THE ATLANTIC COUNCIL OF THE UNITED STATES
INDIA-PAKISTAN TRADE: A ROADMAP FOR ENHANCING ECONOMIC RELATIONS
WELCOME AND MODERATOR:
DIRECTOR, SOUTH ASIA CENTER
THE ATLANTIC COUNCIL
MOHSIN S. KHAN,
PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS
SCHOOL OF INTERNATIONAL SERVICE,
THURSDAY, JULY 29, 2010
Federal News Service
SHUJA NAWAZ: Good morning, ladies and gentlemen. I am Shuja Nawaz. I am the director of the South Asia Center at the Atlantic Council and I am delighted to see a number of familiar faces. I am sorry that apparently there are some traffic problems that prevented people from getting into the city, particularly from Virginia if they were taking 95. So some of our other guests who were supposed to be here will probably trickle in. But I thought we shouldn’t wait any longer.
The topic today is very close to our hearts at the South Asia Center. We are committed to what we call waging peace in the region. And one of the key elements of waging peace in our mind is opening trade and economic relations between countries in the region and then from the region outwards. And so I am delighted today that we have Mohsin Khan who is a senior fellow at the Peterson Institute for International Economics. Mohsin, of course, has made a name for himself in international economics having been at the International Monetary Fund for well over 30 years. And I had the pleasure of working under Mohsin at the IMF Institute. And not only is he a great economist, but a great manager and a friend. So I am delighted to welcome him to the South Asia Center.
And Surjit Mansingh who, of course, is very familiar to people in the Washington area. She is now, of course, involved with teaching at American University, but has a stellar career in the foreign service and as a scholar. And I thought it would be useful to get an economist and a political scientist together and see if they can agree on what needs to be done and how it needs to be done.
On the subject of trade, a lot has been said and written. Not a lot has been done between India and Pakistan. There is speculation that the current trade levels – the official trade levels are surpassed by the informal, the back-channel trade that occurs via Singapore and via Dubai. I don’t know if all the data are accurate, but there are various estimates. And there have also been some estimates thrown out about the possibility of raising per capita GDP on both sides of the border if trade were to reach the levels that it should normally attain.
But let me not take time away from Mohsin’s presentation. He is going to share his research and his ideas with us. So Mohsin, please.
MOHSIN S. KHAN: Thank you very much, Shuja. And thank you for inviting me to speak. I actually just wanted to mention – I mean, this is some work that has been going on for well, close on over a year now. And I thought I would give you a brief outline of what we have – what I have been working on. And the issue really arose from the fact that, you know, I got interested in the India-Pakistan trade business when I looked at some of the numbers of some of the data that was coming out of the two countries.
So I decided to look into this a little more deeply and what I was struck by – and I think this is much more sort of a political issue. What I was struck by was that everyone that you talk to in Pakistan certainly and in India says, you know, steps toward better economic relations are very important and trade is one way of doing it. But I should mention whenever you come down to actually doing anything, you get hit with this race to solving all the issues, the grand bargain. Unless you can have a grand bargain between the two countries, nothing is going to get done.
So I am not going to address the grand bargain at all. That is really not my area and not my intention here. What I am going to try and argue in this presentation is that, you know, you can take small steps, even baby steps to improve relations without having to race to solve the problem of Kashmir or the Indus Waters or anything like that. And because from an economic standpoint, that seems to me just a no-brainer. Why can’t you do this?
So I am basically going to argue in this paper and that steps can be taken and they are feasible. And they don’t involve a lot of political fallout, if you like, in them. Can I move this (light ?)? So I think the premise, as you see, I mean, you know, basically, I am going to push the line that you can get better economic relations. Now, there was a meeting between – in April of 2005, between then-President Musharraf and Prime Minister Manmohan Singh. And that meeting was very interesting. It generated considerable optimism on both sides of the border. And the leaders actually discussed a number of trade-related issues, which I went into and looked at very carefully.
And they actually did make several key decisions. They came to agreement on how to move the process along in small, but still very meaningful steps on the trade front. But unfortunately, five years later, we are here and implementation is slow, if at all, if not completely stalled. And many obstacles still exist. Basically, here we get into the politics between the two countries that intervenes to slow down the process or stop it in total even though the leaders had agreed at that point.
So I think that they may be – I mean, relatively new governments in both countries, maybe there are opportunities to restart this process again. And that is really my point. What should be done and what can be done in a feasible way? I am not going to say that – I am not that politically naive to say that, you know, you can do a huge amount of things. I am just going to argue, as you will see, some very small steps that can be taken to improve trade relations between the two countries.
First of all, I would start – I mean, the structure of the paper that I have is basically it looks very carefully at what the potential for bilateral trade is. And there, as international economists, we tend to use what are called gravity models to see what is the trade potential between two countries, particularly countries that are neighbors. And so I estimate the trade potential between the two countries.
And then secondly, go into a strategy or if you like, strategy is too big a word, a roadmap for reducing barriers to trade that consist of two phases. One short term, up to one year. You can do these things in a year. And then, of course, there are longer-term issues that need to be resolved on the trade front. And I would call them medium term or, say, one to five years or something like that.
Now, for what it is worth, both countries are members of the South Asian Free Trade Agreement. They are both signatories. And trade therefore between them should be completely free. But trade is really unnaturally small. I mean, it is really striking how small trade is between the two countries. I mean, for example, in 2008, bilateral trade flows between the two countries were a little more than $2 billion. Now, they are up – they were up from – in 2000, for example, they were only $500 million. This is official trade between the two countries. In 2009, in the wake of the Mumbai attack, again, trade fell to about $1 billion between the two countries.
Pakistan right now accounts for half a percent of India’s trade. India, on the other hand, accounts for a little over 1 percent of Pakistan’s trade. These are countries, they are two relatively big countries with a common border. And yet this is the sort of situation in official trade. Contrast this with what was happening just after independence of the two countries in 1947. At that point in 1947-48, 70 percent of Pakistan’s trade was with India. And 63 percent of Indian exports went to Pakistan. So there has been a huge decline since those days.
