PEAC

EW

R

KS

UNITED STATES

INSTITUTE OF PEACE

Kashmir

A Problem in Search of a Solution

Shahid Javed Burki

Library of Congress Control Number: 2006939894 Peaceworks No. 59. First published March 2007.

The views expressed in this report are those of the author alone. They do not necessarily reflect views of the United States Institute of Peace.

United StateS inStitUte of Peace 1200 17th Street NW, Suite 200 Washington, DC 20036-3011

Phone: 202.457.1700 Fax: 202.429.6063 E-mail: usip_requests@usip.org Web: www.usip.org

Contents

Summary 1

Preface 3

1. Introduction 5

2. HistoricalBackground:Kashmir’sEconomy 15

3. EconomicandOtherCostsoftheKashmirDispute 21

4. SouthAsianRegionalIntegrationasaFrameworkforSolvingtheKashmirProblem 27

5. FosteringPeaceinKashmirwithintheSAFTAFramework 45

6. Conclusion 53

Notes 55

AbouttheAuthor 61

AbouttheInstitute 62

Summary

TheongoingterritorialdisputebetweenIndiaandPakistanoverthestatusofthecontestedareasofJammuandKashmir(henceforthKashmir)iswellknownandwelldocumented.1Thisstudyacknowledges thatany resolutionof thisdisputemaybemanyyears in themaking.Thus,ratherthanproposingsolutionstotheterritorialconflict,thestudyexplorestheutilityof forgingenhancedeconomicopportunities for thepeopleof the regionandargues thatdoingsomaypreparethegroundfortheeventualresolutionofthedispute.Manyofthepro-posalsadvancedherewillrequireallthepartiestothedispute—India,Pakistan,andthepeo-pleofthedividedstateofKashmir—toagreeonasuiteofprogramsthatwouldbringaboutpositiveeconomicchangefromwhichtherecannotbeanyturningback.Ibelievethatsuchpositivechangewouldcreatevestedinterestsandbeneficiariesthatwouldresistanyretrench-mentfromcontinuedprogress.

Pakistanmayrequireparticularlyrobustfocusbecauseitmustdealwithuniqueincentivestospoilsuchnormalization,asnumerouspartiestherecurrentlybenefitfromsustainedconflictwith India. Indeed,Pakistan—perhapsmore so than India—hasalreadypaidaheavypricefortheconflict,particularlyforitsrelianceonpoliticalandevenmilitantIslamasanintegralaspectofthecountry’sdefensestrategyanddomesticpolicies.Asaconsequenceofdecadesof instrumentalizing Islam for political reasons, militant and obscurantist versions of thereligionhavebecomeentrenchedwithin layersofPakistan’scivil societyandhaveaffectedPakistan’spoliticalandsocialdevelopment.

AlthoughIndiahasnotsufferedinthisway,ithasincurredadifferentsetofcostsforitsownintransigenceinthefaceoftheKashmirdispute.WhileIndia’sKashmirwarwasfoughtonaconventionalbasisearlyon,theconflictdidnotaffectitssocietyorthepoliticalsystembeyondthedisputedterritoryofKashmir.However,anargumentcanbemadethattheKashmirdis-putehasmigratedthroughoutIndiaandhasbecomeintertwinedinlong-standingcommunalconflictsbetweenproponentsofHindunationalism(Hindutva)andIndia’sownMuslimcom-munities,asevidencedbytherecentepisodicmassacresofMuslims(e.g.,theriotsassociatedwith thedemolition in1992of themosqueatAyodhyaand communal riots inGujarat in2002).2Fora time,Kashmir’sdistancefromIndia’smainpopulationcenterssomewhatdis-tancedtheconflictfromIndiansociety.However,thissituationhaschangedinrecentyearswithterroristattacksinIndia’shinterlandandevenintheevolvingrelationshipsbetweentheostensibly secular stateof Indiaand its various religiouscommunities.Needless to say, theKashmiristhemselves,particularlythoselivinginIndian-administeredKashmir,havebornethedirectbruntoftheviolenceperpetratedbyIndiansecurityforcesandIslamistmilitants,andhavehadtosurvivethedevastationofthecivilwar.

Whilethedirectcostsbornebyallpartiestothedisputehavebeenenormous,theopportunitycostshavebeenequallysignificant.Althoughbothgovernmentstendtodownplaytheactualcostsoftheconflict,thereislittleevidencethateithersideunderstands—orevenconsiders—

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theextentoftheseopportunitycosts.Furthermore,thegovernedpeoplearescarcelyawareofthemagnitudeandkindsofopportunitiesthathavebeensacrificed.Enteringthesenotionsoftheconflict’sdirectandopportunitycostsintopublicdebatemaybeanimportantstepincultivatingconstituentsfornormalizationandresolutionofthedispute.

ThisstudymakestwomajorcontributionstothemassiveliteratureontheKashmirdisputeandproposalsto“resolve” it.First, itpositsthenotionofopportunitycostsandprovidessomeestimatesastotheirmagnitude.Itishopedthatoncetherespectivepublicsunderstandthefullrangeofimpactsoftheirgovernments’policies,theymaydemandnewapproaches.Sec-ond,thestudyproposesanumberofmeansofcreatingneweconomicopportunitiestocre-atenewconstituenciesforpeace.ThiscontributionrelatestothefirstbecauseitsuggeststhatopportunitycostsareimposednotonlybytheactionsofIslamabadandNewDelhibutalsobytheirinaction.Byfailingtoconsiderandpursueinnovativeeconomicideas,thecapitalsareimposinganotherlostopportunityontheirpeoplesandtheKashmirpopulationslivingundertheirrespectivecontrol.

Thenewopportunitiesexploredhereinvolvemovingalongthreefrontssimultaneously.First,IndiashouldgrantautonomytothestatewellbeyondthatpromisedinArticle370ofitsCon-stitution.Second,IndiaandPakistanshouldallowthefreemovementofpeople,goods,andcommoditiesbetweenPakistanandthepartofKashmirIndiaoccupies.ThemostappropriatewayofachievingthiswouldbeinthecontextoftheSouthAsiaFreeTradeArea,which,hav-ingbecomeoperationalonJanuary1,2006,islikelytoevolveintermsofitsscopeandgeo-graphic coverage.3 Third, India and Pakistan shouldbecomepartners, so that they—alongwithacommunityofinternationalandbilateraldonors—mightconsiderlaunchingamassiveprogramofeconomicdevelopmentandreconstructiononbothsidesoftheborder.Althoughtheprogramsuggestedinthisstudywouldcost$20billionoveraten-yearperiod,itwouldroughlydoublethestate’sgrossdomesticproductgrowthrateto9.5percentayear,signifi-cantlyreducethepoolofpoverty,andbetterintegratetheeconomiesofthetwopartsofthestatewithPakistanandnorthernIndia,respectively.This,inturn,wouldsetthestagefortheultimateresolutionofthislong-standingconflict.

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Preface

Inthesummerof2004,theResearchandStudiesProgram(nowtheCenterforConflictAnaly-sisandPrevention)attheUnitedStatesInstituteofPeaceorganizedaneventtoexplorevariouseconomicinitiativesthatcouldinprinciplelaythegroundworkforpeaceinKashmiroverthelongtermoratleastproviderelieftotheinhabitantsofthevariousdisputedareas.WajahatHabibullah,VijaySazewal,TeresitaSchaffer,andmyselfparticipatedinthisevent.AmbassadorSchaffergraciouslypreviewedsomeoftheideasthatformedthebasisofherrecentpublica-tiontitledKashmir: The Economics of Peacebuilding(Washington,DC:CenterforStrategicandInternationalStudies,2005),whileWajahatHabibullah,thenaJenningsRandolphFellowattheInstitute,presentedsomeofhisresearchthatexploredthepoliticaleconomyoftheKash-mirconflictandopportunitiesforeconomicpeacebuildingthere.(SeeWajahatHabibullah,The Political Economy of the Kashmir Conflict: Opportunities for Economic Peacebuilding and for U.S. Policy,SpecialReportNo.121 [Washington,DC:UnitedStates InstituteofPeace, June2004].)Afteranevaluationofthevariouspresentationsatthis2004meeting,ResearchandStudiesbelievedthattherewastremendousscopetoflushoutingreaterdepththevariouseconomicaspectsoftheongoingKashmirdiscord.ThisstudywascommissionedbythemwithaneyetowardbuildinguponandexpandingontheworksofSchafferandHabibullah.ThereaderalonecanjudgetheextenttowhichIhavefilledthischarge.Ialsowishtothankthefouranonymousreviewerswhoofferednumeroushelpfulsuggestionsforrevision.Anyerrorsoromissions,however,aremyown.

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Introduction

TheKashmirconflicthasnowenduredformorethanadecadeandahalfandhasclaimedbetween30,000and50,000lives.4Mostoftheliveslostwereinthebrutalwarfarethatdidnotdistinguishcombatantsfromnoncombatants.Asaresultofthisprolongedconflict,thestate’seconomyhassuffered.ForadecadeandahalfKashmirhasbeenoneoftheslowestgrowingregionaleconomiesinSouthAsia.Todayit isamongthepoorerstatesof India. In2000–01,forexample,itwasthesixthpooreststateinIndiaintermsofpercapitaincome(seetable1).Dataonaggregategrowthratesandpercapitagrossdomesticstateproduct(GSDP)andnetdomesticstateproductsimilarlyindicatethat—atleastsincetheearly1980s—thestatehasperformedconsiderablylesswellthanIndiaasawhole(seetables2–4).5Infact,nomatterwhichseriesofeconomicdataisused,Kashmirisamongthebottomone-thirdofthe Indianstates.This isnotsurprising,given the intensityof the insurgencyover thepastdecadeandahalf.

Unlike India, Pakistandoesnotproduceestimatesofprovincial products, and thedataoneconomicactivitiesinthepartofKashmiritadministersaresparseandsketchy(seetable5).AspartofmyongoingworkontheeconomichistoryofPakistansincethecountrygainedindependence,Iamattemptingtofillinseveraldatagaps.6OnepartofthisstatisticalexerciseistodevelopaproductionfunctionforthedistrictsofPakistanusingthequalityofland(irri-gatedorrain-fed)andqualityoftheworkforce(proportionofthepopulationworking,yearsinschool)asdeterminantsofgrowthand income.Thedistrictdataareassembled intotenregionsratherthanfourprovincesandKashmir.Theseregionsaremoreeconomicallyhomog-enousthantheprovinces,andgrossnationalanddomesticproductaremoreevenlydistrib-uted.According to theseestimatesand this lineofanalysis,percapita incomeof theareaadministeredbyPakistanwas86percentofthenationalaveragein1990butslightlyhigherthanthenationalaveragefifteenyearslater.Therearetwopossiblereasonsforthisrelativelybetter performance. First, a large number of Kashmiris have migrated over the past half-centuryandareworkinginBritainandNorthAmericaorhaverelocatedtoPakistan’smajorcities.7ThegovernmentofPakistanestimatesthatmorethanamillionKashmirisareworkingoutsideandremitting$500millionayeartotheirfamiliesanddependents.Thislevelofremit-tanceisequivalenttoslightlylessthanafifthofthegrossregionalproduct.Second,Kashmir,becauseofthestructureofitseconomy,hasalowerincrementalcapitaloutputratiothantheaverageforPakistan.Inotherwords,thesameamountofcapitalinvestmentwouldproduceahigherrateofgrowth.8

IcontendthatanyprocessthatultimatelyresolvestheKashmirimpassewillinvolvechangingtheway theKashmirproblem is viewed fromboth sidesof the India–PakistanborderandwithinKashmiritself.Ihopetocontributetothisreframingoftheproblembyfirstestimatingthecostsalreadybornebythepartiesengagedintheconflict.Oneoftheinnovationsofthisstudyistheintroductionofanewwayofunderstandingtheimpactsoftheconflict—namely,throughbroadlydefinedopportunitycosts.Myestimatessuggestthatthesecostsaremuch

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higherforPakistanthanforIndia.Indiscussingandestimatingopportunitycosts,Ifollowthe“whatif?”orcontrafactualapproachofhistoriansandpoliticalscientists.Inotherwords,IaskwhatwouldhavehappenedtothePakistanieconomyhaditnotspentsomuchonbuildingupitsmilitarystrength,haditcontinuedtotradewithIndiaasitdidbeforeachievinginde-pendence,haditbecomeanattractiveareaforforeigninvestment,andhaddomesticinves-torstakenalongerviewofitseconomicpotential.

Thisstudyiscomposedofsixsections:anintroduction,foursubstantivesections,andabriefconclusion. Following this introduction, I provide an overview of the Kashmiri economy,emphasizingtheweaknessesthathaveemergedasaresultoftheprolongedconflictinthearea.IthenprovideestimatesofthecosttothePakistanieconomyoftheconflictbasedonquantifyingthelikelyimpactoffourcounterfactuals,or“whatifs?”Next,Iprovideanover-viewoftheevolvingregionaltradingarrangementinSouthAsiainvolvingeightcountriesofthe region and also assess how this arrangement could be used to develop the region ofKashmir.IconcludebypresentingaprospectiveplanforfosteringpeaceinKashmirwithintheSAFTAframework.

Table �. Per Capita Income by Indian Province

StatePer Capita Income

2000–01 (in Rupees)

1 Bihar 5,466

2 Orissa 8,547

3 UttarPradesh 8,721

4 MadhyaPradesh 10,803

5 Assam 11,357

6 Kashmir 12,399

7 Rajasthan 13,116

8 Manipur 13,213

9 Tripura 14,348

10 Meghalaya 14,510

11 ArunachalPradesh 14,587

12 WestBengal 16,072

13 Sikkim 16,143

14 AndhraPradesh 16,373

15 HimachalPradesh 18,920

16 Gujarat 19,228

17 TamilNadu 20,975

18 Kerala 21,310

19 Maharashtra 23,726

20 Haryana 23,742

21 Punjab 25,048

22 Goa 45,105

23 Karnataka 180,413

24 Chhattisgarh —

25 Jharkhand —

26 Mizoram —

27 Uttaranjal —

Source:GovernmentofIndia,Census of India, 2001, New Delhi, 2003.

