Purists among economists - those who believe that all economic decisions should be left to the marketplace - have a hard time understanding the advantages of regional economic arrangements. They believe that such arrangements distract from ushering in the perfect world in which production systems are based on the comparative advantage of each country. Countries would produce only those goods and services in which they have advantage, importing all other from the rest of the world.
Unhappily for neo-classical economists, the world's production systems are not arranged according to the comparative advantage of each individual country. Economists, who pursue classical or neo-classical lines of thinking, like to play in a world unencumbered by politics. But politics is a hard fact of life in all countries and trade between nations is one of those areas in which it has a great deal of influence.
I WILL FOCUS BRIEFLY ON FOUR SUBJECTS: One, what are the economic advantages of regionalism in the context of South Asia. Two, speculate a bit on what would have happened had the relations between India and Pakistan not deteriorated as rapidly as they did after the two countries gained independence. Three, suggest a new strategy for growth that Pakistan could follow which focuses on its geography.
And, four, go on to speculate on what is the best course for Pakistan to follow if a regional economic arrangement were to emerge soon as one consequence of the easing of tensions in South Asia.
Pakistan today - also India, albeit to a somewhat lesser extent - would be a very different place had three things happened differently. One, had the partition of British India not resulted in a thorough ethnic cleansing of what is today's Pakistan.
This country today would be a multi-cultural and multi--religious society, tolerant of a variety of different views, particularly on religion. But the bloodshed that resulted from the way British India was partitioned had unanticipated demographic consequences.
It resulted in the movement of some 14 million people across the newly defined border between India and Pakistan. As many as eight million Muslim refugees arrived from India to find new homes for themselves in Pakistan. Six million Sikhs and Hindus left in the opposite direction.
In the 1940s, the area that now constitutes Pakistan, Muslims accounted for slightly more than two-thirds of the total population. Today Muslims account for nearly 97 percent of the citizenry.
Two, the British could have done a cleaner job of partitioning their Indian domain by incorporating all the princely states into either India or Pakistan. There was no need for ambiguity in this area.
The same principle that was applied to divide the provinces and districts of India - the Muslim majority areas going to Pakistan and all other remaining with India - should have been used for assigning the princely states to the two successor countries.
This, for whatever the motive, the British did not do. The decision to let the princes decide their future laid the basis for the Kashmir problem. The Kashmir issue was to bedevil relations between India and Pakistan for more than half a century.
Third, the Indian administration need not have attempted to economically smother Pakistan the moment it was born. If the first generation of Indian leadership, disappointed though it was at having failed to preserve the unity of the country they had inherited from the British, been more generous with Pakistan the economic history of the sub-continent would have been very differently.
If the leadership of the Indian National Congress had reconciled itself to the partition of British India they would not have put Pakistan under an economic squeeze right after the two countries were born.
This squeeze had two aspects. One, India was unwilling to give Pakistan its share of the "Sterling balances," the debt that was owed by London to its colony for the financial support the latter provided Britain in the Second World War. Two, India refused to accept Pakistan's decision not to follow its decision, along with other members of the Sterling Area, to devalue its currency with respect to the dollar.
Pakistan decided to keep the value of its currency unchanged, a decision not welcomed by Delhi. Pakistan deprived of even the most basic goods of consumption launched a programme of industrialisation. It invited the private sector to invest in consumer industries and provided them with rich incentives to enter these activities. Had India not forced Pakistan's hand by declaring a trade war, policy-makers in Karachi would have not moved to develop so quickly the industrial sector.
Most likely, they would have looked to Pakistan's well endowed agriculture to generate growth for the new economy.
Where would Pakistan, India and South Asia be today had these three things not happened? What if the partition of the sub-continent of British India not resulted in such a massive transfer of populations between the successor states of Pakistan and India? What if the Kashmir problem had not been created by the way the British chose to partition their Indian empire? What if India had reconciled itself quickly to the creation of a Muslim state on its north-western and north-eastern borders? We can speculate about all these possibilities in order not to be fanciful.
Had Pakistan not been so thoroughly "Muslimized," it would not been facing today the problem of Islamic extremism - a problem about which President Pervez Musharraf wrote in an article contributed recently to The Washington Post. I have coined the verb "to Muslimize" to deal 'with two different phenomena in Pakistan's history.
The first accompanied the partition of the British India, which resulted in Pakistan becoming a predominantly Muslim state. The second is occurring now as several Islamic groups in the country attempt to force Islamisation on Pakistan's economic, political and social structures.