I am not suggesting that, you know, you go back to that world where there were reasons for the trade that took place then or the volume of trade that took place then. But you certainly move up from this unnaturally small number.
Now, that is certainly only on the face of it. I should have mentioned there is a lot of informal trade going on via Dubai particularly. The estimates there are about $2 billion. But they could be higher via Singapore and so on. And then, of course, we are not counting smuggling that takes place particularly in agricultural products across the border. We don’t have any estimates for that. But even so, even if you add the 2 billion that we know comes via Dubai, it really is still a very small thing.
And, of course, transport costs are very high when you go via Dubai. If you want to buy a bicycle in Lahore, you can get an Indian bicycle in Lahore. The only problem is that Indian bicycle made in Amritsar actually has to go to Dubai physically and then come back to Pakistan to Lahore. Really a roundabout way of doing this and therefore the cost increases very dramatically, transport cost.
So now, there have been a number of studies using gravity models to assess the effects of the South Asian Preferential Trade Agreement, which preceded the South Asian Free Trade Agreement. And based on these studies, it turns out that for trade between India and Pakistan, you actually calculate from these models, you calculate what is the potential trade given the common variables, common border, distance and variables such as common language, which exists, of course. What will the trade be?
And it turns out that the estimates are somewhere in the region of that trade should be something like 25 percent – sorry – 25 times or even 50 times higher than it is now. And so you can have – there is this – from a potential point of view, the potential for trade between the two countries is huge. The PIIE model is a Peterson Institute of International Economics model, which I used in order to generate new numbers for this. And it is very similar to other models. And it shows that for the ’76 – the 1976-2005 period, the coefficients that one normally thinks of in this model and one normally thinks of in gravity models, as I said, common border, common language, common colonizer. All these are sort of standard variables that people use and this model uses that as well.
And it turns out that one can then use these numbers, these results of this model, which I won’t go into because this is not time to do that. But using the parameter estimates and the numbers generated by these models, you can then move to actually calculating potential trade between the two countries.
And what I do is actually calculate the actual-to-potential trade ratios between the two countries based on this model. And basically, you then compare that – you compare potential ratio – it is the actual to potential. And so if the actual to potential is greater than one because it is a ratio, it a greater-than unity, it implies that observed trade exceeds the gravity model, its predictions. And if it is less than one, it shows that, you know, the observed trade falls below the model’s predictions.
So look at the numbers there. Basically, actual-to-potential trade, Indian exports to Pakistan, they range between .02 percent and .05 percent – .02 and .05, so that is 2 percent, 5 percent. So you can see that if you wanted to get to 100, which is what you want – 100 or ratio one would mean that actual is equal to potential. That is giving you something like 25 to 50 times – 20 to 50 times the trade. Pakistani exports similarly – I mean, it could be – they could rise hundredfold in order to get to one.
So on average, basically, I would come down to saying that if you use all the estimates that roughly speaking, trade could be 20 times higher for these two countries than it is now. So if you took the 2008 level of trade, that would mean trade should be – between the two countries should be 42 billion, not 2 billion. So that is essentially the numbers I start off with, that that is the potential of trade.
Now, what is keeping trade from getting there? So I look at the constraints that exist on – and I will come to that. There are both two types of constraints that operate in both countries. One is tariffs, basically, standard form of trade barrier. But the other and far more important are non-tariff barriers that put a constraint on trade between the two countries. What I start off with, as I have said, short-term measures. These can – I mean, I don’t want to call them confidence-building measures because everyone talks about that and they don’t – nothing has happened on that front. But basically, to build support, both public and political support for trade liberalization, in the short term, I would argue that you can focus on bilateral measures that is between the countries so you don’t have to go to the WTO and get multilateral agreements, SAFTA-type agreements. You can go bilaterally.
And many of these – and, in fact, most of the short-term measures I am going to propose here can be done by executive order. They don’t require new legislation at all in either of the two countries. Now, then you can move, you know, into medium-term measures, which are more difficult admittedly. And some of those will require parliamentary approval in the two countries. At the moment, it is difficult to see whether that support will come. But my argument is that if you get started on the short-term measures, that in itself – I will conclude that point – that in itself can build the momentum for the medium-term measures because what I am going to argue is that you have to build constituencies in the two countries that support this.
There are constituencies interestingly that do support this idea of more trade between the two countries. But I think you have to create vested interest that really push this forward. So what are these measures that we could start with? Essentially, now, most of these measures that I have listed up there were agreed to in 2005, Musharraf-Manmohan Singh meeting. But the agreements were limited in scope and, as I said, not implemented, not fully implemented, at least.
I think the issues are really well-known on both sides in both India and Pakistan and have been discussed at length or ad nauseam between the two countries – between the two countries and within the two countries. And I believe that the countries could and should be able to move ahead rapidly on expanding and implementing these measures. If you think about it, I mean, as trade economists would call it, these are measures that are not trade policy, the short-term measures. These are trade facilitation. They sort of involve the infrastructure for trade.
Now, what are they? I mean, for example, very simple one, easing visa restrictions and business travel restrictions, issuing businessmen multiple entry visas, issuing non-reporting visas or in both countries, they have this also specific city visas whereby as a Pakistani, you can get a visa to go to a city. And if you need to go to another city – businessmen often do – you require police approval and you have to – generally you report to the police when you arrive there. This same thing happens across the border in Pakistan as well.
So I would say that, you know, ease visa restrictions. You do not require legislation for that. Eliminate city-specific visas and, perhaps, police reporting. Then there is facilitating sea shipments. Right now the situation between the two countries on sea shipments, I mean, is very simple. In order for – in order for you to ship goods on sea, both countries have a third country – third-party port requirement. In other words, if you want to go from Mumbai to Karachi, ship something there, it has to go via somewhere else. It cannot go – there is no direct – it is a non-tariff barrier and it just increases the cost of doing business.