Introduction �

� Kashmir

Table �. Annual Compound Growth Rate in GSDP in Indian States, �9�0s and �990s (percent per annum)

GSDP at 1980–81 Prices 1980–81 to 1993–94

GSDP at 1993–94 Prices 1993–94 to 2000–01

States States

Sikkim 10.65 Pondicherry 13.76

ArunachalPradesh 8.79 Chandigarh 9.60

Delhi 7.40 Goa 9.45

Nagaland 6.90 Sikkim 8.97

Maharashtra 6.57 Delhi 8.89

Rajasthan 6.24 Karnataka 8.24

Goa 6.12 Tripura 8.19

Tripura 6.10 Manipur 7.98

Haryana 6.01 WestBengal 7.12

AndhraPradesh 5.75 Meghalaya 6.82

Karnataka 5.61 Rajasthan 6.80

Meghalaya 5.60 HimachalPradesh 6.79

A&NIslands 5.52 AllIndiaGDP(CSO) 6.32

TamilNadu 5.51 TamilNadu 6.23

AllIndiaGDP(CSO) 5.35 Gujarat 6.16

AllStatesGSDP 5.27 Maharashtra 5.92

Manipur 5.14 Haryana 5.73

Gujarat 5.13 AllStatesGSDP 5.72

Punjab 5.12 AndhraPradesh 5.46

HimachalPradesh 5.06 Kerala 5.28

Introduction 9

GSDP at 1980–81 Prices 1980–81 to 1993–94

GSDP at 1993–94 Prices 1993–94 to 2000–01

States States

WestBengal 4.93 Punjab 5.07

MadhyaPradesh 4.68 Kashmir 4.79

UttarPradesh 4.61 MadhyaPradesh 4.29

Kerala 4.27 UttarPradesh 4.25

Orissa 3.82 Bihar 4.13

Assam 3.63 Nagaland 4.02

Bihar 3.53 A&NIslands 3.96

Kashmir 3.35 Jharkhand 3.56

Pondicherry 3.32 Orissa 3.27

ArunachalPradesh 3.06

Chhattisgarh 2.88 Assam 2.63

Notes:CSO=CentralStatisticalOffice

All States GSDPrepresentsthesummationofGSDPforallstatesatconstantpricesforindividualyears,andthecompoundgrowthratehasbeenestimatedforthem.

ThegrowthrateinAll-India GDP (CSO)representsthecompoundgrowthratebasedontheCSO’sestimatesofGDPaspernationalaccountsstatistics.

AllStateDomesticProductmeasuresat1993–94pricesfortheperiod1990–91to1992–93havebeenderivedbyamethodofsplicingusingtheavailable1980–81series.

Source:S.L.Shetty,“GrowthofSDPandStructuralChangesinStateEconomies,”Economic and Political Weekly,vol.38,no.49(December6,2003),201–32.

9

Table �. continued

�0 Kashmir

Table �. Annual Compound Growth Rates of Per Capita GSDPs in Indian States, �9�0s and �990s (percent per annum)

States

Per Capita GSDP at 1980–81 Prices

(1980–81 to 1993–94) States

Per Capita GSDP at 1993–94 Prices

(1993–94 to 2000–01)

Sikkim 8.05 Pondicherry 11.65

ArunachalPradesh 5.51 Goa 7.91

Goa 4.53 Tripura 6.84

Maharashtra 4.18 Karnataka 6.63

TamilNadu 4.10 Chandigarh 5.88

Rajasthan 3.67 Sikkim 5.64

Karnataka 3.67 Manipur 5.54

AndhraPradesh 3.53 WestBengal 5.46

Haryana 3.50 TamilNadu 5.15

AllIndiaGDP(CSO) 3.17 HimachalPradesh 4.96

Gujarat 3.17 Delhi 4.87

Punjab 3.14 Gujarat 4.48

Delhi 3.12 AllIndiaGDP(CSO) 4.32

HimachalPradesh 3.10 Rajasthan 4.16

Tripura 3.08 Kerala 4.13

AllStatesGSDP 3.08 AndhraPradesh 4.12

Kerala 2.88 Maharashtra 3.82

WestBengal 2.69 AllStatesGSDP 3.78

Meghalaya 2.63 Haryana 3.75

Introduction ��

States

Per Capita GSDP at 1980–81 Prices

(1980–81 to 1993–94) States

Per Capita GSDP at 1993–94 Prices

(1993–94 to 2000–01)

Nagaland 2.54 Meghalaya 3.23

Manipur 2.52 Punjab 3.10

UttarPradesh 2.33 MadhyaPradesh 2.25

MadhyaPradesh 2.25 Kashmir 2.21

Orissa 1.94 UttarPradesh 2.06

Assam 1.39 Orissa 2.03

Bihar 1.36 Jharkhand 1.77

A&NIslands 1.35 Bihar 1.33

Kashmir 0.78 Chhattisgarh 1.25

Pondicherry 0.28 Assam 1.00

ArunachalPradesh 0.56

A&NIslands 0.37

Nagaland –1.12

Notes:All States GSDPrepresentsthesummationofGSDPforallstatesatconstantpricesforindividualyearsandthecompoundgrowthratehasbeenestimatedforthem.

Growthratein All-India GDP (CSO)representsthecompoundgrowthratebasedontheCSO’sestimatesofGDPaspernationalaccountsstatistics.

AllSDPmeasuresat1993–94pricesfortheperiod1990–91to1992–93havebeenderivedbyamethodofsplicingusingtheavailable1980–81series.

Source:Shetty,“GrowthofSDPandStructuralChanges.”

Table �. continued

�� Kashmir

Table 4. Annual Compound Growth Rates in NSDP in Indian States, �9�0s and �990s (percent increase)

Per CapitaNSDP at 1980–81 Prices

States 1980–81 to 1993–94

Per CapitaNSDP at 1993–94 Prices

States 1993–94 to 2000–01

Sikkim 10.45 Pondicherry 14.80

ArunachalPradesh 8.89 Goa 9.73

Delhi 7.86 Chandigarh 9.64

Nagaland 7.58 Delhi 9.01

Goa 6.78 Sikkim 8.88

Maharashtra 6.59 Tripura 8.42

Rajasthan 6.15 Manipur 8.30

Haryana 6.11 Karnataka 8.14

Tripura 5.89 Meghalaya 7.25

AndhraPradesh 5.76 WestBengal 7.17

Karnataka 5.52 Rajasthan 6.79

TamilNadu 5.47 HimachalPradesh 6.52

AllIndiaNDP(CSO) 5.25 AllIndiaGDP(CSO) 6.20

AllStatesNSDP 5.19 TamilNadu 6.08

Punjab 5.17 Haryana 5.57

Meghalaya 5.04 AllStatesNSDP 5.52

Gujarat 4.95 Maharashtra 5.46

A&NIslands 4.90 AndhraPradesh 5.46

HimachalPradesh 4.87 Gujarat 5.30

Introduction ��

Per CapitaNSDP at 1980–81 Prices

States 1980–81 to 1993–94

Per CapitaNSDP at 1993–94 Prices

States 1993–94 to 2000–01

Manipur 4.87 Kerala 5.06

WestBengal 4.80 Punjab 4.88

UttarPradesh 4.51 Kashmir 4.57

MadhyaPradesh 4.28 MadhyaPradesh 4.20

Kerala 4.05 UttarPradesh 4.01

Orissa 3.49 Jharkhand 3.98

Assam 3.38 Bihar 3.97

Bihar 3.33 A&NIslands 3.55

Pondicherry 2.83 ArunachalPradesh 2.76

Kashmir 2.60

Orissa 2.53

Assam 2.44

Chhattisgarh 2.05

Notes:All States GSDPrepresentsthesummationofGSDPforallstatesatconstantpricesforindividualyearsandthecompoundgrowthratehasbeenestimatedforthem.

GrowthrateinAll-India GDP (CSO)representsthecompoundgrowthratebasedontheCSO’sestimatesofGDPaspernationalaccountsstatistics.

AllSDPmeasuresat1993–94pricesfortheperiod1990–91to1992–93havebeenderivedbyamethodofsplicingusingtheavailable1980–81series.

Source:Shetty,“GrowthofSDPandStructuralChanges.”

Table 4. continued

�4 Kashmir

Table �. Gross Domestic Regional Product in Pakistan, �990 and �00�

1990 2005

Population GRP

Per Capita

GRP

Population GRP

Per Capita

GRP

Millions % $b % $

NorthwestFrontierProvince

14.2 4.2 295 21.9 13.5 8.4 7.8 356

FATA 2.5 0.7 280 3.9 2.4 1.4 1.3 358

NorthPunjab 11.8 5.3 449 18.1 11.2 10.4 9.6 575

CentralPunjab 33.7 16.4 487 48.4 29.9 36.5 33.7 754

SouthPunjab 13.9 6.8 489 20.9 12.9 11.5 10.6 550

CoastalBalochistan 1.4 0.6 429 2.3 1.4 1.3 1.2 565

InlandBalochistan 3.6 2.0 555 5.6 3.5 3.6 3.3 643

UrbanSindh 11.9 10.6 891 18.4 11.3 22.2 20.6 1,207

UpperSindh 10.2 5.3 520 18.3 11.3 10.0 9.3 546

AzadKashmirandNorthernAreas

2.8 1.2 429 4.2 2.6 2.7 2.6 643

106 53.1 501 162.0 100.0 108.0 642

Note:FATA=FederallyAdministeredTribalAreas.

Source:Thesearemyestimatesusinglandandlaborproductivityindicesfordifferentregions.Iestimatedtheindicesusing(a)thequalityoflandcultivated(rain-fedorirrigated),(b)thequalityandparticipationratesoflabor(qualitydeterminedbythelevelofliteracy),and(c)thelevelofurbanization.Punjabwasdividedintothreeregions;Sindhintotwo,urbanandrural;andBalochistanintotwo,coastalandinland.ThefederalcapitalofIslamabadwasincludedinNorthPunjab.TheseestimatesweremadeasapartofmyongoingworkonPakistan’seconomichistory.

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Historical Background: Kashmir’s Economy

In1947,atthetimeofthebirthofIndiaandPakistan,thestateofKashmirhadapopulationoffourmillionpeople,mostofitconcentratedinthefertilevalleyoftheJhelumRiveroftheIndusRiversystem.TheIndusitselfflowedthroughthenorthernareasofthestate,withitsmouthinthemountainsintheundemarcatedareabetweenKashmirandChina.Anumberofmajortrib-utariesoftheInduseitheroriginatedinthestateorpassedthroughit,collectingwaterfromthemeltingsnowinthehighmountainsinthearea.Withthisabundanceofwater,itwasnaturalthatKashmirwoulddependonagricultureformostofitsincomeandforthelivelihoodofmostofitspopulation.AbundantwatermeantthatKashmircouldpracticemoreintensiveagriculturethancouldthewater-scarceIndianandPakistaniPunjabs,twoareasthatarecontiguoustothetwopartsofthestate.Forthesamereason,horticulturewasmoreprevalentinKashmir.

Inthelate1940s,landwasthemainsourceofincomeforthestate’scitizens;itcontributed60percenttotheGSDPandemployed85percentoftheworkforce.Althoughricewasthemaincropandthestaplefoodforthestate’scitizens,thearea’sabundantforestsandanimalhusbandryprovidedimportantsourcesofincomeforasignificantproportionofthepopula-tion.Handicrafts,includingwoodworkingandwoolweaving,hadamarketnotonlyamongthe tourists who visited the area but also all over British India. Two sectors—tourism andhandicrafts—wereimportantsourcesofexternalcommerceforthestate.Thesesectorswerealso themain“foreignexchange”earners for theareaandgaveKashmirand itspeopleareputationforbeautyanddexteritythattraveledfarbeyondthestate’sborders.

The total population of the state has increased more than four-fold in the fifty-eight-yearperiod since thedepartureof theBritish—agrowth rateof2.8percenta year. Today, thelargestnumberofpeopleliveinthevalley,whichalsohasthehighestconcentrationofpopu-lation.TheareaofAzadKashmir,administeredbyPakistan, isalsoverydenselypopulated,with331personspersquarekilometer.Ladakh,underIndia’scontrol,andtheNorthernAreas,underPakistan’scontrol,arethinlypopulated.Almostone-thirdofthepopulationlivesintheareasadministeredbyPakistan(seetable6).

AtthetimeofthepartitionofBritishIndia,thestatehadapopulationofslightlymorethanfourmillion,onemillionofwhomwereintheareasthatwereoccupiedbyPakistanafterthefirstKashmirwarof1948–49.TheremainingthreemillionlivedinthepartofthestatethatwastobecontrolledbyIndia.ThepopulationintheIndianpartofKashmirincreasedatarateoflessthan1percentayearuntil1971.Afterthatyear,thegrowthrateincreasedthreefoldto2.6percentayear(seetable7).Ithasstayedatthatlevelforthreedecades,notshowingthedeclinesinfertilityexperiencedinotherpartsofIndia.Thesuddenjumpinthegrowthrateinthe1960smayreflectsomemigrationintotheareafromotherpartsofIndia,adevelop-mentresentedbythenativepopulationofthestate.Further,thecoverageoftheearlierIndiancensusesinthestatemayhavebeenlesscompletethanthosecarriedoutinlateryears.

