Wednesday, 15 January 2014

How Important is Trade with India?

There is a lot of noise on how the only thing that will save Pakistan is trade with India. On bended knees we should beg. The donors have spent over 10 million dollars to buy out all our leading intellectuals on worthless studies that state the obvious conclusion that they want that trade with India will be good for us. They have another 10 million+ to spend on this subject. So whatever you read by people know that it is not freely written.

But do not get me wrong! I am all for trade with not only India but with everyone. Have been for it forever. As an economist, how can I disagree with openness? That is the fundamental tenet of economics that has been established since Adam Smith and David Ricardo in the late 18th century. But openness means trade with all. Indeed Pakistan should be open to trade with all including India.

But the rhetoric is that it will be a panacea for Pakistan. Fantastic numbers are quoted with no basis because there can be no basis of a situation that has not happened. Besides we have possibilities of trading with everyone else. Why is our trade/GDP ratio not growing even though we have openness with many other countries, like Iran, Afghanistan Central Asia, and the Gulf? So there are some structural impediments that are not letting trade work. And they will be there even if we do trade with India.

Yet large number of conferences, opeds and media headlines are yelling all manner of grandiose claims on trade with India. 10 million dollars will buy you a lot of claims on the subject.

Interestingly enough, while we are spending 10 million dollars on this subject (and it is our money since it comes from aid committed to us), we have no money to study, energy, governance, pricing, deregulation and many other such subjects. All our bets are on one issue trade with India which I find very surprising as a policy analyst. Like in life, policy also must seek a multipronged approach for building an economy and society.

Let us look at the issue a little more closely. India is a large country with many states some larger than even our Punjab. There are no trade barriers there. So one would expect that all states will benefit from the union of India. All states will be growing at the same rate and converging to the same level of welfare. Over 60 years equalization would have taken place.

In a recent paper, Cherodian and Thirlwall look closely at the data and after much econometrics found that “regional differences in gross State domestic product per head in India have continued to widen” through the last 6 decades. Even if they control for various policy and other state controlled variable as well as resource endowments, they find that disparities are widening. They find that without state reform and development efforts Indian integration or trade within India is not enough to get the poor regions to catch up with the richer regions.
If trade has not helped the poor Indian states to catch up with the rich, why is there such grand expectation of it? Why are we willing to postpone domestic reform and wait for trade with India? Perhaps the donors will use some of their dollars to tell us why this is so?
Economics 101 affirms that openness is important. It opens up a highway. But the highway is only useful to someone with a nice car, with a smooth powerful engine, a good driver, and gasoline in the tank and passengers ready to travel. If we have a poor quality car (poor governance), amateur driver (nonprofessional, non-research government), no energy, and all the passengers living of SROs, who do we expect the car to move well on the highway. We can continue to ask for more openness but let us not forget domestic reform.
In fact domestic reform must be our priority number 1!
Indian disparities are also shown in this Financial times map. It confirms that a lot depends on the states abilities to capture the gains from trade that openness provides. In other words the way a state is run--its governance and policies-- is important for development indicators.
These results for India have been substantiated in many papers.