ublished:The Financial Express, Bangladesh, November 14, 2006

By Pradeep S Mehta and Huma Fakhar

A recent action by the Pakistan government to increase the positive list of tradeable products from 773 to 1075 under the South Asian Free Trade Agreement (SAFTA) could result in the doubling of formal trade from US$1.0bn to US$2.0bn. But, this exchange can quadruple if only there is closer economic cooperation, and that could lead to better peace.

Whenever one speaks about the peace-promoting economic relations between India and Pakistan, skeptics opine that relations between the two are marred by the border dispute and terrorism across borders. Hence, to expect more peaceful relations between the two fast growing economies through trade is a dream. We do not agree.

Once, one of us had written to the US government to promote mutual trade between the two countries by offering duty free imports if one used the others’ inputs in their exportables to the US. The idea was received positively.

Until recently, we did not know that to promote peace in the Middle East, the US had adopted a similar scheme. In 1996, the US Congress authorized designation of qualifying industrial zones (QIZs) between Israel and Jordan (1999) and Israel and Egypt (2004). The QIZs allow Jordan and Egypt to export products to the United States duty-free if the products contain a minimum level of inputs from Israel. The purpose of this trade initiative has been to support the prosperity and stability in the region by encouraging economic cooperation. It has worked well.

Since both India and Pakistan are currently preparing to or entering into various preferential trade agreements (PTAs, bilateral as well as regional) with other countries and regions (both with developed and developing countries), it would be sensible to include QIZs type of arrangement in some of the agreements particularly with the European Union (EU), US and China and even within South Asian Trade Agreement (SAFTA) and the proposed Association of South Asian Nations (ASEAN)-India Free Trade Accord (FTA). Such arrangement would help both Indian and Pakistanis exporters/importers to reap benefits of free trade as well as promote greater cooperation.

Among other ways to promote economic cooperation is to look at cross-border infrastructure projects across the globe, which have been able to release limitations on free economic relations and therefore open prospects for economic benefits from cooperation. Regional cooperation projects have a potential for the improvement of the well-being of all parties involved because of the scale economies they permit, the complementarities between the economies, and the externalities they induce (multiplier effects, attraction of foreign investment, diminution of gaps, etc…).

The East-West Economic Corridor (EWEC), a 1500 Km. long highway project crossing six Greater Mekong Sub-region countries in South-East Asia connecting South China Sea to Indian Ocean and the Middle-East regional cooperation projects are some good examples. In the same vein, mega-economic projects like the Turkmenistan-Afghanistan-Pakistan and the Iran-Pakistan-India gas pipeline projects would help in promoting trust and regional economic cooperation between India and Pakistan.

History provides ample evidence that no neighboring countries have ever survived and progressed on prolonged belligerent relations. “History repeats itself” is the saying going around for time and again. The famous economist Wilfred Pareto (1889) wrote, “customs unions and other systems of closer commercial relations (could serve) as means to the improvement of political relations and the maintenance of peace”.

The Southern African Development Community originated in the 1980’s as a coalition opposed to apartheid in South Africa and has more recently turned to creating a free trade area. Some observers note that African customs unions and free trade areas are as active in areas such as conflict resolution as in trade liberalisation. Finally, many see relaxed tensions between India and Pakistan as the real payoff from the SAFTA agreement, regardless of what happens to trade barriers in the region (World Bank, Global Economic Prospects, 2005).

Many current studies also point out that regional trade agreements (RTAs) that expand trade flows appear to have a substantial dampening impact on conflict. Mansfield and Pevehouse (2000) attempt to identify empirically the role of RTAs in ameliorating conflict. They found that, on an average, the likelihood of the outbreak of a militarized interstate dispute declines by around 50 per cent if both belong to the same RTA. However, only RTAs that expand trade flows appear to have a substantial impact on conflict. In Africa, for example, RTAs that address the management of cross-border resource issues (such as water) are more effective in reducing military conflict than other RTAs.

Though both India and Pakistan are moving closer, it is at a snail’s pace and constantly encountering hurdles. Some of the above measures could divert attention from sticky matters and accelerate the speed of greater economic cooperation between the two nations through reduction (if not elimination) in tensions and mistrust and bringing in peace and tranquility in this region.

Pradeep Mehta is Secretary General of CUTS International, a research, advocacy and networking group in Jaipur, India and Huma Fakhar is partner, Fakhar law International and Market access Promotion, Lahore, Pakistan.