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Table �. Distribution of Population of Kashmir, �00�

RegionAdministered

byArea

(sq. km)Population

(million)Density

Persons/km

KashmirValley India 15,900 6.0 377

Jammu India 26,000 4.8 185

Ladakh India 59,000 0.223 3.8

AzadKashmir Pakistan 13,300 4.4 331

Northernareas Pakistan 72,500 0.9 12.4

Total 186,700 16,323

Source:Author’sprojectionsbasedontheIndian(2001)andPakistani(1998)censuses.

Table �. Size and Growth of Kashmir’s Population

Year Population (million) Growth rate, per annum

1941 2.971

1951 3.254 0.9

1961 3.561 0.9

1971 4.617 2.6

1981 5.987 2.6

1991 7.804 2.6

2001 10.070 2.7

2005 12.845 2.6

Source:ThedataarefromthecensusesconductedbythegovernmentofIndiainthefirstyearofeverydecade.Thefigurefor2005isanextrapolationofthe2001estimateusingtheaveragerateofgrowthofpopulationintheperiod1981–2001.

Additionally, the state’s Hindu population in the two decades between 1961 and 1981increasedby91percent,whiletheMuslimpopulationgrewbyonly58percent,despitethelowerbirth ratesamongtheHindus (see table8).ThismovementofHindus into thestatecontributed to the tension between the two communities, although it was not the entirereasonforthetension.

Table �. Distribution of Religions in the Population of Kashmir (in millions)

Religious Groups 1961

% of total 1971

% of total 1981

% of total

Muslims 2.43 68.8 3.04 66.1 3.84 64.1

Hindus 1.01 28.5 1.4 30.4 1.93 32.2

Sikhs 0.006 1.4 0.1 2.2 0.14 2.3

Buddhists 0.005 1.3 0.06 1.3 0.07 1.4

Christians 0.001 0.9 0.001 0.001

Jains 0.001 0.3 N/A N/A

Other

Total 3.54 100.0 4.6 100.0 5.99 100.0

Source:DataprovidedbytheDirectorateofEconomicsandStatistics,PlanningandDevelopmentDepartment,StateofJammuandKashmir.

Withpopulationcontinuingtogrowrapidly—at2.6percentayearcomparedwiththeIndianaverageof1.9percent—andwiththeGSDPincreasingatonly3.4percent,theincidenceofpovertycontinuedtoincrease.In2002,morethanathirdofthestate’spopulationwasabso-lutelypoor,withanaverageincomeoflessthanadollaraday.TheincidenceofpovertyinthestateisconsiderablyhigherthanthatintheneighboringpartsofbothIndia(thestatesofPunjabandHaryana)andPakistan(theprovinceofPakistan).Povertywasprevalentinbothruralandurbanareasandamongtheyouth.TheunemploymentrateshaveincreasedsteadilyinthepartofthestateunderIndia’scontrolsincethebeginningoftheinsurgencyin1989.9

GiventhevariousconstraintsuponKashmiris,manychosetomigrateoutofKashmirduringBritishrule.KashmiristraveledfarintoIndiaandsettledinmanydistantplaces,includingtheUnitedProvincesofBritishIndiaandDelhi,thecapital.However,mostKashmiriswholefttheirstatesettlednearerhome,inPunjab.TheyfoundedKashmiricoloniesincitiessuchasAmrit-sar,Lahore,andSialkotthatwerenottoodistantfromtheirhomeland.Kashmirisnowconsti-tute an important segment of the Pakistani establishment (army, the civil service, and thepoliticalelite)andhaveretainedsignificantcultural,linguistic,andpoliticaltiestotheirerst-while homeland. Moreover, many Pakistani politicians have been Kashmiri, including MianNawazSharif,Pakistan’stwo-termprimeminister,andGeneralKhwajaZiauddin,appointedbyShariftosucceedGeneralPervezMusharrafaschiefofthearmystaffbeforeMusharraf’smilitarycoupof1999.10FamousIndianpoliticalfigureshavealsobeenKashmiri,includingtheNehrufamily,andJawaharlalNehru’sattachmenttotheregionplayedaroleinIndia’spolicytowardthestateandcontributedtoIndia’sunwillingnesstoimplementtheresolutionspassedbytheUNSecurityCouncilin1949.11

HistoricalBackground:Kashmir’sEconomy ��

�� Kashmir

Asthestateismostlymountainous,littleagriculturallyusablelandwasavailable,whichcon-tributed to thegrowingpoverty,particularly in the rural areas.Nevertheless, theeconomycontinued to depend on agriculture as it had done for centuries. In 2000–01, agricultureaccountedforclosetoathirdofGSDP(seetable9).Riceremainedthemaincrop,withsomelanddevotedtowheatandcorn.Thereweresomechangesinthecompositionoftheecon-omyinthenearlysixdecadessinceKashmirbecamepartofIndia.Thetwomostsignificantwerethedirectproductoftheinsurgencythatbeganin1989:tradeandtourismlosttheirimportance.Aslateastheearly1980s,thesetwoactivitiesaccountedfor17.2percentoftheGSDP.Theirsharedeclinedtolessthanone-tenthofthetotalby2000–01.In1980–81,for-estry’scontributionwasestimatedat9percent.Twentyyearslater,ithaddeclinedtoonly3.3percent.Theunsettledconditionsinthestateandthegovernment’sinabilitytoinvestinthepowersectorputenormouspressureonitsforestryresources.12

Table 9. Sectoral Composition of Kashmir’s Economy, �9�0–�� to �000–0� (percent of GSDP)

1980–81 1990–91 2000–01

Agriculture 37.8 35.0 28.9

Forestry 9.0 7.0 3.3

Otherprimary 0.8 0.6 1.0

Manufacturing 4.6 5.7 6.2

Construction 7.7 10.0 11.0

Othersecondary 0.6 0.1 0.1

Tradeandtourism 17.2 16.5 9.9

Realestate 9.2 3.6 11.5

Other 13.1 21.5 28.1

Total 100.0 100.0 100.0

Source:PlanningCommissionofIndia,Delhi,variousreports.

In 2002, Kashmir’s GSDP was $3.3 billion, equivalent to only 0.7 percent of India’s grossnationalincomeof$495billion.Inthesameyear,thestatehadapopulationof10.3millionoralmostonepercentofIndia’stotalpopulationof1.049billion.Thestate’sincomeperheadofthepopulationwas$325comparedwithIndia’saverageof$495.Thestatehadaverylowsavingsrate;thecentralgovernmentwasthesourceofmostofthegovernment’srevenues.Asa special category state,Kashmir receiveshighercentralgovernment support forpublicsector investment comparedwithother regions.Ninetypercentof this flow isprovidedasgrants,theremaining10percentasloans.Forotherstates,30percentofthecentralgovern-ment’ssupportforinvestmentcomesintheformofgrantsand70percentcomesasloans.13Includingcentralgovernmentsupport,thetotalamountofinvestmentintheeconomywasno

HistoricalBackground:Kashmir’sEconomy �9

morethan$400millionayearor12percentoftheGDPintheearly2000s.Thislevelofinvest-ment produced a small increase in the state’s domestic product, estimated at Rs (rupees)1,525crores($33million),fromRs5,745croresin1994–95toRs7,270croresfiveyearslaterin 1999–2000. These estimates are in constant terms. In other words, total state productincreasedatanannualrateofonly$6millionayear,orlessthanadollarayearpercitizen.

ThisbriefoverviewoftheeconomyofKashmirsuggeststhatunlessaconcertedeffortismadetoincreasethelevelofinvestmentandincreasetherateofGSDPgrowth,thestate’scitizenswill remainmired inpoverty.As the remainderof this studyargues, any resolutionof theKashmir problem will likely need to include a massive augmentation in investment in theregion’seconomy.

�9

��

Economic and Other Costs of the Kashmir Dispute

Pakistanhaspaidaheavyprice for its relianceonpolitical Islam for theprosecutionof itsdomesticandforeignpolicies.FundamentalistinterpretationsofIslamhavepenetratedPaki-stan’scivilsociety.IndiahaspaiddifferentcostsforitsownunwillingnesstoresolvetheissueofKashmirinafinalandjustmanner.InrecentyearsIslamistmilitantshaveattackedimpor-tanttargetsinIndia,suchastheRedFortinNewDelhiin2000andtheParliamentcompoundin2001.ThelatterattackbroughtIndiaandPakistantothebrinkofwarandagainremindedtheinternationalcommunityoftheconsequencesofthedispute.Moregenerally,thefester-ingKashmirdispute,onceconfinedtotheHimalayanarea,nowspillsintothelong-standingdiscordwithin IndiabetweenproponentsofHindutvaandthecountry’snumerousMuslimcommunities.14While Indiaclingstentatively toKashmir to justify itsnationalnarrativeasasecular,multiethnic,multireligiousstate,itsunwillingnesstosettlethisdisputeputsatriskthisverynarrative.15

Ibelievethatafundamentalelementofcreating“pressureforpeace”involvesinformingtherespectivepublics of Pakistan and India about the enormityof thedirect andopportunitycostsassociatedwiththepoliciespursuedbybothcapitals.Thus,itisusefultodevelopsomeestimateof thesecosts to informthePakistanipeopleand itspoliticalestablishmentas towhetheritwasprudenttopaysuchaheavypriceforthisconflict.Indiaalsoincurredcosts,butnotashighasthose incurredbyPakistan.AsSumitGangulysaid inhisrecentForeign Affairsessay,“acontinuedinsurgencyinKashmirandpoorrelationswithPakistanwilldistractNewDelhi,therebyimposingsignificantpoliticalopportunitycosts....Thepossibilityofsuchacrisismightalsodeterinvestors.”16

Becausebothgovernmentstendtodownplaytheactualcostsoftheconflictandneithersideevenconsidersthattherehavebeensubstantialopportunitycosts,thepublicisscarcelyawareof themagnitudeand implicationsof thekindsofopportunities thathavebeensacrificed.Enteringthesenotionsofdirectandopportunitycostsintopublicdebatemaybeanimportantstepincultivatingconstituentsfornormalizationandinresolvingoutstandingdisputes.

This study contributes to the debate over Kashmir by exploring the conflict’s opportunitycosts.EconomiccostsassociatedwiththeKashmirconflictcanbeestimatedbydisaggregat-ingthecostoftheconflictandthelikelybenefitsthatwouldhaveresultedhadtherelationsbetweenthetwocountriesbeenmoreamicable.Thisdisaggregationcanbedonebyestimat-ingboththecostsofhighmilitaryexpendituresandadeclineinintraregionaltrade,particu-larlybetweenIndiaandPakistan,andthepotentialbenefitsofalargerflowofforeigndirectinvestment(FDI)andaninvestor-friendlydomesticenvironment.Asaresult,theoveralleco-nomiccostoftheconflictcanbeestimatedbyposinganumberofcounterfactuals:

3

�� Kashmir

Counterfactual 1:WhatwouldPakistanhavespentonthemilitaryif itsrelationswithIndiahadnotsouredonaccountofthedisputeoverKashmir?Howwouldalowermilitaryexpen-diturehaveaffectedthecountry’seconomyanditsrateofeconomicgrowth?

Counterfactual 2:WhatwouldhavebeenthebenefittothePakistanieconomyhadthetwocountriescontinuedtotradewitheachother?

Counterfactual 3:HowwouldPakistanhavebenefitedhadforeigninvestors,whohavebegunto play an enormously important role in economic development with the advent of whateconomistscalltheprocessofglobalization,notshiedawayfromPakistanonaccountoftheriseofIslamistradicalism?

Counterfactual 4: ThepersistentproblemofKashmirhascontributedtopoliticalinstabilityinPakistan,whichinturnhasaffecteditsrateofeconomicgrowth.Whatwouldhavebeentheimpactofpoliticalcontinuityontheeconomy?

BeforeIproceedwithananalysisoftheresultsofthiscounterfactualtreatment,abriefdiscus-sionofanalyticalmethodologyisappropriate.Ofthefourcounterfactualsmentionedabove,three—savingsfromsmallerdefenseexpenditures, largerflowsofFDI,and largerdomesticinvestments—wouldhavelikelyledtogreateramountsofcapitalflowingintotheproductivesectorsof theeconomy.The impact theseadditional flowswouldhavehadontherateofincreaseinPakistan’sGDPisestimatedbyusingthecapitaloutputratioforPakistanfortheentireperiodof1947–2005.17Asforthefourthcounterfactual—largertradebetweenIndiaandPakistan,whichinturnwouldhavecontributedtoincreasingthetrade-to-GDPratioforPakistan—theimpactonGDPgrowthisestimatedbyusingthetrade-to-GDPelasticityratioforthecountry.ThisestimateswhatoneadditionalpercentagepointincreaseintradewouldlikelycontributetogrowthinGDP.