I would say then you can move to, you know, increase rail traffic, you know, coordination of rail authorities. There is an interesting thing, which I learned. I mean, there are a lot of things I learned looking into these measures. I mean, bureaucrats on both sides of the border are sitting there busily designing these restrictions. It is very interesting to see some of these. There is an interesting restriction on rail traffic, which admittedly I didn’t know about. That is yes, because of the Musharraf-Singh meeting, there is an agreement that, you know, you can ship goods via train, through rail to the other country.
But the put a restriction on that says the wagons must return empty, you know. So basically, you can’t – if somebody goes from, let’s say, Amritsar to Lahore, you ship your goods there. In fact, the train or the wagons on the rail have to return empty. They cannot bring back goods. Again, I mean, the agreement at the political level was that you can have this. I suspect that then the bureaucrats who came in and wanted to restrict that and narrow the scope of that put in this requirement.
The opening of additional border crossings and bus routes, you know, I think that the road crossings and road traffic. Right now there are interesting restrictions on road traffic. For example, in the Srinagar-Muzaffarabad route, you know, basically, the bus routes, the famous bus traffic that took place between the two countries, the agreement on that, bus routes. It is restricted to relatives of the people on the other side. So, you know, if you are not a relative, you can’t take a bus. It is only sort of once a week. You can increase the – but that is not the main issue. Road crossing – I came across a very interesting example of restriction on road crossing. This is the famous – the Wagah border, the Attari border crossing.
What happens in – and that is a border crossing where there is a lot of truck traffic going. The only problem is that at 2 o’clock every afternoon, the border closes down in order to prepare for the retreat ceremony that takes place on both sides of the border. Both sort of border police engage in this very ceremonial lowering of the flag. But at 2 o’clock in the afternoon, I mean, the retreat is at sundown. But nevertheless, so why not create another road? I mean, it is very easy to do.
So I think that these are, again, what is the restriction on that? Well, I think that the restriction on that is basically somebody, again, coming in and saying, you know, how do we restrict the traffic, I mean, restrict the sort of movement of goods that we put in this – (inaudible). Businessmen on both sides of the border hate this thing of having this sort of restriction put on just arbitrarily, even though there is supposed to be free flow of trucks across the two borders.
The other thing I would argue, which is very easy to do and both sides’ central banks have agreed to this is to allow other countries’ banks to open branches in the other country and to hold accounts in the other country. This is part of the sort of globalization of financial markets and certainly there is no reason for that. So that is the cross-border banking operations.
Air links is also another issue, which is there are no direct air links between the two capitals. There air links, but not between the two capitals. Why is that? There is no ready explanation for this. You know, on security grounds, you ban it all or if you don’t, then, you know, why not allow basically to have direct flights between Islamabad and Delhi? So these are the small, if you like, I even call them baby steps that you can take because the agreement in principle exists. It is the execution and the implementation of these agreements properly that is an issue.
I think that if you move onto then what are the medium-term measures that one could undertake in order to increase trade between the two countries, I think the major issues that come up. India has – and Pakistanis believe high tariffs on goods of particular interest to Pakistan. So they hit textiles, agriculture, leather goods. This is the kind of thing that the Pakistani exporters believe. Indians businessmen, on the other hand, say well, Pakistan – we have granted Pakistan most favored nation, even though those other tariffs are high. We have granted Pakistan most favored nation. Pakistan should reciprocate on that.
I see no reason why Pakistan does not grant MFN status to India and abolish what is called a positive list of goods that you can ship. I think that there is no real reason for that. Pakistan also restricts transit trade and that is a big issue because India wants to export to both Afghanistan and beyond to Central Asia, et cetera. But it has to go via Pakistan. And under WTO rules, Pakistan has to grant India transit rights to ship its goods to those countries, but it doesn’t. I mean, and when it does, it restricts it very sharply.
So I think for the Pakistanis, they can very – I mean, I see no reason why they can’t move to grant India MFN status and eliminate – these are two big issues for the Indian exporters both to Pakistan and beyond. So I think that – so there is, you know, SAFTA calls for tariff rates within the region to come down to zero by 2012. It is not likely that this target will be met, but my view is that the tariff rates are not the major restriction on trade between the two countries. It is the non-tariff barriers that are the major restriction.
And so aside from non-tariff barriers, then you start getting into longer-term issues and medium-term measures like improving infrastructure, expanding roads and modernizing roads, modernizing ports, improving the regulatory framework of the key infrastructure sectors, attracting the private sectors in both countries to participate in infrastructure projects. See, the thing is that both countries stand to gain from joint projects in infrastructure. And the best example of that is energy. Sizable scope exists for joint energy projects including joint energy grids, you know, in the Punjab Haryana area, this is very easy – people have done a lot of work on that and find that that is a very promising area.
There is, of course, the issue of a gas pipeline from Iran to India passing through Pakistan, which is up in the air at the moment. It is very beneficial to India from an economic standpoint, of course. It is very beneficial for Pakistan. Pakistan in order for – apart from getting gas itself, also would stand to gain something close to $1 billion a year in fees – transit fees for the gas going to India. It is in both countries’ interest to – economic interest certainly.
There are potentials – tremendous potentials in my view of business-to-business links in IT. You know, I have talked to some very prominent IT people in India who also believe, you know, that, for example, things like call centers, et cetera, could very easily be established in Pakistan. But right now, even though there is no overt restriction on that, permission has never been granted. It just stays somewhere in some ministry down below. I mean, it has never actually been granted, although the politicians would say that it is not – they have no opposition to it.
You know, you can improve on customs procedures and these are important. I think one of the big steps in my view should be on the area of foreign direct investment where I have looked at fairly carefully and allow other countries – the other countries’ companies to float shares in the other security markets. So, for example, Indian companies floating shares in the Karachi stock market and vice versa. Pakistani companies could float shares in Mumbai stock market. Remove double taxation and, you know, harmonize corporate and individual tax. These are sort of – but these all require legislation, so I am not sort of – I am mindful of the fact that these can be political hot potatoes and take a while to do.