If India had not forced a trade war on Pakistan in 1949, Pakistan would have industrialised less rapidly than it did. If trade had continued between the two countries, there would have been much greater incentive for Pakistan to invest in agriculture rather than build a largely inefficient industrial sector.
Pakistan today would be an economy drawing a larger part of its gross domestic product, exporting a significant part of high value crops to India. The two countries would have proceeded to structure their production systems according to their respective comparative advantages.
Had commerce continued with India, the Pakistani economy would have had larger component of trade in its gross domestic product than is the case at this time. It would have also invested more in improving the physical infrastructure - roads, railways, irrigation - that it inherited from the British.
Lahore would have become the centre of commerce in the sub-continent with the networks of roads connecting India with China, Afghanistan, Central Asia and Iran. With so much commerce flowing through the city Lahore would have also become the cultural hub of South Asia.
Had India and Pakistan begun to relate with one another on friendly terms, other countries in the region would have also benefited. The country that suffered the most from the ill-will between these two countries is Afghanistan. India played the "Afghan card" from the very start building on the sentiment in the Pathan areas of that country that had never totally reconciled to the drawing of the Durand Line that cut across the tribal belt of northern British India and Afghanistan. At the same time, Pakistan continuously looked for opportunities to loosen India's grip on Kabul.
This became possible after the Soviet Union invaded Afghanistan to establish a communist regime in that country. Pakistan's involvement in the war against the Soviet occupation ultimately led to its support for the establishment of the Taleban regime in Afghanistan.
The Taleban provided sanctuary to Osama bin Laden's al Qaeda network. It may be a bit of a stretch to closely link the terrorist attacks of September 11, 2001 on the United States with the dynamic unleashed by the way the British partitioned India. But such a link can be plausibly established.
Easy relations between India and Pakistan might also have preserved Pakistan in the form it was originally created. The resentment of the people of East Pakistan (today's Bangladesh) against the economic policies of the regimes in Karachi and Islamabad that were dominated by policymakers from the country's western wing had little to do with the difficult India-Pakistan relations. Nonetheless, had Pakistan been spared the need to invest so heavily in building its military strength, it might have been less prone to be ruled by the military which was dominated by Punjab. Had the military not intervened, Pakistan might have succeeded in putting together a political structure in which Bengal would have had a prominent voice.
In other words, with good relations between India and Pakistan, the latter may have succeeded in developing a robust political structure for itself.
But the most important impact of friendly relations between India and Pakistan would have been in the area of economics, particularly for Pakistan. Friendship with India would have added anywhere between 1.5 to 2 percentage of growth to the Pakistani economy.
Compounded over 57 years, Pakistan's GDP today would be some two to three times its present size had the Indo-Pakistan relations not deteriorated into total hostility right from the time of the birth of the two Asian giants.
In sum, both countries - more Pakistan than India - have paid a very heavy economic cost far the continued hostility. But that is now in the past. For the future, there is every reason to argue that it is in Pakistan's economic interest to forge a lasting peace with its neighbour to the south.
ADVANTAGES OF A SOUTH ASIAN REGIONAL ARRANGEMENT: It has been seen in many parts of the globe that deep animosities among nations can be overcome by economic co-operation which produces a dynamic of interdependence between people and the owners of production systems. It has often been claimed that democracies don't go to war with one another.
That may be true to some extent. It can also be maintained that countries that have tied together their economic systems find it difficult to use military force to settle differences.
The main argument to be advanced in this short presentation is that the peace process between India and Pakistan would succeed if it is supported vigorously by trade and other forms of economic exchanges.
However, to make sure that the two countries don't use "economic wars" as they did in the forties and fifties to make political points against one another, it would be a good strategic move to fix Pakistan and India into a regional economic arrangement. Trade will necessarily be the most important component of such an arrangement.
There are pragmatists who argue that in an imperfect world regional trading arrangements (RTAs) play an important and productive role. But, argue the proponents, such arrangements must be open they must not discriminate too much against those who are not included within their purview. Open regionalism of this type is useful for a number of reasons.
To begin with it locks in a government's commitment to lower tariffs and to the removal of other constraints against a relatively free movement of goods. Countries operating on their own can - and often do - change trade regulations in response to pressures by vested interests or to meet resource shortfalls.
This has been done very frequently in Pakistan by a device called the SRO, issued from time to time by the Central Board of Revenue, usually in response to pressure from vested interests.
Such unilateral actions are difficult to take when countries surrender some of their rights and a bit of their sovereignty to regional trading arrangements.
RTAs also lead to greater foreign direct investment. Foreign investors operating within RTAs have the comfort that government policies will not change suddenly. They can also access much larger markets.
They can locate their investments in one place and expect to sell their goods in a wider market.