ThereislittledoubtthatintheabsenceoftheKashmirdispute,militaryexpenditureasapro-portionofGDPwouldhavebeenlessforPakistanthanforIndia.Smallcountriesintheneigh-borhoodoflargestatestendtospendlessondefenseiftheirrelationsarecordial.In2002,Argentina,forinstance,spentonly1.1percentofitsGDPondefense,comparedto1.6percentforBrazil.ForCanadatheproportionwasonly1.1percentcomparedwith3.4percentfortheUnitedStates.EvenBangladesh,whichhasuneasyrelationswithIndia,itsmuchlargerneigh-bor, spentonly1.1percentondefense.18 If Pakistanhad spent2.5percentondefense—aproportionroughlyequivalenttothatofIndia—itcouldhavesavedasmuchas3percentofGDPayear.Compoundedoverthelengthoftheconflict,theamountsavedisequivalenttofourtimesthecountry’scurrentGDP.Whatwouldhavebeentheconsequenceifthisentireamounthadbeen invested in theeconomy?Assuming that the rateof returnwouldhavebeenthesameasthatrealizedfrominvestmentsinthepast,additionalcapitalflowsintotheeconomywouldhavesignificantlyaddedtothecountry’seconomicgrowthrate.Putanotherway,militaryexpendituremaintainedatalevelof2.5percentayearwiththesavingsutilizedatanincrementalcapitalratiooffour—whichmeansthatinvestmentequalto4percentofGDPraisestherateofGDPgrowthby1percent—wouldhaveincreasedthelong-termGDPgrowth rate by asmuch as 0.75 to0.85percent a year. This addition to the rate ofGDP

EconomicandOtherCostsoftheKashmirDispute ��

growthcompoundedover55yearswouldhavemeantanincreaseofmorethan50percentinthesizeoftheGDP.19

Althoughasmalleramountcommittedtomilitaryexpenditurewouldhavedirectlycontrib-utedtoincreasingGDPgrowth,conflictwithIndiaalsohurtPakistanbyreducingtradeasaproportionofitseconomy.India’sinitialantipathytowardPakistanwasnottheresultoftheKashmirdispute.ThefirstgenerationofIndianleaders—inparticular,JawaharlalNehru,thecountry’sprimeminister,andSardarVallahbhaiPatel,thepowerfulinteriorministerinthefirstIndian cabinet—were angry at Muhammad Ali Jinnah, Pakistan’s founding father, and hispoliticalassociates.JinnahandhiscolleaguesstoodinthewayoftherealizationoftheHinduleadership’sdreamofaunited India—theachievementof theHindutvadream.The Indianleaders were also convinced that they could get Pakistan to return to the Indian fold byincreasingtheeconomiccostofseparation.20ItwasforthisreasonandnotbecauseofKash-mirthatIndialauncheditsfirsttradewaragainstPakistanin1949.However,theKashmirsitu-ationlatercausedrelationsbetweenthetwocountriestoworsenandprogressivelyloosenedthestrongeconomiclinksthathadexistedbetweenthetwopartsofBritishIndiabeforetheybecameindependentstates.DuringtheBritishruleofIndia,theadministrationinNewDelhiinvestedlargeamountsofresourcestoturntheprovincesofPunjabandSindhintogranariesforthefood-deficitprovincesofBengal,Bihar,andOrissa.Inthe1940s,some60percentofthe exports—mostly foodgrain and cotton—from the areas that now constitute PakistanwenttoIndia.AboutthesameproportionofPakistan’simportscamefromIndia.21

Hadthetwocountriescontinuedtotradeatpre-independencelevels,22therateofincreaseinPakistan’s international tradewouldhavebeenon theorderof8 to10percenta year,rather than theaverage6percent achievedover thepast twenty-two years. This increaseclearlywouldhavecontributedtotheGDP’sgrowth.Indeed,economistsmaintainthatthereisan“overallrelationshipbetweentradeandproductivity(thetrade-productivityelasticity):A1percentriseintheratiooftraderelativetoGDPisassociatedwitha0.5percentriseinGDPpercapitaoveraperiodofonetotwodecades.”23Withtherelationshippositedabove,itwouldnotbeanexaggerationtosuggestthatbymaintainingtradewithIndiaatthelevelsof the late1940s,Pakistanwouldhaveaddedanotherone-third toone-halfapercentagepointtoitsGDPincrease.Thiswouldhavemeantanadditionalone-thirdincreaseinitscurrentlevelofGDP.

TheotherimportantoutcomeofnormalizedrelationswithIndiawouldhavebeenagreaterflowof FDI into the country. The contributionof large FDI flows to thedevelopment andmodernizationoftheeconomiesofEastAsiaisnowwellrecognized.SouthAsiahasnotben-efitedfromtheincreasedavailabilityoftheseflowsinlargepartbecauseofthesecurityprob-lemsassociatedwiththeKashmirconflict.Therewereotherreasonsaswellfortheregion’srelativeeconomic isolation—amongthemthe lessopeneconomicpolicies followedby thecountries in South Asia for nearly four decades. However, even when these policies wereabandonedinfavorofgreateropenness—astheywereintheearly1990s—foreigncapitaldidnotbecomeanimportantcomponentofinvestment.ThisisparticularlytrueofPakistan.24

�4 Kashmir

Better relations with India and more intraregional trade would have brought additionalFDI into Pakistan, adding significantly to its relatively low levels of domestic savings anddomestic investments. In 2002, Pakistan received $823 million FDI compared with India’s$3billion. Both countries did poorly in that area compared with those in East Asia. Forinstance,Malaysiareceived$3.2billion,Thailand$2.4billion,SouthKorea$2.0billion,andthePhilippines$1.1billion.25Foreign investorsstayedawaypartlybecauseof the lessopeneconomiesoftheregionbutalsobecauseofthevirtualabsenceof intraregionaltradeandbecauseofsecurityconcerns.Intheabsenceoftheseconcerns,IndiaandPakistancouldhaveattracted$10billionayearand$2billionayear,respectively.Twobilliondollarsofforeignflowswouldbeequivalentto3percentofPakistan’sGDP.26

Pakistanalsowouldhavebenefited fromcross-border investmentswithin theSouthAsianregionhaditmaintainedgoodrelationswithitsneighbor.LargeIndiancorporationsarenowinvestingabroadbutarereluctanttodosoinPakistan,becausetheyarestillnotconfidentthatthecurrentthawwillpersist.OtherSouthAsiancountriesarenowbenefitingasIndia’scorporate sector reaches out to them. In early November 2005, for instance, India’s TataGroupunveiledBangladeshasthebeneficiaryof its largestFDI—“anoutlaysobig itcouldmatchinvaluethecountry’stotalcurrentstockofFDI.”Tata’splanstoinvest$2.5to$3.0bil-lioninBangladeshfortheproductionofsteelandfertilizerandtogenerateelectricityfromthecountry’sabundantbutuntappedcoalreserves“couldadd1.9percenttonominalgrossdomesticproductgrowth.”27GoodrelationswithIndiashouldattractIndiancorporateinter-estinPakistan.

Pakistanhashadalonghistoryofpoordomesticsavingsrates,whichtranslateintolowratesofinvestmentunlessforeigncapitalisavailable.Whiledomesticsavingsincreasedfrom11to13percentfrom1990to2002,grosscapitalformationdeclinedbyfourpercentagepoints,from19to15percentofGDP.The8percentsavings–investmentgapwascoveredbyforeignflowsin1990;thedeclineinforeignflowsbroughtinvestmentclosertodomesticsavingsby2002.Hadforeignprivatecapitalbeenavailablein2002totheextentsuggestedabove—intheneighborhoodof$2billionayear—thiswouldhavebroughtinvestmentbacktothelevelsofthe late1980s.Foreignflowsamountingtoabout3percentofGDPwouldhaveaddedabout0.75percenttothecountry’srateofeconomicgrowth.

AttheheightoftheinsurgencyinKashmirinthe1990s,aseriousinvestmentgapemergedbetweenPakistanandIndia.AccordingtoastudybyIjazNabiandhisassociatesattheWorldBank,privateinvestmentinIndiaandPakistanwasaboutthesamefrom1982to1991.How-ever,from1992to2001,privateinvestmentinPakistanwassixpercentagepointslowerthaninIndia.28Ifaproportionofthisgap—sayabout75percent—isattributabletothedeteriora-tionoftheinvestmentclimateinPakistancausedbytheriseofIslamistmilitancyinthecoun-try,thenwecaninferthatthisdevelopmentaloneledtoalossingrowthofatleastoneper-centagepointofGNP.StablerelationswithIndiawouldhavebroughteconomicandperhapsalsopoliticalstabilitytoPakistan,whichwouldhaveproducedabetterinvestmentclimateinthe country and contributed to higher levels of domestic savings and investment. StabilitywouldhavealsocontributedtoincreasingtherateofGDPgrowth.

AggregatingthefourpositiveconsequencesforthePakistanieconomyhadPakistanresistedinvolvement in theKashmirdisputeshows that its long-termgrowth ratecouldhavebeensome 2.25 to 3.2 percentage points higher than that actually achieved (see table 10). Agrowthrateofthismagnitudesustainedoverhalfacenturywouldhaveincreasedthecoun-try’sgrossproductbyafactorofbetween3.4and4.4.Indeed,hadthecountrybeenatpeacewith Indiaoverthepastdecades,Pakistan’s2003–2004GDPcouldhavebeenthreeandahalftimeslargerthanitwas—$330billionratherthan$95billion—anditsincomepercapitacouldhavebeen$2,200ratherthan$630.Theseestimates,ofcourse,areveryrough.Theyarebasedonaseriesofheroicassumptionsabouttheefficientuseofresourcesdivertedfrommilitary todevelopmentexpenditure;aboutasignificant increase intradewith Indiaandahigherleveloftradecontributingtoeconomicgrowth;aboutPakistanbecominganattractivearea forFDI;andaboutdomestic savingsand investment increasingwith tranquility in theregion.Evenifhalfofthebenefitsestimatedabovehadbeenactuallyrealized,though,theywouldhavechangedtheeconomic,political,andsocialcomplexionofPakistan.

Table �0. Economic Losses Caused by the Kashmir Dispute

CauseGrowth Forgone

(% per year)

Highexpenditureonthemilitary 0.75–0.85

Reductioninintraregionaltrade 0.3–0.5

Largerflowofforeigndirectinvestment 0.75–0.85

Largeramountsofdomesticinvestment 0.75–1.0

Total 2.25–3.20

Source:Author’sestimates,asdetailedinthetext.

Insum,agoodcasecanbemadethatPakistanhaspaidaveryheavyeconomic,social,andpoliticalpriceforcontinuingtokeeptheKashmircaseonthefrontburner.Indeed,thisisagood time for the country to take a hard look at the cost–benefit calculus of itsKashmirpolicy.Unfortunately,currentlyavailabledatadonotsuggest thatPakistanhas takenstepstowarddoingso.

Thatsaid,itisdifficultforcountriestobringaboutdramaticchangesinlong-heldpositions.PresidentMusharraf’s“U-turn”ontheTalibancameaboutonlybecauseofglobalhostilitytothe regime that controlled Afghanistan at the time of the September 11, 2001, terroristattacksontheUnitedStatesandbecauseofclearpressurefromtheBushadministration.29Nosimilarpressuresexist inthecaseofKashmirotherthantherealizationbyPresidentPervezMusharrafandhisassociatesthattherearelinksbetweenthecontinuationofthedispute,theriseofIslamistextremisminthecountry,andthethreatthatthegroupsespousingjihadasastatepolicyposetothecountry.30

EconomicandOtherCostsoftheKashmirDispute ��

�� Kashmir

Table ��. Military Expenditures in India and Pakistan, �99�–�00�

India Pakistan

Population,1992(m) 869 113

Population,2002(m) 1,049 145

GDP,1992($b) 282 43

GDP,2002($b) 495 61

Militaryexpenditure,1992($b) 6.49 2.8

Militaryexpenditure,2002($b) 12.87 2.5

Armedforces(000) 1,270 580

Armedforces(000) 1,300 590

Expenditurepersoldier,1992($m) 5.1 4.8

Expenditurepersoldier,2002($m) 9.9 4.2

Source:EstimatedfromthedataintheWorldBank,World Development Indicators(Washington,DC,2004),table5.8,283.

��

South Asian Regional Integration as a Framework for Solving the Kashmir Problem

Thissectionbuildsacaseforusingtradewithinaregionalarrangementasawaytodevelopthe Kashmiri economy and to create pressure for peace on both sides of the border. TheinaugurationoftheSouthAsiaFreeTradeArea(SAFTA)providesanopportunityforIndiaandPakistantofacilitatetradewithKashmirbyremovingbarrierstotradeandtoeasethemove-mentofpeopleacrosstheLineofControl.

Economies of the South Asian Region

ThesevenmembersoftheSouthAsianAssociationforRegionalCooperation(SAARC)hadanestimatedpopulationof1.3billionin2002andacombinedGDPof$640billionmeasuredatmarketexchangeratesor$3.4trillionintermsofpurchasingpowerparity(PPP).Thisisarelativelypoorregion,withaveragepercapitaincomeofonly$466inconventionaltermsand$2,493inPPPterms(seetable12).

Table ��. Macroeconomic Data for the SAFTA Countries, �00�

Population(thousands)

GDP, PPP (current int’l $m)

GDP(current US$m)

Per capita income (PPP)

Per capita income (current

US$)

Total Trade

(US$m)

Trade% of GDP

Bangladesh 135,684 229,995 47,563 1,695 351 15,849 33

Bhutan 851 — 591 — 695 358 61

India 1,048,641 2,810,987 510,177 2,681 487 157,242 31

Maldives 287 — 641 — 2,232 970 151

Nepal 24,125 33,344 5,494 1,382 228 2,462 45

Pakistan 144,902 281,270 59,235 1,941 409 22,347 38

SriLanka 19,007 67,668 16,567 3,560 872 13,093 79

SouthAsia 1,373,497 3,423,264a 640,268 2,493a 466 212,321 33

LowIncome

2,269,705 4,697,081 197,781 2,070 418 416,358 46

aExcludesBhutanandNepal

Source:TheWorldBank,World Development Indicators 2004.

