How important is trade with India?

The writer served as deputy chairman of the Planning Commission from 2010 to 2013 There is a lot of noise on how the only thing that will save Pakistan is trade with India. The donors have spent over $10 million to buy out all our leading intellectuals so they produce worthless studies that state the conclusion that they want — that trade with India will be good for us. They have another $10 million plus to spend on this subject. So whatever you read by people, know that it is not freely written. Do not get me wrong! I am all for trade with not only India, but with everyone. As an economist, how can I disagree with openness? That is the fundamental tenet of economics that has been established since the times of 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, such as Iran, Afghanistan, Central Asia and the Gulf? There are some structural impediments that are not letting trade work and they will be there even if we do trade with India. photo 8_zps41b18d85.jpg Yet, a large number of conferences, op-eds and media headlines are yelling all manner of grandiose claims on trade with India. An amount of $10 million 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. Policy 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 of its states would 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, equalisation 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 six decades. Even if they control various policies and other state controlled variables, 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 for us? Why are we willing to postpone domestic reform and wait for trade with India? 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, why 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 one! Published in The Express Tribune, February 8th, 2014.