I think that I will basically conclude by saying that again repeating that, you know, there are relatively new governments in both countries and there is a potential for improved economic ties. The measures I have outlined, particularly the short-term measures, are really supported by businessmen on both sides of the border. So there is a constituency in both sides of the border that they feel that these are measures that – overall, I think potential for trade, as I mentioned before, is enormous. And you take the most conservative number. It is 20 times.
Now, this could – if this trade were allowed to take place and not restricted, I believe that, you know, it could be an important catalyst for lowering tensions and improving the security climate in both countries for both investment, development in both countries and therefore, in growth and for development – over all economic development of the region. So the trade roadmap seems to me very clear. But, you know, of course, it is going to take political courage on both sides of the border and will on both sides of the border to follow it.
And I think that one of the – what most people who work on India and Pakistan realize – and to me, it was a new realization – is that, you know, politicians and political figures can come to agreements on a lot of things and very important things. But the execution and implementation of these measures is in the hands of the bureaucracies of those two countries. And you have to basically find ways of, if you like, restricting their ability to restrict trade. And that is essentially what they do.
I will give you one final example. There is no actual restriction in the countries on foreign direct investment by the other country. So, for example, if a Pakistani firm wants to set up a factory in India, there is no restriction and vice versa. There is no restriction in Pakistan. And yet, nothing has been done. Every time there has been an application for permission to do this – in fact, they say – the Pakistani side says – I don’t know exactly about the Indian side – the Pakistani view is that there is no restriction and you do not need permission to set up a factory. But believe me, if you did try as an Indian businessman to set up a factory, you would have hurdles that you wouldn’t believe that they can throw up and obstacles that they can throw up against you.
Let me conclude by saying I think that one has to keep pushing. To me, even if you get some success in terms of the short-term measures, which are easy to implement, if you get – you could improve, increase trade by five, 10 times. That in itself would be a big deal for the two countries and then you could move to the medium-term measures. Thank you.
MR. NAWAZ: Thank you, Mohsin. Though I must add that even if you are a Pakistani businessman and you want to set up an enterprise in Pakistan, sometimes you feel that there is some hidden force that is trying to prevent you from doing that. And I am sure the same exists in India with the bureaucracy. But let me ask Surjit if she could give us her comment.
SURJIT MANSINGH: I don’t know why I am wearing this –
MR. NAWAZ: Later on we will be over here.
MS. MANSINGH: Oh, all right. Thank you very much and thank you very much for inviting me. And I have had the great pleasure of listening to Mr. Mohsin Khan and reading his paper also. So I agree with almost everything that he has said, especially about his – with respect to his recommendations for the short term and also the medium term, particularly the implementation of the 2005 agreements between Dr. Manmohan Singh and Gen. Musharraf. I agree totally that they should be implemented. He, of course, didn’t mention some of the reasons why they haven’t been implemented. But I will come to that a little later.
The two things that I would like to emphasize that for the last 20 years or more, those of us who have been interested in improving relations between India and Pakistan have been urging some relaxation of visa restrictions. And under SAARC, visa restrictions have been reduced, almost eliminated for certain categories of people, but not for the ordinary persons. And I think that is going to be very difficult because if you – I am sure both Shuja and Mohsin are aware – or they may not be aware – of the incredible complications for ordinary tourists, for ordinary visitors to India that have been created by the Headley case. I mean, it has become almost impossible now. Indians can’t go and come freely. They start questioning you if you are coming and going too often.
The other thing that I particularly – other two points that I particularly reemphasize that have already been presented. One is the need for improved transport links. Most of these transport links were cut off in 1965. Except for the Srinagar-Muzaffarnagar and the Amritsar-Lahore, they have not been restored. There are many proposals to restore them. Let’s see what happens. And the production of transaction costs. I think when calculating prices, the tariffs are insignificant now in India. They are down to 6 percent. But it is all the other transaction costs on both sides of the border and a very large element of the transaction costs, I understand, consist of bribes. And, of course, if the bulk of the trade between India and Pakistan is informal trade, then you can imagine that the bulk of the transaction costs are also bribes to enable the smuggling or the third (part ?) – et cetera, et cetera.
I have a few things to add. One is that there is a great deal of improvement in the trade, as indeed Mohsin has already pointed out, from 2000, 180 million, to now, 2 billion official bilateral trade. There have been some transport links, which have also been mentioned, which are very important. The other thing I wanted to add was the Punjab-to-Punjab agreements and interactions, which I think are very important.
Now, Indian Punjab is not nearly as important in India as Pakistan Punjab is dominant in Pakistan. But in 2004, Chief Minister Amardiner Singh on the Indian side and Chief Minister Chaudhry Pervaiz Elahi on the Pakistani side got together and initiated a whole series of events that brought – (inaudible) – where the Punjab is a region of itself. I have never lived in the Punjab, although I come from there, but the whole concept of Punjabiyat which is a complex and rich and harmonious concept is something that would be – it would do us all a great deal of good to cultivate it.
They had the World Punjabi Congress, two of them, one in Patiala, one in Lahore. They had the Punjabi games. They had the use of the Punjabi language, which in India is written in Gurmukhi and in Pakistan is written in Shahmukhi. Shahmukhi is a Punjabi language written in the Persian script. And a friend of mine who grew up in Sialkot now in Pakistan has recently published his autobiography, particularly focusing on his early years up to politician. And it was first published in Pakistan in Shahmukhi and only later was published in India in Gurmukhi and was very well-received in Pakistan. In fact, there was a great many, many celebrations.