4

�� Kashmir

Bywayofcomparison,Chinain2002hadapopulationof1.280billion,slightlylessthanthatofSouthAsia.However,itsGDPinbothconventionalandPPPtermswasconsiderablyhigher:$1.234trillionand$5.792trillion,respectively.China’sGDPpercapita,estimatedat$960atmarketexchangerates,wasalmosttwicethatofSouthAsia.InPPPterms,incomeperheadofhousehold ($5,792)was2.3 times larger than that inSouthAsia.31 There isnowbroadconsensusamongChinascholarsthattheopentradingsystemadoptedbythecountryafteritbegantoreformitseconomyinthelateseventieshashelpedittoachieveandmaintainhighgrowthratesinitsGDP.TheSouthAsianregionhasbeenconsiderablylessopenthanChina.ThisisoneofseveralreasonswhySouthAsiahasdonemuchlesswellthanChinaoverthepastquartercentury.In2002,Chinahadatrade-to-GDPratioof75percent,whereasthatofSouthAsiawasonly33percent.Thereislittleinter-regionaltrade(seetable13).Asdiscussedinsection3,theproblemofKashmirhascontributedtothesharpreductioninintraregionaltradeoverthepasthalfcentury.Findingasolutiontotheproblemwillundoubtedlyhaveasignificanteconomicimpactacrosstheregion.

South Asia and the New International Production System

DespiteIndia’simpressivegainsoverthepastdecadeinbecomingamajorworldplayerintherapidly expanding sector of information and communication technology, South Asia as aregionremainspoorlyintegratedintotheevolvingglobalproductionsystem.Thereareessen-tiallytworeasonsforthis.First,aninwardlyfocusedstrategyofeconomicgrowthpursuedbyall countries of the region from the time of their birth as independent states to the early1990s,when India—and to a lesser extent Pakistan—washit by serious foreignexchangecrises,haskeptSouthAsiaisolated.Thisstrategywasadoptedbecauseoftheeconomicphi-losophysubscribedtobythefirstgenerationoftheregion’sleaders,inparticularthosewholedIndiaduringitsformativeyears.JawaharlalNehruwasthemostdominantvoiceamongthisgroupofleaders.HewasparticularlyimpressedwiththeSovietmodelofcentralplanningthatplacedthestateattheheadoftheeconomyandemphasizedrapidindustrializationbydevelopingsuchproducergoodsindustriesassteel,ironworks,andmachinebuilding.

Second,theotherreasonfortheSouthAsiancountries’willingnesstolockthemselvesbehindwallsofprotectionandtoremainoblivioustothechangesoccurringaroundthemwasthedeephostilitythatdevelopedbetweenIndiaandPakistanvirtuallyfromthemomentoftheirbirth.Hadthetwocountriesmaintainedgoodrelations,theymighthavelearnedtodealwiththe world outside and to look beyond their immediate borders. Continuing antagonismbetweenthetwocountriescontributedtotheregion’sisolationuntiltheearly1990s.Eventothisday,theregionhasnotfullyopeneditselftotheoutside.Thisfailurehasresultedincon-siderableeconomiclossfortheregion.

Inthepastfourdecades,developingcountrieshavecarvedoutaprominentroleforthem-selvesintheevolvingglobalproductionsystemandinworldtrade.Thesetwodevelopmentsarecloselylinked.Theevolvinginternationalsystemofproductionisbasedontheactivitiesofsome60,000corporationsthathavespreadtheirproductionfacilitiestomanypartsofthe

world. These companies—the United Nations Conference on Trade and Development(UNCTAD)callsthemtransnationalcorporations(TNCs)—havegoneintoregionsthatofferedawelcomingenvironment.The“globalproductionsystem”—anotherUNCTADtermusedintheir annual World Investment Reports to describe the way a large number of American,WesternEuropean,andJapanesefirmshaveevolvedintoTNCs32—nowencompassesanum-beroflessdevelopedEastAsiancountries.SouthAsiaislargelyabsentfromthefield,eventhoughtheTNCshavelocatedtheirproductionfacilitiesinmanycountriesandinmanyconti-nents.Thechoiceoflocationisdictatedsometimesbythefiscalenvironmentinwhichtheyhavetooperate.Butmostofthetimelocationisdeterminedbyfactorendowmentsandtheenvironmentofferedbythehostcountry.33TheSouthAsianenvironmentlackedasenseofsecuritylargelybecauseofthetensioncreatedbytheKashmirdispute.

Bysplittingthefinalproductintoseveralintermediateproductsandcomponents,TNCsmaxi-mizereturnsontheirinvestments.Theyareabletoplayonvariouskindsofarbitrages—wage,skill,andknowledgebeingthemost important—bylocatingthemanufactureofpartsandcomponentsinthecountriesthathavethecomparativeadvantageinproducingthem.Thesecomponentsarethensentforassemblyintofinalproductsandshippedtocustomersallovertheglobe.TheEastAsiancountrieshavebecomemajorsuppliersofthesepartsandcompo-nents.ThisisonereasonwhyChinanowrunsasizeabletradedeficitwiththecountriesofEastAsiaandhasalargetradesurpluswiththeUnitedStates.

Withthissystemofproductioninplace,muchinternationaltradetakesplacewithinfirms.Thedirectionof trade isalsoprofoundly influencedby this system.This isone reasonwhy thedevelopingworld’sshareofworldtradeincreasedfromaboutone-fifthin1960toaboutone-thirdin2004.34Thisincreasehappenedwhileinternationaltradeasawholewasgrowingatunprecedentedrates.Ineveryworldregion,growthinexportsoutpacedgrowthinoutput.Inthedevelopingworld,theEastAsianregionoutperformedtherest.LatinAmericanexportsalsogrewasashareoftheworldmarketinthe1990s.TheSouthAsianregion(SAR),ontheotherhand,didrelativelylesswell.Althoughtheregion’sGDPgrowthin1980–2000anditsshareofexportsinoutputalsoincreased—particularlyinthelatterpartofthisperiod—ithadthe lowestshareoftrade intheaggregateGDPofanyregionbarringtheMiddleEastandNorthAfrica.Non-oilexportsharesoftheEastAsiaandPacificregionincreasedfrom18per-centin1980,to25percentin1990,to34percentin2000.ThecorrespondingsharesfortheSARwere8,8.5,and14percent,respectively.

ThereareseveralreasonswhySouthAsiahasdonepoorlyintermsofbecomingbetterinte-gratedintotheglobaleconomy.Oneofthemoreimportantreasonsisitsfailuretodrawfor-eigncompaniesintotheregionasbothinvestorsandtraders.TNCssetupoperationswheretheyseealargedomesticmarket;awell-developedworkforce;reasonablephysicalinfrastruc-turethatensuresuninterruptedsuppliesofelectricity,gas,andwater;securityforthelivesofboththeexpatriateswhocomeinwiththeseventuresandthepeopletheyemploy;asoundfinancialsystem;andlegalandjudicialsystemsthatcanresolvecontractdisputes.35

SouthAsianRegionalIntegrationasaFrameworkforSolvingtheKashmirProblem �9

�0 Kashmir

Table ��. Direction of Exports from the SAFTA Countries (percent of total)

Destination Bangladesh Bhutan India Maldives Nepal PakistanSri

Lanka

UnitedStates 36 3 21 38 29 29 38

UnitedKingdom

11 3 5 10 2 9 13

Germany 12 <1 4 3 8 6 4

China 1 <1 4 — — 7 —

France 7 2 2 0 1 4 2

India 1 91 — <1 49 0.5 4

Source:U.S.InternationalTradeCommission,COMTRADEStatistics2004,WashingtonDC,2004,Varioustables.

The main question addressed in this study is whether formal regional integration wouldreversethistrend.TheIslamabaddeclarationissuedbytheleadersofthememberstatesoftheSAARCaftertheconclusionoftheirsummitheldinIslamabadJanuary4–6,2004,hassetintomotionaprocessthatmayculminateinthecreationofafree-tradingareainSouthAsia.WouldthisresultinimprovingSouthAsia’seconomicperformanceandintegratetheregionintotheglobaleconomicsystem?ShouldthesuccessoftheproposedSAARCbemeasuredonlyineconomicterms?CouldtheproposedSAFTAprovideaframeworkwithinwhichtheeconomiesofthetwopartsofKashmircouldbefirmlyembeddedwithintheeconomiesofIndiaandPakistan?CouldsuchasubregionalarrangementbethefirststeptowardgreatereconomiccooperationbetweenIndiaandPakistan?

EvenatthisearlystageofanalysisofthepossibleoutcomeofSAFTAanditsimpactontheeconomiesoftheregion,itisimportanttounderscorethatSAFTA’ssuccesswilldependonnoneconomicoutcomes.RobinCook,formerforeignministerofGreatBritain,hasarticulatedverywellthecontributionregionalintegrationcanmaketoregionalpeace:“Pauseforawhileto contemplate the remarkable transformationofEuropeanpoliticswhichmade thisevent(thesigningoftheEuropeanConstitutioninOctober2004)possible.Mostofthecountriessitting together in the same council chamber have been at war with each other in livingmemoryandinthecenturythatprecededit.”Butashefurtherstates,theprogresstowardincreasingeconomicandpoliticalassociationamongthecountriesofEuropewasnotalwayseasy:“TheirappealtopastmillenniumbetrayswhatderivestheirresistancetoEuropeaninte-gration—amisplacednostalgiafortheoutdatedworldoffreestandingnations.Itisanerathathasvanished.Weareallinterdependentnow.”36

CouldaregionaltradingarrangementinSouthAsiasuchastheoneenvisagedunderSAFTAsetinmotionthesamekindofdynamismthathasbroughtEuropetoitspresentsituation?

TheanswerwilldependinpartonhowtheSAFTAcountriesshapetheagreement.TheycouldadoptaverynarrowapproachandcreateatradingarrangementintheregionthatdoeslittletobringoutSouthAsiaintotheglobaleconomyasavigorouspartner.ThatwouldbethecaseifthesevencountriesengagedfocusontheirnarrownationalinterestsandnotonthebroaderissuesoftheroleofSouthAsiaintheglobaleconomyoronlayingaframeworkwithinwhichsomeof the long-standingdisputesamong the states—suchas theproblemofKashmir—couldberesolved.37Ifthelatterapproachwereadopted,somepoliticalfigurelikeRobinCookmightsaysomethingsimilarafewdecadesfromnow.

WhyhasSouthAsiastruggledsohardtodevelopatrulyregionaleconomy?Whyisittheonlymajorregionintheworldinwhichthegravitymodeloftradedoesnotapply?Accordingtothegravitymodel,theflowoftradeisdeterminedbythesizeofthetradingeconomiesandthedistancebetweenthem.Countriesclosetooneanothershouldtrademoreamongthem-selvesthanwithdistantcountries.ThisisnotthecaseinSouthAsia.

History as a Determinant of the South Asian Malaise

PoorregionalintegrationinSouthAsiahasbeentheresultofmanycircumstances,themostimportantofwhichhasbeen,ofcourse,theintensehostilitybetweenIndiaandPakistan.Thishostilitydatesbacktothetimewhenthetwocountriesgainedindependencefromcolonialrulein1947.It isonlynow,followingtheSAARCsummitof2004andthemeetingonthesummit’ssidelinesbetweenMusharrafandthen IndianprimeministerAtalBihariVajpayee,thattherelationsbetweenthetwocountrieshavebeguntothaw.Althoughsomewarminghasoccurred, there isstilla longwaytogobeforehistory’s legacycanbeovercome.Thatnoted, the successful implementation of SAFTA could play a role in improving relationsbetween these two longtime rivals. It could alsoprovide the frameworkwithinwhich theKashmirproblemcouldbeaddressed.

Successful implementationof SAFTAwould alsohelp to restorehealth to the SouthAsianeconomybyremovingsomeofthedistortionsthatresultedfromthepartitionofBritishIndiaintotheindependentstatesofIndiaandPakistanandthesubsequentdivisionofPakistanin1971.ThelattereventresultedinEastPakistan,theeasternwingoforiginalPakistan,gainingindependenceasBangladesh.Undercolonialrule,mostoftheSARwasonecountrywithanintegratedeconomy,withmuchof thephysical infrastructurebuilt specifically toallow theeasyflowofgoodsandcommoditiesamongtheprovincesofBritishIndia.There-creationofsuchaneconomycouldcontributesignificantlytothesolutionoftheKashmirproblemandtothe integrationofthestate,whichhasbecomeincreasingly isolated,asvividly illustratedbytheaftermathof theOctober8,2005, earthquake.Both the IndianandPakistanipartsofKashmirarenowinaneconomiccul-de-sac,cutofffromtherestoftheworld.AsubregionalarrangementcenteredaroundthetwopartsofKashmir,therefore,wouldcertainlyresult inthe reboundof thestate’seconomy,providingadditionalemploymentopportunities to theregion’syoungpopulation,reducingtheincidenceofpoverty,andrelinkingtheareawiththelargerSouthAsianandglobaleconomies.

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SuchanarrangementcouldbedevisedindependentofSAFTA,whichwasformallyproposedatthetwelfthSAARCsummitheld in Islamabad inJanuary2004andformally launched inNovember2005atthethirteenthsummitheldinDhaka.JustasIndiaandPakistanhavefoundit difficult tonegotiateKashmir as a stand-aloneproblem,preferring tomake it part of a“compositedialogue”involvinganumberofotheroutstandingissues,sotoomaycraftingaseparatesubregionaltradingarrangementbepoliticallydifficult.MakingitapartofSAFTA,however,iscertainlyfeasible.

ToproperlyenvisionhowthetworegionsofKashmircouldbefusedintooneeconomicsystemwiththerestofAsia,withbenefitsaccruingtoall,onemustfirstconsideraspecificpartoftheregion’shistory.Inthelatterpartofthenineteenthcenturyandtheearlypartofthetwentiethcentury, India was repeatedly ravaged by famines. According to the British historian NiallFerguson,“Anotherfamine[aftertheonein1780]in1783killedmorethanafifthofthepopu-lationoftheIndianplains;thiswasfollowedbyseverescarcitiesin1791,1801,and1805.”38TheenormouslossoflifecausedbythefaminescreatedgreatanxietyinIndiaOfficeinLondon.Anumberofblue-ribbonRoyalFamineCommissionswereestablishedtodevisealong-termsolutiontotheproblemofpersistentfoodscarcities.EventuallyastrategywasadoptedaimedatincreasingthedomesticsupplyoffoodgrainsinIndia.

