the preferred destinations of the export industry in Pakistan rather than the United States and the European Union.

This brings me back to the need for aggressively developing trade and economic relations with India. I am aware of the fact that there are important constituencies in India that are against developing close relations with Pakistan. The same is true for Pakistan. Serving these two groups is not in the larger interest of both India and Pakistan.

At the “Aman ki Asha” conference held in New Delhi in May this year at which I was one of the keynote speakers, I was asked why Pakistan had not granted the “most favoured nation” status to India which it is required to do under the WTO. My answer was simple and honest. I said that the reason why that had not happened was once given to me by former President Pervez Musharraf. When I pressed him on that issue by saying that it was in Pakistan’s own interest to extend the MFN status to India, he said that the problem was that the term “most favoured nation” did not translate well in Urdu.

The conservative Urdu press would play up the issue that Pakistan had declared India to be the “nahaet pasandeeda mulk.” That would be hard for his government. The United States was once faced with the same quandary with respect to its trade relations with China. It dropped the term MFN in favour of trade promotion activity. Pakistan could do something similar.

The main conclusion that we should draw from this analysis is that a serious reconsideration of our economic strategy is required to factor in the opportunities available in the country’s immediate neighbourhood.

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/look-out-for-the-neighbourhood-changes-160