When we talk of regional co-operation from Pakistan's perspective, should we talk only about South Asia or should we also look at other possibilities - including regional alliances with the non--Arab countries of the Middle East, the Muslim countries of Central Asia, even bilateral trading and economic arrangements with China, Asia's largest and most dynamic economy. We should certainly look at all these possibilities.
Three of South Asia's largest economies - Bangladesh, India and Pakistan - were once part of a single political entity - British India. It was, therefore, inevitable that even after partition, there would be considerable inter-country flow of goods and commodities.
This happened, but only for a while. In 1948-49, the first full year after partition, 32 percent of Pakistani imports came from India while India bought 56 percent of Pakistan's exports.
Fifty-two years later, the situation was dramatically different. In 2000-01, India imported only 0.42 percent of Pakistan's exports and provided only 0.13 percent of the latter country's imports.
In absolute terms, the Indian exports to Pakistan in 2000-01 were valued at only $186 million out of a total of $44 billion. In the same year India imported only $65 million worth of goods and commodities from its northern neighbour while its total imports were $50 billion.
While politics have obviously interfered in the conduct of trade between India and Pakistan - a subject to which we will turn in the section that follows - other South Asian countries have not done well either. South Asian intra-regional trade declined from 19 percent in 1948-49 to 12 percent in the early l950s to only 2 to 5 percent in recent years.
These official numbers, however, underestimate the real volume of trade between the countries in the region, particularly between India and Pakistan. Estimates of illegal trade between these two countries through smuggling or through third countries (for example Singapore and Dubai) put its value at one billion dollars a year. From being major trading partners at the time of their birth, India and Pakistan now exchange very little of the goods, commodities and services they produce.
But political quarrel between India and Pakistan is not the only reason why intra-regional trade did so poorly in South Asia. There were several other causes as well, among them the autarkic economic policies followed by all countries in the region, poor communication links among the countries, and lack of complementarily in the products produced by the regional economies. Let me deal with each of these three factors.
The South Asians, having taken the decision to delink their economies, made no effort to improve intra-regional communications. This was an incredibly short-sighted and economically self-defeating policy to adopt.
The British had left a fairly well developed road and railways network that linked all parts of their large empire in India. The North-Western Railway linked Karachi with Delhi and then to other parts of the sub-continent.
The fabled Grand Trunk Road connected Peshawar through Delhi with Calcutta. The railway and road network that was built with the NWR and the GT Road as their backbones could have been of considerable economic value had the two countries continued to develop them. That, as we will discuss below, did not happen.
And in so far as the complementarities among the regional economies are concerned these were not sufficiently pronounced for several decades to warrant the development of strong regional trading ties. It is only in recent years, with the various service sectors becoming leading players in the Indian economy, that Bangladesh, Sri Lanka and Pakistan can begin to take advantage of what India has already achieved or is on the way to achieving.
Even if Pakistan and India have the political will to open their presently closed borders to inter-country trade, it would be better to do it initially in the context of a regional arrangement. Using such an arrangement will reduce the temptation for either country to use trade as a weapon of diplomacy. It has happened on numerous occasions before. The time has come to build these relations on a more robust foundation.
A LEAP-FROG GROWTH STRATEGY FOR PAKISTAN: occupying new niches in international trade. Once Pakistan policymakers begin to factor in international trade as an important determinant of development, they could adopt an entirely new strategy of growth.
This strategy, would not necessarily follow those that propelled the region of East Asia and China towards relative prosperity. It would also not seek to build the knowledge-intensive export sector to the extent India has done. Instead, it could follow a strategy of its own - a kind of hybrid based on the experiences of other Asian nations.
Pakistan could follow one of the three models that have been tried successfully by various Asian countries. The first of these is the model that produced the "miracle economies" of East Asia. Also called "tigers" and "cubs," these economies essentially tapped the large export markets available in the industrial world. This strategy essentially duplicated what Japan had done in the 1950s and 1960s.
In following export led strategies, the industrial sectors in the miracle countries were guided by the state which identified areas into which they could expand. The industries that were being helped were almost always privately owned.
Nonetheless, the state not only helped industries identify markets abroad, it also got the financial sector to lend large amounts of money to the chosen industries at below market rates. In the parlance of economics this was called "directed credit" - credit provided by banks to industries at the direction of the state.
This connection between industry and finance proved remarkably successful but it also led to the financial crisis of 1997-98. What came to be called "crony capitalism" - that is how directed credit evolved - worked for a while but had to be adjusted once the financial crisis exposed its weaknesses.