And I think that the amount of context, we were speaking earlier about prime minister in the Gudrat, who grew up in Jhelum. And I remember because I know him a little. When he was prime minister, the degree of sentimentality and emotion with which he tried to initiate better relations with Pakistan and introduced the idea for the entire SAARC region of non-reciprocal trade concessions on the part of India.
I want to come to the one area in which I do not agree with not with Mohsin said in his presentation, but from the abstract that I initially read in which he seemed to equate India and Pakistan. And I don’t think that that is fair. He himself has mentioned the fact that India gave most favored nation treatment to Pakistan in 1996, which still has not been reciprocated. There is other trade concessions that have been offered by India, not reciprocated, not accepted. The Federation of the Indian Chambers of Commerce and Industry, FICCI, and the Confederation of Indian Industry.
And I remember when I was in Delhi, which I was until just a few years ago, how active the Punjab, Haryana, Delhi chambers of commerce were in pushing the bureaucracy and pushing the politicians to facilitate trade between India and Pakistan. Similarly, in the years ever since the UPA government came in since 2004, with Prime Minister Manmohan Singh, the government of India has been really very actively trying to liberalize the economy further.
In the 2008, 2010 economic survey, excise duties have been reduced. Duty-free – the list of duty-free items has been greatly expanded to include all those elements that as Mohsin has pointed out are of most interest to Pakistan, leather, food, garments, sports goods and so on. And the general tariffs in India have fallen to 6 percent.
The other great difference, of course, between India and Pakistan is that there is no institution in India comparable to the Pakistan army that owns the country and that appears anyhow – gives a very strong impression of having a vested interest in preventing normalization.
I would end by giving my impression of the key difference. In India at the present time, especially with Dr. Manmohan Singh as prime minister, the government is ahead of certain sections of the Indian public. Because of the Mumbai terrorist attacks and the seeming lack of pursuing this in Pakistan, the government of India has been very severely chastised and criticized for going ahead with bilateral talks, for being patient and apparently generous.
And the impression that I have is that in Pakistan – I mean, I wish sensible people like Shuja and Mohsin were taking decisions in Islamabad. And I know that many people in Pakistan who want a normal trading full relationship with India, but they are not the ones who are taking the decisions. So perhaps the government is still lagging behind one section of public opinion in Pakistan. But I hope – I hope indeed that the various recommendations that Mohsin has made, excellent recommendations, I sincerely hope that both countries will find it possible to implement. Thank you.
MR. NAWAZ: Thank you, Surjit. We are going to open to questions now. And I would request – I would request that when you do ask your question, if you could please wait for the microphone and identify yourself, so that we can have a good transcript available. I am going to forgo my privilege as moderator to ask the first question because I thought I might save my questions until the end and then maybe do a quick roundup. So I am going to go to the front row here first.
Q: Good morning. My name is Tom Trimble. I am with Science Applications International Corporation. And Dr. Khan, perhaps a question for you, but maybe both of you. If it were America and Canada in this situation, I think many of us would believe that there is a Senate subcommittee for the creation of impediments portrayed with Canada operating in the basement of the Capitol. There must be someone embedded in the bureaucracies of both sides who has a vested interest in precluding what would seem to be so obvious, an area to be a bit of a hero.
You would think a bureaucrat on each side or the leader of each of the two countries would see the advantages of actually implementing some of these things that are now permitted and come out all the better for it, both personally and politically, as well as improve the conditions in the country. Is there something there, a black hand that just doesn’t let that happen?
MR. KHAN: Well, I don’t think there is a black hand. You know, I think that the issue certainly on the Pakistani side of the border is that, as I mentioned – I mean, there is no – there is only political costs from being, you know, at least in the government, political costs from being seen as too friendly with India. There is no gain in that. And I think that bureaucrats are certainly risk averse in this. And I think there may be some truth to what you are saying about the army in this.
But it is very difficult to say who actually is – is there a sort of conspiracy of any kind or some kind of group that is preventing this from happening. I don’t think that is the case. It is just a general tendency on both sides of the border. I mean, they look at the, you know, the way the political winds are blowing. And if they are blowing, you know, towards more – blowing favorably towards improved relations, then they will ease up on their restrictions. But if they are not, then basically they don’t.
But I think that there is – certainly on the Pakistani side of the border in the ministry of trade. They keep coming out with very grandiose sort of ways of improving trade between the two countries. But it never gets past – into the implementation stage, I think, whether it is in cabinet or is it in the bureaucracy somewhere.
So the short answer to your question – I have gone about it in a roundabout way – is that I don’t think there is any one place you can point a finger at and say look, if I take care of that, of a particular group, then we should be all right.
Q: Thank you.
MR. NAWAZ: Do you want to add to that?
MS. MANSINGH: I would like to add to that is that if you look at any aspect of the Indian economy, you find a dreadful lag between policy enunciation and implementation. For the last six years, the government of India’s first priority has been investment and infrastructure. Now, there are some people who say that many of these roads have been dramatically improved, et cetera. But I think the trading community still complains bitterly and with full justice with the great inadequacies of the transport system.
The second – I agree entirely with Dr. Khan that there is no single black hand. It is a lot of individual obstructions. And unfortunately in India, most unfortunately in the last few years, especially since the Mumbai attacks, security has become a big consideration as, indeed, you know, I have lived in Washington before and I live here now. And it is quite appalling, the heavy hand of the security considerations. So you are speaking about these railway wagons on the trains going between Amritsar and Lahore and then the stuff coming from Lahore to Amritsar.
Pakistani traders have complained that the Indians’ demand that molasses that Pakistan exports to India should be packed not in the containers they use for everybody else, but they should be packed in wooden barrels. The answer given by the Indians is that this is for security reasons. Now, I suppose they imagine Ali Baba and the 40 thieves in the containers. (Chuckles.) But all of these petty little things and we have seen particularly on the India-Bangladesh border, the India-Pakistan border is so heavily fenced now with so few transit points that I think the opportunities for the kind of thing that occurs in the East are less.