TheBritishplannerssawanopportunity inthevasttractsofvirginlandintheprovincesofPunjabandSindh.Thislandcouldbeputundertheploughbybringingtoitirrigationwaterfromthewell-endowedIndusriversystem.Thestrategyworked,andwithinafewdecades,PunjabandSindhwereabletoproducevastquantitiesoffoodgrainssurplus.Butthissurplushadtobetransportedtothefood-deficitareasinIndia’snortheast,particularlytotheheavilypopulatedprovincesofBengalandBiharandtheeasternUnitedProvinces.Todothis, theBritishmadelargeinvestmentsintransportinfrastructure,particularlyinasystemoffarm-to-marketroadsconnectedwiththefabledGrandTrunkRoadthatlinkedKabulwithCalcuttaandwasoriginallyconstructedbyEmperorSherShahSuriintheearlysixteenthcentury.TheBritishadministrationalsoinvestedinrailwaysandtheportofKarachi.TheseinvestmentsinirrigationandtransportinfrastructurelaidthebasisforthecloseeconomicintegrationofthevariousareasoftheBritishIndianEmpire,whicharenowpartsoftheindependentstatesofBangladesh,India,andPakistan.Butthiswell-developedregionalinfrastructurefellintodisre-pairasaresultoftheconflictbetween IndiaandPakistan.Eventhe IndianstateofPunjabcametodependonthedistantportsofBombayandCalcuttatoexportitssurplusfoodgrainsandtoimportsomesignificantagriculturalproducts.39

However,KashmirhassufferedthemostfromtheseveranceofcommunicationlinksbetweenIndiaandPakistan.TheroadsconnectingSrinagarinKashmirwithRawalpindiinthePakistanipartofPunjabandJammuinthestate’ssouthwithSialkot,alsoinPakistan’sPunjab,werethemainlinksconnectingKashmirwiththeoutsideworld.Entirelynewlinkshadtobecre-atedoncetheKashmirdisputeclosedtheborderbetweenthetwopartsofthestate.Thesenew links connectedKashmirwith Indiaand redirected the state’seconomy inanentirelydifferentdirection.40

IfSAFTAsucceedsinitsaims,overthenextdecadeitshouldbeabletorestoretheeconomicand trading system that existed before British India was divided into several independentcountries.Itcouldalsoreestablishtheoncevibrantcommunicationlinks,especiallybetweenthe two parts of Kashmir. The state could once again benefit from the natural links withtoday’sPakistan.EasingoftensionsbetweenIndiaandPakistanwouldalsohelptorevivethehistoricaltradelinksbetweenKashmirandChina(theoldsilkroutepassesthroughPakistan).Itwaspoliticsthatseveredtheselinks;itwilltakepoliticstorestorethem.

Politics intervenedmostdramatically in theway thewatersof the IndusRiver systemweredividedbetweenthesuccessorstatesofIndiaandPakistan.Thewaterdisputesurfacedintheearly1950sandalmostledtoanotherwarbetweenthetwocountries.Ittookintenseinterna-tionaldiplomacyandtheinvolvementofaconsortiumledbytheWorldBanktosavethesitu-ation.Anagreement—theIndusWaterTreatyof1960—wasreachedthatledtotheassign-mentofthreewesternriversofthesystem(theIndus,theJhelum,andtheChenab)toPakistanandthreeeasternrivers(theRavi,theSutlej,andtheBeas)toIndia.41WhiletheIndusWaterTreatyhelpedtosolvetheproblembetweenIndiaandPakistanbyfindinganequitablewaytosharewaterthatflowedthroughthesystem,ithadnegativeconsequencesforKashmir.42

ThiswasnottheonlydisputebetweenIndiaandPakistanthathadprofoundeconomiccon-sequencesfortheSouthAsianregion.The1947partitionofBritishIndiaintoIndiaandPaki-stanneednothaveresulted inthesharpdecline intradebetweenthesetwonewentities.This declinehappenedmostly for political reasons. In 1949Pakistan refused to follow theothercountriesofwhatwasthencalledtheSterlingAreaandtodevalue itscurrencywithrespecttotheU.S.dollar.43India,inturn,refusedtorecognizethenewexchangerateof144ofitsrupeesto100Pakistanirupeesandhaltedalltradewithitsneighbor.Pakistan,starvedofmostmanufacturedgoodsofdailyconsumption,launchedaprogramofindustrializationtoachieveameasureofself-sufficiency.Hadthistradewarnotoccurred,Pakistanwouldnothaveindustrializedasrapidlyasitdidandwouldnothaveforsakenitscomparativeadvantagein agriculture.44 Some of these developments could be reversed—with beneficial conse-quencesfortheSouthAsianeconomies—bythesuccessfulimplementationoftheproposedSAFTAalongwitha subregionalarrangement involvingKashmir. Indeed, it shouldnowbepossibletotakeadvantageofthenewpoliticaldynamicthatcamewiththesigningoftheIslamabadpeacedeclarationin2004andtobegintoresolvesomeissuesthatseemedintrac-tablenottoolongago.

ThepoliticalproblemsbetweenIndiaandPakistanwerenottheonlyreasonforthepoorper-formanceofintraregionaltradeinSouthAsia,however.Allcountriesintheregionpursuedimportsubstitutionapproachestowardeconomicdevelopmentfornearlyfourdecades,fromindependenceinthelatefortiestotheadoptionofgreateropennessintradebeginninginthemid-eighties.Consequently,followingindependencefromBritishrule,tradeamongtheSouthAsiancountriesfellfromabout19percentoftotaltradein1948toaround4percentbytheendofthefiftiesandtoonly2percentby1967.45Thislowsharebegantoincreaseonlyafterindividualcountries intheregionbegantopursuegeneraltradeliberalizationpolicies,withthe share having increased to 5percent in recent years (see table 14). As a comparison,

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however, intraregionaltradeaccountedfor67percentofthetotalfortheEuropeanUnion,62percentforNorthAmericanFreeTradeAgreement(NAFTA)countries,and26percentfortheAssociationofSoutheastAsianNations(ASEAN).SouthAsia,inotherwords,hasalongwaytogobeforeitcanachievethelevelofintegrationattainedbyotherworldregions.

Table �4. Officially Recorded Intraregional Trade as a Share of Total Trade, �9��, �990, �994, and �99�

Country Intraregional Imports Intraregional ExportsTotal intraregional

Trade

1981 1990 1995 1998 1981 1990 1995 1998 1981 1990 1995 1998

India 1.3 0.4 0.6 1.1 2.9 2.7 5.1 5.6 1.8 1.4 2.7 3.2

Pakistan 1.9 1.6 1.5 2.4 5.5 4.0 3.2 4.9 3.1 2.7 2.2 3.6

Bangladesh 4.7 7.0 17.7 17.5 7.9 3.1 2.3 2.7 5.4 5.8 12.7 12.4

SriLanka 5.2 7.0 11.4 12.9 8.8 3.7 2.7 2.4 6.5 5.6 7.5 8.2

Nepal — 13.4 17.5 31.7 63.8 7.7 9.2 36.2 47.4 11.9 15.0 32.8

Maldives 6.0 7.4 4.5 7.7 22.3 13.8 22.5 16.6 9.4 9.2 6.7 9.4

Bhutan N/A 10.9 57.5 59.9 N/A 9.6 87.9 81.9 N/A 9.7 73.5 71.8

SouthAsia 2.4 2.0 3.8 4.3 4.8 3.1 4.3 7.5 3.2 2.4 4.1 4.9

Notes:N/A=notavailable

SharesforBhutanarebasedonpartnerdata(mirrorstatistics).TherearediscrepanciesbetweenFOB(FreeonBoard)andCIF(CustomsInsuranceandFreight)valuesinmirrorstatistics.ThelargedeclineinNepal’sregionaltradeintheearly1990swasduetothe“tradeandtransit”crisiswithIndia,duringwhichIndiaclosedanumberofkeytradeandtransitpointswithNepal.

Source:EstimatedfromInternationalMonetaryFundDirectionofTradeStatisticsandreproducedfromTrade Policies in South Asia: An Overview,WorldBankReport#29949(Washington,DC,2004).

Asbrieflydiscussedearlier,historyleftoneotherlegacyinSouthAsiathatispertinenttothisstudy:theadoptionofdirigisticeconomicpoliciesbyallcountriesintheregion.ItallstartedwithJawaharlalNehru,who,takingtheadviceofanumberofwell-establishedeconomistsbutalsofollowinghisowninstincts,broughtsocialisteconomicmanagementtohiscountry.ThiswasaneasysteptotakesinceIndia,asaresultofthesupportithadprovidedtoBritainin fighting the SecondWorldWar, alreadyhad awell-developedbureaucratic system thatcouldquickly establish controls over the economy.During thewar, the Indianbureaucratsweremaderesponsibleforsettinguppublicsectorenterprisesforproducinggoodsforthewareffortthatcouldnotbeobtainedreadilyfromthemarket.Theywerealsoresponsibleforprocuring supplies for the fighting forces while ensuring that domestic shortages did notoccur.Topreventpricegouging, thebureaucrats rananelaboratesystemof rationingandpricecontrols.Thisbureaucracyandtheelaboratesystemsithaddevisedwereathandwhen

Nehrulaunchedwhatcametobecalledthe“licenseraj.”Developedoveraperiodofthreedecades,thissystemleftnocorneroftheIndianeconomy—oldandestablishedornewandmodern—untouched.

Foradecadeandahalf,Pakistantookadifferentroute,encouragingtheprivatesectortohelpmeettheenormousshortagesofconsumergoodscreatedbythe1948tradewarwithIndia.Whileencouragingprivateentrepreneurship,thePakistanistatebuiltahighwallofpro-tectionaroundit.Italsoestablishedstate-ownedfinancialinstitutionstoprovidetheprivatesectorwithcheapandlong-termcapital.And,foratime,Pakistanoperatedadualexchangeratesystemthatgaverichincentivestothosewhosetupimport-substitutingindustriesandpunishedthosewhowantedtoselltheirproductsintheinternationalmarket.

Between1972and1974,ZulfikarAliBhutto,anavowedsocialist,tookthefinalstepinsocial-izingthePakistanieconomy.Soonafterassumingoffice,heundertookaprogramofextensivenationalization of private assets. His administration took control of thirty-one large-scaleindustries,virtuallyallfinancialinstitutions,alllarge-scaletradingcompanies,andeventuallyevensmallagro-productionenterprises.Bythemiddleofthe1970s,thegripofthePakistanistateontheeconomywasastightastheholdofthestateinneighboringIndia.46

LookingatbothIndiaandPakistan,MujiburRahman,thefirstpresidentofBangladesh,foundnoreasonwhyheshouldexperimentwithasystemofeconomicgovernancedifferentfromthosefollowedbyhisneighbors.Healsobroughtbureaucraticsocialismtohiscountry.Con-sequently,byaboutthemid-seventies,SouthAsiahadcloseditselfofffromtheoutsideworld.ThiswasthetimewhenseveralsmallcountriesofEastAsiabegantoopentheireconomiesbothtoforeigntradeandtoexternalcapitalflows.ThesetwoentirelydifferentapproachestoeconomicmanagementweretoprofoundlyinfluencetheeconomicfortunesofbothEastAsiaandSouthAsia.ThequestiontheniswhethertheSouthAsianswillbeabletoclosetheyawn-inggap that hasdevelopedbetween their economic situation and that of EastAsia.HowmuchofarolecouldregionalintegrationplayinrescuingSouthAsia?

TherelativelypoorperformanceofSouthAsiaintermsofcarvingoutagreaterroleforitselfininternationaltradewasdueinparttotheprotectionisttradepoliciespursuedbyallcountriesintheregionuntilrecently.Itwasalsotheconsequence,asalreadyindicated,oftheregion’sfailuretodevelopanindustrialstructurethatwaswellintegratedintotheinternationalproduc-tionsystem.ThereasonitwasleftbehindhadmuchtodowithpoliticaldifficultiesbetweenIndiaandPakistanandtheprotectionisttradepoliciespursuedformorethanfourdecadesbytheregionalgovernments.Thisstance,fortunately,hasbeguntochange.WillSouthAsianowgetbetterintegratedwithopeneconomies,allowinggreaterregionalintegration?PartoftheanswerwilllieinthewaythecurrentleadersofIndiaandPakistanfindasolutiontotheprob-lemofKashmir.ItisnotalwaysrecognizedoutsideSouthAsiathattheproblemofKashmirhasnotonlydeeplyaffectedPakistanandIndia,theformermorethanthelatter,buthasalsotakenaheavyeconomictollonallofSouthAsia.Ithasfragmentedtheregion.Onemanifesta-tionofthisarethemanybilateralandsubregionaltradingarrangementsthatnowcrowdtheSouthAsianeconomicgeography.MovingtowardtheresolutionoftheKashmirproblemby

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usingtradeasagluetobindtogetherthesplinteredregionwillhelpavoidthedifficultiesinher-ent to what—to mix metaphors—economist Jagdish Bhagwati calls the spaghetti-bowlapproachtotrade.47

Asaresultofsomeoftherecentchangesintradepolicyinlargercountries,theSouthAsianregionisnowreasonablyopentointernationaltrade.In2000,SriLankawasthemostopencountry intheregionwithatrade-to-GDPratioof77percent.ThecorrespondingratioforNepalwas44percent;forBangladeshandPakistan,33percent;andfor India,19percent.Therelatively lowerfigurefor India is typicalofmost largecountrieswiththeexceptionofChina.However,thereisrelativelylittletradeamongthecountriesoftheregion.