This has been done successfully and the East Asians are back on the high growth trajectory - something few analysts expected at the peak of the crisis.
The other model that Pakistan could adopt was pursued by China. It focused on developing the human resource by providing all people - boys and girls, men and women, and residents in all parts of the country - with free education and health.
China's human resource development occurred in an environment of authoritarian management of the economy and of the political system. Either by design or purely because of pragmatism, the Chinese, starting in the 1970s, released the enormous energies of this well educated and healthy labour force by gradually loosening political and social controls they had placed on them.
First agriculture and then small- scale and privately owned industries responded to these incentives. The rest, as they say, is history.
Then there is the Indian model. What is today known as the "Indian way" was not a well thought out strategy initially. In fact, the explicit Indian strategy for development adopted by the country's first generation of leaders achieved a result exactly the opposite of that intended. It constrained growth rather than accelerate it.
In the period between the mid-fifties and the mid-eighties the Indian economy chugged along at what came to be called the "Hindu rate of growth" - a growth rate of some 3 to 3.5 percent a year.
The model being followed now is the product of a series of accidents and ad hoc decisions.
What we see in India today is an economy that is being pushed forward by a growth rate which has relied very heavily on knowledge accumulation as an important contributor to growth.
India's policymakers are now confident that based on the recent transformation of the economy they will be able to get their country to climb n to the same growth trajectory on which China is proceeding. This, in sum is the much applauded Indian model of economic success.
Looking at the future, but also looking back at the experience of the various successful Asian countries, what strategy should Pakistan follow? Islamabad has a menu of options available. It could use private industry to aggressively enter the export sector, exploiting the abundant financial resources now available within the reformed financial sector.
This would mean going onto the track previously travelled by the miracle economies of East Asia. But, unfortunately for Pakistan, there is not much synergy between the structure of Pakistan's industrial sector and the nature of demand in the world's large markets.
At this time Pakistan does not have the industrial base from which it can launch a successful export drive. It will not be able to duplicate the experience of East Asia.
Or, alternatively, Pakistan could invest massively in developing its large human resource by providing it with education, health and opportunities for skill development and knowledge accumulation.
Such a strategy could work if Pakistan had the resources but more importantly the political will. When China went on that track it saved about 42 percent of its gross national income, a proportion more than three times Pakistan's abysmally low saving rate of today.
China's human resource oriented strategy produced results after two generations - or at least a generation and a half - had been sacrificed for the sake of the future. Pakistan neither has the luxury of time nor the political will on the part of its leaders to take the country through such a grind.
Finally, Pakistan could follow the Indian approach of concentrating on the accumulation of skills and knowledge by one segment of the population. A small - relatively to the size of the population but still numbering in the millions - highly skilled workforce could enter the growth niches available in the global markets.
This is the strategy adopted by the first administration of President Pervez Musharraf. It was championed with great energy by the then Minister of Science and Technology, Dr Atta ur Rahman. Unfortunately, it did not produce the promised results.
I would advocate, instead, an approach that draws a bit on the Indian experience but then moves on an altogether different track. This two-pronged approach would still emphasise knowledge and skill development as India has done so successfully. Based on a well equipped workforce.
Pakistan could either export its abundant workforce or take part in the rapidly evolving "outsourcing" opportunities that are changing the global production system. On the other track, Pakistan could become the hub of north-south and east-west commerce.
The north-south track could link Central Asia, including Afghanistan with India and points beyond. The east-west track could connect the western parts of China with the Arabian Sea through the ports of Karachi and Gwadar and also with India. These two tracks will cross in Pakistan and bring enormous benefits to the country.
For Pakistan to follow such a strategy, it will have to undertake large investments for improving the physical infrastructure - roads, railways, ports and airports. It will also need to develop its economy to supply this transit trade with the services it needs including insurance, finance, warehousing, processing, transhipment, etc.
Modernisation of the service sector that such a strategy would entail would mean focusing on creating appropriate levels of skills within the country in a number of diverse areas.
What I have spelt out above is a strategy for sustained growth and development suitable for a country in Pakistan's situation. Pakistan could successfully exploit its large and young people to do work for the skill-short sectors in the western economies.
It could, at the same time, use its geography as a point of transit for two routes - new versions of the old Silk Route - that would allow commerce to flow from different parts of the world.
Following this two-pronged approach, Pakistan could leapfrog into the future without going through the paces of development followed, by other Asian countries. But a great deal of thought and planning will need to be done to develop and implement this novel strategy.
And, most important of all, for this strategy to succeed Pakistan will need to draw strength from its neighbours, particularly India, and work within the frameworks of regional trading arrangements.
(To be concluded)