But the harassment of ordinary people, not people like us perhaps, but the ordinary people who are coming and going, much of the trade between Pakistan and India is in live animals and in agricultural products. And you can imagine the potential for harassment and extortion that exists on both sides. And I think if you are talking about black hands, it is this corruption at the lowest levels, not the grand corruption we know about in this country or Europe or Japan. But in our part of the world, I think it is the ground-level corruption that creates a lot of trouble. Would you agree?
MR. KHAN: I think that that is – I mean, corruption certainly plans an important role undoubtedly. I think that I would agree completely with you on, as I said myself, I mean, there is no one single black hand. Yeah, security considerations have become an important issue. But, you know, I mean, in some sense, if you look back and say okay, what were the security considerations in 2000? Much less than they are now and trade was much less. So in some sense, security has been used somewhat as an excuse. I regard this as – I mean, I am being partly facetious in this. Yes, there is a serious issue and problem with cross-border terrorism and terrorists coming from the Pakistan side into India, Mumbai being the obvious example.
But to use that as a restriction on visas for Pakistanis coming to India or wanting to come to India seems to me a bit sort of overreaction because the guys coming across the border to commit terrorists activities are not going to be applying for visas. This is sort of – it seems to me an overreaction that doesn’t hit the source of the problem, but actually hits the others. You know, it is sort of the collateral damage.
I was smiling when you said that it doesn’t affect people like Shuja and me going to India – or I am sure it doesn’t affect Shuja. But I spent three hours at Mumbai airport being interviewed by the police to go in while I was director in the IMF and then spent another two hours the following day in the police reporting procedure because I had a city-specific visa and the Indian – the Reserve Bank of India wanted me to go to Delhi. I had to actually get the visa changed to go to Delhi. And then you had to go to –
The interesting thing that I discovered there – I hadn’t done this before – in Mumbai at the police reporting. You go to the police to report on, you know, who you are and what you are doing and where you are supposed to go and what your business is. What amused me there – I mean, because I was – what amused me there was that you had, you know, the regular sort of lines for people, you know, who are reporting to the police for various other things and then you had the immigration issue lines. And within that line, you had a special line for Pakistanis, which had a painted sign, so it was like a permanent thing that, you know, this is a permanent fixture. Everyone else, there were no sign, there were no sign. This one was a sign, Pakistanis had to go to that side.
I think that what happens in the Pakistan side of the border and on the Indian side of the border to people that have some clout is that you may not get dispensation from police reporting, but what happens is that it is done in a very civilized manner. The policeman will come to your hotel and take your particulars for you and will fulfill that. But overall, I think it is just – I would generalize and say transaction costs are very high between the two countries. And they impact on – and they impact on, you know, the ordinary people much more than they do in general on people who are connected in some way or the other.
MR. NAWAZ: Just to add to that, Mohsin, actually it affects me as much as it affects you because I am still waiting for a long-term visa, so that I can travel to India more frequently. But I am sure that it is in the works. There is a –
MS. MANSINGH: I will tell you what happened to me in Lahore with my American husband and the policemen engaged me in Punjabi and sent him away. And when I finally got out of there after a very long time chattering away in Punjabi and actually fluttering my eyelashes – (chuckles) – he said I thought I would never see you again. It was that bad.
MR. NAWAZ: Well, part of the reason why we are having this session is to try and break down some of these barriers. So I hope that we can lay the groundwork for that on some solid, rational reasoning rather than emotion. We have a question here.
Q: Jack – (inaudible) – George Washington University. There is a fundamental evolutionary change one has to –
MR. NAWAZ: If you point the microphone towards you, please. Thank you.
Q: For the last six or seven years, there has been appreciable involvement of technologies, businessmen in Indian politics in a very evolutionary fashion. They are members of the parliament who made these decision processes and so on and so forth. That has changed the character of how the economy is evolving in India and so on. Unfortunately, you don’t see that as Professor Mansingh pointed out. Still there is a very strong stranglehold of the military in Pakistan. Do you see a similar evolution of what I would call business-class technocrats, intelligentsia and so on and so forth because that is a very important factor in trying to sort of say business – (inaudible) – so on and so forth. Otherwise, we are talking about two different apples and oranges.
MR. KHAN: Well, I think that it is undoubtedly true that the scene in industry has changed dramatically. I asked Nanal Nankani (ph) of InfoSys (ph) about this. And, you know, he is now doing the Indian ID things for India. And so I asked him about that. And I said – posed to him the following question and he gave a presentation on. I said, how were you and your fellow technology-oriented businessmen able to escape sort of the regulations and the restrictions that exist in India and the same exist in Pakistan to inhibit business from developing?
And he told me a very interesting – he said, you know, the reason was that we were in an area in the IT area – it was an area that the bureaucrats knew nothing about. And so there were no regulations. And we were able to escape these regulations because there were none that applied to us. And that is why we were able to develop.
I think that the similar group – there are people like that in Pakistan, much less so at the moment, but the same regulations inhibit – and, of course, added to that is a layer of the army. Yes, but I don’t think that the army plays a very significant role in, if you like, the development of the IT industry in Pakistan. That is not the case.
I think there are entrepreneurs in Pakistan as well, by no means, anywhere near the Indian level. But as, you know, I mentioned in my talk, there are Indian businessmen who think that there are lots of business opportunities in Pakistan. One of the reasons for that is – (inaudible) – gave the example of call centers, language. I mean, basically in Pakistan, there are a lot of English speakers. I mean, you can teach them – like in India, you can, so you can take advantage of that.
I think what Indian businessmen in IT want to do is move up the value-added chain. And therefore, call centers, et cetera, would then be put in Bangladesh, in Pakistan and so on while they move up onto a much more high-tech software development and hardware development and so on. But I think that opportunity exists in Pakistan, too, and people are taking advantage. So while lagging behind India quite a bit, nevertheless, there is the Indian example.