From Autarky to Relative Openness in South Asia

FirstSriLankaand later India,Bangladesh,andPakistanabandonedtradeprotectionism infavorofopennessfordevelopmentandpovertyalleviation.SriLankaembarkedonthiscourseinthelateseventies;itwassubsequentlytakenbythefourlargecountriesoftheSouthAsianmainlandintheearlynineties. India’smovetowardgreateropennesswaspromptedbytheforeign exchange crisis in 1991 and by the prodding of the International Monetary Fund,whichhadbythendevelopedanewapproachthatmostcommentatorssubsumedunderthetitle of The Washington Consensus. Fiscal austerity, privatization, and market liberalizationwerethethreepillarsofthisprogramofeconomicadjustment.AccordingtoJosephStiglitz,“theWashingtonConsensuspoliciesweredesignedtorespondtotheveryrealproblemsinLatinAmerica,andmadeconsiderablesense....Whentradeliberalization—theloweringoftariffsandeliminationofotherprotectionistmeasures—isdonetherightwayandattherightpace,sothatnewjobsarecreatedasinefficientjobsaredestroyed,therecanbesignificantefficiencygains.”48UnlikesomeofthecountriesinLatinAmerica,however,SouthAsiancoun-triesdidnotrushintotheimplementationofthesepolicies.ThepaceadoptedbySouthAsiangovernmentswasmeasured—attimestoomeasured.OnceagainitwasKashmirthatcastadeepshadowoneconomicpolicymaking.

EconomiccrisiswasnottheonlyreasonfortheadoptionofgreateropennessasthestrategyforpromotinggrowthbySouthAsiancountries.TheregionalgovernmentsalsorespondedtothewaydevelopmentinstitutionssuchastheWorldBankinterpretedtheremarkableperfor-mance of the “miracle economies” of East Asia.49 The export-oriented growth policiesadoptedbythesecountrieswerewidelycreditedfortheirphenomenaleconomicgrowthinthequarter-centurybeforetheAsianfinancialcrisisof1997.AsoneWorldBankpublicationhasnoted,“Someanalystshave,withhindsight,attributedtheseachievementstouniquecul-turalandgeographical circumstances.But therewas littleevidenceat theoutset thatEastAsianeconomieswouldachievespectacularresults.Inthe1950seventradeoptimistswereexportpessimistsanddidnotanticipatethatKorea’sexportswouldgrowfourtimesasfastasworldtradeduringthenextthirtyyears.”50In1970,forexample,Korea’strade-growthtoGDPgrowthratiowas0.32;itincreasedto0.66in1988.ForMalaysia,anothermiracleecon-omy, theratio in thesameperiod increasedfrom0.89to1.09.51TheEastAsianeconomic

miraclehadaprofoundimpactonthethinkingofpolicymakersinSouthAsia.Theywerealsopreparedtoacceptopennessinplaceofthediscreditedimport-substitutionpoliciespursuedinthepast.

Fromthemid-eightiestoaboutthemid-nineties,mostmajoreconomiesoftheSARregionundertookmajorreformsaimedatachievinggreateropenness.However,theeffortstalled,particularlyinIndiaafter2000.Oldhabitsdiehard,andtherewerealsostrongvestedinter-eststhathadsurvivedthedemiseofthe“licenseraj.”Theseinterestswerepreparedtomobi-lizepoliticalpressuretoslowtheprocessofreforms.Butthereformerspersisted.LiberalizingmomentumultimatelyresumedinIndiawithlargecutsinindustrialtariffsbetween2002andFebruary2004.According toa recentWorldBank study,“otherdevelopments—Pakistan’scomprehensiveliberalizationofitstradepoliciessince1996/97(includingitsagriculturaltradepolicies),andSriLanka’spotentialtoresumelong-deferredreformsasprospectsimproveofendingitscivilwar—contributetoaregionalpictureofverymixedachievementbutwidelyshared responsibility.”52Asa resultof thesemeasures,PakistanandSriLankaarenowtheleastprotectedmarketsintheregion(seetable15).

Whiletheregionalgovernmentswerebringingdowntheirlevelofprotection,someofthemalso took steps to encourage intraregional trade. For example, since the SAARC was stillstalledbecauseof thecontinuinghostilitybetween IndiaandPakistan, India tooksteps toincreasetradewiththesmallernationsarounditsperipheryandconcludedanumberofbilat-eral trading arrangementswith its neighbors.As a consequence, regional trade expandedrapidlyduringthelate1980sandthroughoutmostofthe1990sintermsoftotalvaluebutnotintermsoftheproportionoftotaltrade.Thisexpansionwasprincipallyduetounilateraltrade liberalization by the countries on India’s borders and to large appreciations of theexchangeratesoftheperipheralcountriesrelativetotheIndianrupee. Infact,mostoftheincreasedtradewasoneway,withlargeincreasesinexportsfromIndia,especiallytoBangla-deshandSriLanka.Thisgrowthinregionaltradehadlittletodowiththegrantofregionaltradepreferences,whichwerenotveryconsequentialinincreasingintraregionaltrade.

Regional Trading Arrangements: Their Pros and Cons

If both India and Pakistan would support regional and subregional trading arrangements,wouldSouthAsiabebuckingthetrendtowardgreatermultilateralismintrade?Byoptingforsuchanapproach,would it bebuyingeconomic inefficiency in return for regional peace?Therearenoreadyanswerstothesequestions.

Among the three approaches to increasing trade among countries, purists prefer unilateralactionnotcontingentupongrantofreciprocitybytradingpartners.53Thesecond-bestapproachistoconductnegotiationsonremovingbarrierstocross-bordertradeinthecontextofsuch“international rounds”as theTokyoand theUruguaydiscussions and theDohadiscussionsbegunin2001.Theleastsatisfactoryapproachistostartwithregionalintegrationasthefirststeptowardeasingtheconstraintsonglobal trade.Notwithstandingthedisdainwithwhich

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puristsregardregionalintegration,suchagreementshaveproliferatedovertheyears,ashastheliteratureanalyzingtheircontributiontopromotinginternationaltrade.Thenumberofregionaltrading agreements (RTAs) has more than quadrupled since 1990, rising to around 230 by2004.54TradebetweenRTApartnersnowmakesupnearly40percentoftotalworldtrade.

RTAshavealsobecomemoreambitiousinscope.Newagreements,includingthosebetweendevelopedanddevelopingcountries—orNorth–Southagreements—areincreasinglyaddress-ingissuesthatgobeyondtrade,suchasinvestment,laborandenvironmentallaws,and,insomecases,politicalopenness.Nontrade issueshavebecomeparticularly importantas thevalueofpreferenceshassteadilydeclinedandasmostcountrieshavebeenreducingtariffsacrosstheboardonamostfavorednationbasis.NotwithstandingsuchNorth–Northagree-mentsastherecentexpansionoftheEuropeanUniontoincorporatelabormovements,mostNorth–SouthandSouth–Southagreementsare confined to intrafirmmovementofprofes-sionals,andneithersubstantiallyincreasesaccessfortemporaryworkers,skilledorunskilled.

MostSouth–Southagreementsarefocusedprimarilyonmerchandisetrade,andtendtotreatservices,investment,andintellectualpropertyrightsunevenlyortoignorethemaltogether.AgreementssuchasASEANandMERCOSURhavenotprovidedspecificallyforliberalizationofservicesbeyondwhatisalreadyavailableasaresultofunilateralactionsbythememberstatesorisincludedinmultilateralaccordssuchastheGeneralAgreementonTradeinSer-vices.ThereisgoodreasonforincludingmodernservicesinRTAs,sincetheyplayalargerrolein the economies of developing countries and also bring in additional foreign investmentflowstothem. Includingmodernservices isparticularly importantforanarrangementthatwould involveKashmir,because tourism,asdiscussed later,hasanenormouspotential forproviding employment to the state’s young population and for accelerating its economicgrowthrate.

AccordingtoarecentstudyoneconomicintegrationinLatinAmerica,controllingforotherfactors,countrieswithfullyliberalizedfinancialandtelecommunicationssectorsgrewannuallyabout1.5percentagepointshigheronaveragethandidcountrieswithmoreclosedecono-mies.55Therearegoodreasonsforthat,becausepreferentialtreatmentofservicesinaregionallowsmoresupplierstocompeteinthemarketandresultsinlowerpricesforconsumersandgreater efficiency. Besides, including services in an agreement does not result in revenuelossesforthegovernmentsbecause,unlikegoods,theirmovementsacrossinternationalbor-dersarenormallynottaxed.

Do RTAs attract more investment? Would a subregional trade arrangement built aroundKashmirbring in investmentfromtheoutsideworld?Thatthesethingsshouldhappenfordomesticinvestmentisobvious,butisthereanimpactonFDI?TheWorldBankrecentlyinves-tigatedtheeffectsofRTAmembershipandothervariablesonFDIflowsfor152countriesoveraperiodoftwenty-twoyears,from1980to2002.Thestudycovered238RTAs.Ingeneral,itfoundthatthecountriesthatwereopen(measuredastheratiooftradetoGDP)grewmorerapidly,weremorestable(measuredintermsoftheratesofinflation),andattractedgreateramountsof FDI.Onaverage,a10percent increase inmarket sizeassociatedwithanRTA

producesanincreaseof5percentinFDI.However,thestudyunderscoredthatanRTAcannotsubstitute foranadequate investmentclimate.56 In thecaseofKashmir,economicgrowthwillonlyhappenonce the insurgency thathasgoneonforadecadeandahalfhasbeensubduednotby force,aswas the Indianobjectiveuntil2003,butbyproviding thestate’syounganalternativewayoflife.Insteadofpursuitofjihad,theyouthhavetobeengagedinthestate’seconomy.

Oncepeace isobtained,Kashmirshouldbeanattractivedestination forFDI. Internationalhotelchains,operatorsofwinterresorts,andorganizersofhikingandothermountainsportswillcertainlybeattractedtothestate.Kashmirhasmuchtoofferasaholidaydestinationfor the aging but rich population of the industrial world, as well as for the hardworkingyoung Asians who, having become integrated into the global workforce, have money tospendonrecreation.

TheanalystswhosupportRTAsasstepping-stonestowardfreeinternationaltrademaintainthatgeographicalproximityisagoodreasontoencouragethem.Insupportingthe“naturalbloc”concept,sometradeexpertshaveused“gravitymodels”57toarguethatgeographyisagooddeterminantofthequantumoftrade.58Itisnaturalforneighboringcountriestotradeextensively among themselves. However, geographical proximity has not worked in SouthAsia,whereintraregionaltraderemainsaninsignificantcomponentoftotaltrade.Thissitua-tion—labeled“inverseregionalism”59bysomeanalysts—isnotjustduetopoliticalproblemsbetweenIndiaandPakistan.Geographicalproximity,itisargued,isnotgoodenoughreasontodeployagreatdealofpoliticalandbureaucraticenergyinmovingtowardregionalintegra-tion inSouthAsia.Butthisargument is incorrect.There isnoreasonwhytheSouthAsiancountriesshouldnotbeableto increasetradewithoneanotheroncetheyhaveovercomesomeoftheirpoliticalinhibitions.Somepastattemptswerenotsuccessfulbecausetheywereapproachedwithanarrowviewof regional integration—topreservenational interestsandjealouslyguardallaspectsofnationalsovereignty—ratherthanabroaderview—to laythegroundworkforimprovingeconomicwelfareofallcitizensoftheregion.Theapproachpre-sentedinthisstudymakesaSouthAsianRTAanintegralpartofresolvingtheKashmirdis-pute,whichhascastsuchadeepanddarkshadowoverrelationsbetweenIndiaandPakistan.Also,assuggestedbyexperienceinotherpartsoftheworld,RTAsdonotnecessarilyintro-duce great inefficiencies into the economies of member countries. In the case of SouthAsia—particularly in thecaseof India,Pakistan,andKashmir—acost–benefit analysis thatalsoincludespoliticalgainswouldsuggestthatsuchanapproach—thatis,onethatacceler-atesthepaceofgrowthandresolvestheoutstandingpoliticaldispute—hasgreatmerit.

Attempts at Regional Integration in South Asia �0

Overthepastdecadeandahalf,SouthAsiancountrieshavemadeaseriesofattemptstoimprove regional trade. Formal agreements were less effective, however, than changes inmacroeconomic policies, in particular the adoption by most countries of market exchangeratesforpromotingregionaltrade.ThesevenmembersoftheSAARC—anorganizationset

SouthAsianRegionalIntegrationasaFrameworkforSolvingtheKashmirProblem �9

40 Kashmir

up in1985 largelyatthe initiativeofPresidentZiaurRahmanofBangladesh—agreedtoacharteraimedat

(a)promot[ing]thewelfareofthepeoplesofSouthAsiaandtoimprovetheirqualityof

life;(b)accelerat[ing]economicgrowth,socialprogressandculturaldevelopmentinthe

regionandtoprovideallindividualstheopportunitytoliveindignityandtorealizetheir

full potentials; (c) promot[ing] and strengthen[ing] collective self reliance among the

countriesofSouthAsia;(d)contribut[ing]tomutualtrust,understandingandapprecia-

tionofoneanother’sproblems;(e)promot[ing]activeandmutualassistanceintheeco-

nomic,social,cultural,technicalandscientificfields;(f)strengthen[ing]cooperationwith

otherdevelopingcountries;(g)strengthen[ing]cooperationamongthemselvesininter-

nationalforumsonmattersofcommoninterests;and(h)cooperat[ing]withinternational

andregionalorganizationswithsimilaraimsandpurposes.61

Asecretariatwassetupin1986inKatmandu,thecapitalofNepal,headedbyasecretary-generalandonedirectorfromeachofthemembercountries, tofacilitatetheworkof theorganization.Untilthe1990s,thesecretariatwasnotaskedtoworkonissuesrelatedtoeco-nomiccooperationandintegration.However,inApril1993,theSAARCCouncilofMinisterssignedanagreementtoformtheSouthAsianPreferentialTradingArrangement(SAPTA).Theagreementbecameoperational inDecember1995.FollowingSAPTA’sestablishment, threeroundsofpreferential tariff reductionswere implemented. The coverageof SAPTA-1, con-cludedin1995,wasverymodest.Itcoveredonly6percentoftradedgoods(about226prod-uctsatsix-digitHS[HarmonizedSystems]level).Theimportantissueofnontariffbarrierstotradewasnotincluded;theywerelefttobedealtwithatalaterdate.SAPTA-2,concludedin1997,wasslightlymoreambitious;itcovered1,800six-digitHSitemsandalsoincorporatedprovisionsabouteasingsomeofthenontariffbarrierstotrade.SAPTA-3,signedin1998,wasthemostambitiousofthethreeagreements.Itcovered2,700items.WorkonSAPTA-4wasinitiatedin1999butwasputonholdafterthemilitarytakeoverinPakistanonOctober12,1999,andanenormousincreaseintensionbetweenIndiaandPakistanin2001–02.PoliticshadonceagainintervenedinthehaltingadvanceofregionalintegrationinSouthAsia.