I mean, and I just point one thing out. I didn’t mean to imply that – to equate Pakistan and India. India is an economic powerhouse in the region. And I would turn that around by saying India can afford to be much more magnanimous in its trade policies with Pakistan because Pakistan really doesn’t compete in the goods and products that India is favoring. I mean, and sometimes Pakistan – you talk about – India wants to move up from doing textiles. Pakistan is still into textiles.
Pakistani agriculture is much more productive than Indian agriculture. You said that the tariffs had been reduced on agricultural goods. Yes, they have been reduced on agricultural goods. Yet what the Pakistanis complain about most is the subsidies given to agriculture in India, particularly on the products that they are interested in, fruits, vegetables and so on. So I think that – my point would be, if you like, one additional point I could make here is that India can afford to be more open than Pakistan. In a sense, it can offer Pakistan much more than Pakistan in turn can offer India.
If you like, the 42 billion that I pointed out, $42 billion worth of trade that could be the potential trade for the two countries. I would say that roughly, you know – this is trade both ways – 30 billion will be Indian exports to Pakistan and 12 billion will be Pakistani – I mean, Pakistani ratio is about one third of the gain that you could have. So Indians can afford to be – the Indian side can afford to be more open because it stands to gain more as well, not relative to its own economy, but relative to what the gains are.
MR. NAWAZ: Could I just quickly follow up on that, Mohsin, because I am glad you went into the specifics of the types of goods that India wants and the types of goods that Pakistan might end up importing from India. One of the fears that has been expressed by some people within Pakistan is that because India has this enormous capacity to produce particularly consumer goods that it would flood the market with subsidized or low-priced goods and destroy Pakistani consumer industry to which a counterpoint that is made within Pakistan by other people is that China has already done that.
MS. MANSINGH: As in India, China has done that.
MR. NAWAZ: So the question really is, where is the comparative advantage? I mean, is India going to be really looking for more cement from Pakistan, for instance, because it needs it for its infrastructure? Is it really looking for transit trade for energy purposes? So have we – in your research, have you identified some of these specific areas where India would not be competing inside Pakistan, but that Pakistan would have an advantage and would be able to export to India those goods, which India desperately needs and vice versa?
MR. KHAN: Yes. I mean, you can go sort of category by category and see which country has a comparative advantage. There is no doubt that India has a strong comparative advantage in production of consumer goods. And that is what Pakistanis fear. But as you pointed out, I was going to say exactly the same. I mean, the fact that the Chinese goods could come in – I mean, let the Chinese and the Indians – basically, if the Indians come in and compete in the Pakistan market, they would be competing largely with the Chinese production, not with Pakistanis.
On the other hand, if you look from Pakistan’s point of view, basically, as I said, agriculture is still very – textiles. India wants to move up from textiles. Pakistan is still into textiles. So in some sense, you know, think of Pakistan basically becoming sort of moving up behind India on the value-added chain. As India moves to more technology, more value-added export goods, Pakistan takes over in producing and selling the more basic goods like, you know, cotton, yarn and so on, cloth and this kind of thing. While India produces the Yves Saint Laurent shirt, Pakistan produces the cotton that goes into it.
MR. NAWAZ: Thank you.
Q: Hello, I am Shikha Bhatnagar. I work here at the South Asia Center at the Atlantic Council. Thank you, Dr. Khan and Dr. Mansingh for joining us today. Since we are at the Atlantic Council and we look at trans-Atlantic relations, what do you see – and, you know, over the last decade, especially in India, we have seen an increased presence of U.S. and European companies in the region, particularly in some of the sectors that you, Dr. Khan, mentioned, banking, Citigroup is everywhere in both India and I am guessing Pakistan as well.
Do you see a role for American and European companies to move this dialogue forward to open some of these barriers in some of these sectors? And on a related note, as one of our goals here at the South Asia Center is to see what the role of the diaspora is in improving the dialogue in the region. So do you see a role for Indian and Pakistani businesspeople who are also increasingly interested in investing in the region itself, do you see a role for them in maybe pushing some of these policies forward in their governments?
MR. KHAN: I think that American companies like Citigroup, et cetera, that have a presence on both sides of the border are, in fact, pushing for the removal of these restrictions because it affects them, too, in their business across the border. I mean, it would be much easier if Citigroup’s operations in Pakistan were not part of the Middle East, but were part of the Indian operations, which are just across the border from them. So I think that they would be sort of certainly pushing for this.
I think what you mentioned about the diasporas in the two countries, I think they are – well, let me just backtrack. First of all, as I said, there is support for this kind of elimination of these measures by businessmen on both sides of the border. Dr. Mansingh mentioned the fact of the CBI in India, et cetera. In fact, there is a group of businessmen on both sides of the border that meet regularly. In fact, it is well-established and they talk about these issues. They have asked – they also asked me to give this paper at one of their meetings.
So I think the pressure on the bureaucracy and eventually the politicians will come from businessmen seeing the opportunities on both sides of the border. And that is where this myth the Pakistanis used to carry around that India will come in and swamp us with their cheap, you know, consumer goods. It turned out to be just a myth because India didn’t swamp Pakistan completely either. Pakistani businessmen still made money.
I think bringing in – now I am coming to the diaspora point that you raised. I think that is a very interesting point. At the present, we don’t see that in either of the two countries. I mean, Indian diaspora wants to invest in India. Pakistani diaspora also wants to invest in India. But I think that the idea of bringing them to – of pushing that that perhaps as Americans, you know, here living, let’s say, they could invest in the two countries and joint ventures and so on and so forth. That would be a big plus. And I think that would lead to, I believe, better economic relations across the borders, too.
MR. NAWAZ: I am going to ask Surjit to speak on that. But let me just add – (inaudible) – amount of information. I am familiar with some businessmen of Pakistani origin who are American citizens who actually moved to Singapore to set up shop there, so they can have joint operations and invest in India and in Pakistan. So some of it is going to happen. But as you were saying earlier – (inaudible) – to be transaction costs.
MS. MANSINGH: Only two brief points. There is already in North America an organization that I only know the acronym. The acronym is APNA, A-P-N-A, which is again Punjabiyat. Punjabis from India and Pakistan belong to a joint organization.
We have also in North America something called the India-China-America Institute. And it was only founded in 2003. But that has contributed enormously to the mutual trade and investment among all three countries – and between India and East Asia as a whole, particularly China, Hong Kong and India.
So I would go along with you that if we could have an India-Pakistan-America institute to do the same thing, it might be a very good thing. But when we look at the United States, I mean, I am appalled by the way the American bureaucracy totally separates their considerations.
And therefore you have, I think, an institutional barrier to dealing with the Indian subcontinent as a subcontinent. And there are all kinds of reasons for it but we had already agreed that we were not going to get into grand bargains and political issues. But that is also a factor that may or may not – I don’t know enough about the American business community. But it may well be similarly affected. I don’t know. Do you know?
MR. NAWAZ: I don’t. All I can say is that the only APPNA I’m familiar with is the Association of Pakistani Physicians of North America.
MS. MANSINGH: Oh. (Chuckles.) I think this is the –
MR. NAWAZ: Are you familiar with something called SAPNA? South Asian, Punjabi –
MR. KHAN: Punjabis in North America – (chuckles).
MS. MANSINGH: No, it’s association of Punjabi something-something. Punjabis. Association of Punjabis in North America. Right.
MR. KHAN: (Off mike.)
Q: Hi, Arigin Virma (ph) with CSIS. I was going to ask for the entire panel what your thoughts were on the recent Afghan-Pakistani trade deal. Secretary Clinton was celebrating this deal but I wanted to get your thoughts, if this is another case where, at the political level, it’s seen as a breakthrough but in terms of implementation it causes problems.
MR. NAWAZ: Thank you for raising that because I had a question for Mohsin on this, on the WTO regulations because it is rather interesting to see Secretary Clinton actually presiding over the signing of yet another Pakistan-Afghanistan transit trade agreement when there is already one in existence – and that specifically prohibits the transit trade to extend to India. So how would that stand up in WTO?
MR. KHAN: Okay, well, WTO rules on transit trade are very clear. Essentially, countries that are signatories of the WTO must allow transit trade to take place among third-party countries doing it. So Pakistan really does not have a leg to stand on, on this issue of restricting trade or Indian exports to Afghanistan and beyond. Legally, it has none. But you know, WTO rules and regulations are regularly flouted by just about every country.
And so the Pakistanis can sit back and say, well, fine, take us to court and we’ll fight us in country. And I think at the present, they haven’t actually gone to court yet, but let me – I mean, India has not made – India has to make an official, formal complaint to the WTO that Pakistan is doing this kind of restriction –
MR. NAWAZ: And the U.S., in this case, is abetting the –
MR. KHAN: And in this – well, because the U.S. flouts WTO regulations fairly frequently too. And you know, there’s always these cases and complaints coming into the WTO. And one of the interesting things that – you know, is that Pakistan doesn’t make that many complaints, but India and China make a lot of complaints about trade policies and exchange rates and so on. So I think that, yeah, I mean, in that sense the Pakistanis – the Americans are abetting this for the time being.
MS. MANSINGH: You know, I have a question, actually. Because when the Afghan finance minister was in Washington, he made a very strong point that, you know, they were pursuing this agreement with Pakistan. And they were very, very keen that it should extend to India. And I was looking things up on this agreement and it appears that there’s no explicit prohibition. It is merely that Afghan trucks cannot cross the border into India.
MR. NAWAZ: Right.
MS. MANSINGH: So they have to unload and physically reload on the other side. And since I believe that is what happens to much of India-Pakistan trade too, it’s one of your –
MR. KHAN: Yeah, another type of barrier, yes. That’s right.
MR. NAWAZ: Do we have any other questions? Tom, did you have a –
Q: Well, I do. I’ll make it very brief.
MR. NAWAZ: This will be the last one so that we can let Mohsin go at 11:30.
Q: Yes, we spoke earlier this morning and it was very interesting and informative. Thank you both – about trains and trucks and wooden barrels and so on. Has the advent of Internet purchases and the subsequent FedEx flights and DHL and UPS trucks and so on changed the landscape any or are they delayed just as much as anyone else?
MR. KHAN: No, I think that it’s a fair point you make. I mean, basically, what has happened is that Indian businesses – I mean, there is a very interesting, sort of, set of operations. You’re talking about Singapore, in Dubai, where Indian and Pakistani businessmen have set up shop there and are partners. And one of the things – and a variety of things: hedge funds, investing private equity funds and so on; they are doing that.
But one of the interesting areas where they do this is essentially in providing shipment of goods through – they basically are facilitating through the Internet trade between the two countries via the (Web ?) and claiming that they can bring the cost down significantly. And they can. And they’ve been able to do it. Yes, so a lot of the growth in the trade between India and Pakistan via the WI has been facilitated by the use of the Internet.
MR. NAWAZ: Thank you, Mohsin. And I want to thank both Mohsin and Surjit Mansingh for having taken the time to spend with us. I’m delighted that we managed to get a lot of facts out there. We will be posting a transcript of this exchange on our website so please – (inaudible, background noise) – those who missed this excellent discussion. And we hope to carry forward this movement maybe with some additional projects involving the embassies in both India and Pakistan.
I should end on a very positive note in the sense that I have had visits from Pakistani business for years – (inaudible) – who have told me that they have invested heavily in the Punjab border, on the Pakistani side, and have been waiting for years for the border to open because they have got infrastructure way out and everything needing to be the (entrepreneur ?) for Punjab on the Indian side of the border. And that’s still waiting.
So we hope that that wait will not be too long. And with that I want to thank all of you for joining us today and I hope you come back to our future events, too. Thank you.
MS. MANSINGH: Thank you very much. (Applause.)