Asexperienceinotherpartsoftheworldindicates,regionaltradingarrangementssucceedonlywhentheyarebackedbystrongpoliticalwillandstrongpoliticalsupportwithinmembercountries. These have been absent up until now in South Asia, largely on account of thedecades of ill feeling built up between India and Pakistan. The recent easing of tensionbetween the twocountriesand the seriouspublic commitmentmadeby the IndianprimeministerandthePakistanipresident—mostrecentlyonApril19,2005,attheNewDelhisum-mit—indicates that there is nowconsiderablepoliticalwill forgreater regional integration.Publicsupportforbetterrelationsbetweenthetwocountriesisalsoinevidence.

Table ��. Summary of Tariff Structures in South Asia

India March

04Pakistan 2002/03

Bangladesha 2004/05

Sri Lanka Feb 04

NepalAug 03

TopnormalCDrate 30b 25 25.0 27.5 25

Othernormalprotectivetaxes

0 — 4.0 3.75 4.5

Topnormalprotectionrate 30 25 29.0 31.25 29.5

AverageCDrate 22.2 17.3 16.3 11.3 13.7

Averageofothernormalprotectivetaxes

0 1.5 3.9 2.1 4.3

Averageofotherprotectivetaxes

0 0 6.3 0

AverageCD+otherprotectivetaxes

22.2 18.8 26.5 13.4 18.0

%ofproductswithtotalprotectionrates>normalmaximumprotectionratec

2.8 1.1 15.8 0.9 5.8

NumberofnormalCDslabs 7 4 4 6 5

NumberofCDslabs>normal

17 10

None:usespara-tariffs

&VATexemptionforextra

protection

2 3

RangeofCDslabs>normal 40–210%

40–250% 75&100%

40,80,130%

%ofadvaloremtarifflines>normalCDrate

2 0.1 0.2 5.2

%oftarifflineswithspecificduties

5.3 0.9 1.2 0.6

Notes:CD=customsduty;VAT=value-addedtax.

aTariffdataonBangladeshasofJune2004.ThesefiguresreflecttariffchangesannouncedintheFY05budgetonJune10,2004,whichindicatedasignificantmovetowardreductionofprotectionviareductionofthetoprateto25,amovetothreenonzerotariffslabs,andrationalizationofsupplementaryduties.

bThe“generalmaximum”CDrateisdefinedasaratethatincludesatleast5percentoftotaltarifflinesandabovewhichtherearenomorethan10percentoftotaltarifflines.The“generalmaximum”is30percentinIndiabecauseofthelargenumberofagriculturalcustomsdutiesclusteredatthisrate.TheIndiangeneralmaximumCDrateforindustrialtariffsis20percent.

cPercentageoftarifflineswithtotalprotectionrates(inclusiveofselectivepara-tariffs)inexcessof“normalmaximum”CDplusnormal(generallyused)para-tariffs.

Source:Trade Policies in South Asia: An Overview.

SouthAsianRegionalIntegrationasaFrameworkforSolvingtheKashmirProblem 4�

4� Kashmir

The Islamabad Summit Declaration, �004 ��

At their summitheld in Islamabad, the sevenheadsof stateof theSAARCnations tookamajor step toward regional economic integration and agreed to launch SAFTAby January2006.Thisstepshouldhavebeentakenearlier.Attheirsummitin1997,theSAARCleadershadagreedtolaunchSAFTAby2001.Thefive-yeardelaywascausedbytherapiddeteriora-tionofrelationsbetweenIndiaandPakistanfollowingthenucleartestsbythetwocountriesinMay1998,themilitarytakeoverinPakistaninOctober1999,andthenear-warbetweenthetwocountries in2001–02,whenmorethanamillionsoldierswereamassedalongthelongIndo-Pakistanborder.Therewasasuddeneasingoftensionbetweenthetwonationsstarting inApril2003whenAtalBihariVajpayee,thenprimeministerof India,“heldoutahandofpeace toPakistan”andpledged towork toward creatingapeaceful SouthAsianregion.

SAFTAisatraditionaltradeagreementinthesensethatitdoesnotincludesomeofthenon-tradeissuesthathavebeenincorporatedintosomenewRTAsinotherpartsoftheworld.Inthatsense,SouthAsiaisstillplayingcatch-upwithotherdevelopingregions.SAFTAcoverstariffreductions,rulesoforigin,safeguards,institutionalstructures,anddisputesettlement.Italsocallsfortheadoptionofvarioustradefacilitationmeasures,suchasharmonizationofstandardsandmutualrecognitionoftestresults,harmonizationofcustomsprocedures,andcooperationinimprovingtransportinfrastructure.

TheSAFTAtariffreductionprogramstipulatestariffsof20percentbytheregion’smoredevel-opedeconomies—India,Pakistan,andSriLanka—withintwoyearsoftheentryintoforceoftheagreement.Theregion’sleastdevelopedcountries—Bangladesh,Bhutan,Maldives,andNepal—weregrantedalongerperiodtomaketheadjustmenttoalowerlevel.Thesecoun-triesarerequiredtoestablishtariffsof30percentinthesameperiodbutareallowedlongerperiods for the seconddownwardadjustment,when tariffswouldbe reduced to the0 to5percent range. India andPakistanwill adjust to these lower levels in five years after thecompletionofthefirstphase,SriLankainsixyears,andBangladesh,Bhutan,Maldives,andNepalineightyears.India,Pakistan,andSriLankawillreducetheirtariffstothelowlevelsonimports from other countries no later than January 1, 2009. The agreement also calls foreliminationofallquantitativerestrictionsforproductsonthetariffliberalizationlist.Whilethememberstateshavebeenallowedtodeveloplistsofsensitiveitemsthatwouldnotbesub-jectedtothefullstipulatedtariffcuts,thenumberofproductstobeincludedinthecountrylistswouldbesubjecttorevieweveryfouryears.

TheIslamabaddeclarationestablishedinstitutionalmechanismstooverseetheimplementa-tionoftheSAFTAagreement.AMinisterialCouncilwasappointedasthehighestdecision-making authority, while a Committee of Experts (COE) was formed to monitor in detailimplementationoftheagreementandtoresolvedisputes.TheCOEisrequiredtoreporttotheministerseverysixmonthsontheprogressoftheagreement,whichistobefullyimple-mentedby2015.63

TheMinisterialCouncilhasheldseveralmeetingssincethesigningoftheSAFTAdeclarationandmadeconsiderableprogresson twoof the four issuesassigned to it. Ithasagreed tosensitivelistspreparedbyindividualcountriesandhasalsoagreedonaformulapertainingtotherulesoforigin.Initially,notmuchprogresswasmadeontheissuesofcompensationandtechnicalassistancetotheleastdevelopedcountries(LDCs)intheregion.India,Pakistan,andSriLanka—thenon-LDCs—arguedthatcompensationwasneverincludedinanyotherRTAandthatitsincorporationintheSAFTAwouldsignalthattheagreementwoulddivertratherthancreatetradeamongmembercountries.Thenon-LDCsalsoindicatedthattheydidnothave theeconomiccapacity toprovidea substantialamountof technicalassistance to theLDCs.TheseandothermattersweretobediscussedattheSAARCsummitscheduledtobeheldinDhakaonJanuary9–11,2005.Themeetingwastwicepostponed,oncebecauseofthehavoccausedbythetsunamionDecember26,2004,andthesecondtimebecauseofthemove by the king of Nepal against the elected government of his country. The NepaleseactionwasnotwellreceivedbyNewDelhi;theIndianprimeminister’sofficeannouncedthatitwould not beprudent for that country’s leader to sit at the same tablewith a politicalusurper.India,inotherwords,wasproclaimingbythisactionthattoremaininSAARCandSAFTA, a countryhad tohaveademocratic formofgovernance.By takingactionagainstNepal,IndiawasalsoindirectlysendingastrongsignaltoIslamabadanditsmilitary-dominatedregime.Onceagain—althoughthistimeadifferentsetofcountrieswereinvolved—politicsintervenedtostopprogresstowardregionaleconomicintegration.

TheinaugurationofSAFTAwasdelayedbysixmonthstoprovidemoretimefortheCOEtoconcludeitsworkandtohaveallcountriesformallyratifytheIslamabaddeclaration.InMarch2006,Pakistanbecamethelastcountrytodoso.ThefirstroundoftariffreductionsfinallybeganonJuly1,2006.IfSAFTAachievesitspotential,itwillchangethestructureofregionaltradewithinSouthAsia(seetables16and17).

SouthAsianRegionalIntegrationasaFrameworkforSolvingtheKashmirProblem 4�

44 Kashmir

Table ��. Source of Imports into the SAFTA Countries (percent of total)

Source Bangladesh Bhutan India Maldives Nepal PakistanSri

Lanka

UnitedStates 4 2 7 1 3 9 4

UnitedKingdom

2 3 5 2 1 5 4

Germany 2 4 4 1 4 7 2

China 17 1 5 1 14 16 4

Singapore 12 2 2 26 9 5 7

Japan 7 16 3 2 2 9 6

RepublicofKorea

8 2 2 — 2 5 5

India 19 62 — 11 47 >1 14

Notes:SAFTA=SouthAsiaFreeTradeAssociation

Source:U.S.InternationalTradeCommission,COMTRADEStatistics2004.

Table ��. Intraregional Trade (US$m)

Destination Bangladesha Bhutan India Maldives Nepala Pakistana

Sri Lanka

SriLanka 4 0 917 14 0.188 NR

Pakistan NR NR 205 0 NR 29

Nepal NR NR 349 0 NR 1

Maldives 0 0 31 0.016 2 45

India 62 32 0.118 280 45 169

Bhutan NR 39 0 NR NR 0

Bangladesh NR 1,170 0 NR NR 9

Notes:NR=neithercountryreports

aNonreportingcountry

Source:U.S.InternationalTradeCommission,COMTRADEStatistics2004.

4�

Fostering Peace in Kashmir within the SAFTA Framework

Theefforttobuildafree-tradeareainSouthAsiaovertheperiodofadecadeoffersauniqueopportunityforlayingthegroundworktoresolvetheKashmirproblem.Indeed,thisground-workcouldbelaidwithintheSAFTAframeworkalreadyagreedonbytheSAARCcountries.Inparticular,aneconomicdevelopmentprogramforKashmircouldbeformulatedthatwouldrelyheavilyongreatertradeamongIndiaandPakistanandthestateofKashmir.

Exactly how would a subregional trading arrangement work for Kashmir in the context ofSAFTA?Asalreadysuggested,asubregionalagreementinvolvingIndia,Pakistan,andthetwopartsofKashmirhasarealisticchanceofsuccesswithintheSAFTAframeworkinpartbecauseitprovidesforthemultilateralsupervisionthatIndiahasthusfarbeenunpreparedtoacceptasapartoftheKashmirproblem.TheSAARCcouldadmitKashmirintoitsambitasaquasi-state,leavingitsexactpoliticalstatusundetermined.ThepresentLineofControl(LOC)couldbecomeasoftborderbetweenKashmir’stwoparts.Thisquasi-statecouldbegiventhesamerightsasthe LDCs (Bangladesh,Bhutan,Maldives, andNepal) in theoriginal framework.Thequasi-statewouldhavenobordercontrolsalongtheLOC,meaningcustomsandimmigrationpro-cedureswouldbeestablishedontheborderswith IndiaandPakistan.However,goodsandcommoditieswouldbeallowed freeentry fromKashmir toboth IndiaandPakistan.Dutieswouldbeleviedonlyonimportsintotheregion,withrevenuessplitbetweenthetwoadmin-istrations—oneinSrinagarandtheotherinMuzaffarabad—onthebasisofpopulation.

Additionally,Kashmiricitizens,carryingaseparateidentitycard,wouldhavetotalfreedomofaccesstoIndiaandPakistan.Onlywhenleavingthetwocountrieswouldtheyberequiredtocarrynationalpassports.CitizenshipwillcontinuetobedeterminedonthebasisofresidenceinKashmir.Thistwindocumentationapproach—anidentitycardandanationalpassport—isone solution to theproblem IndiaandPakistanhave faced inallowing travel across theLOC.OnceKashmirhasbeenincorporatedasasubstate(oraquasi-state)inSAFTA,IndiaandPakistan should then formulate a ten-year economic development plan focused on a fewhigh-prioritysectors.

Becausesuchaplanwouldcosttensofbillionsofdollarstoimplement,itwouldrequiretheactivesupportoftheinternationalcommunity.However,adevelopmentplanfocusedonthestate’sphysicalandhumanendowmentwillworkonlyifitgainspoliticalacceptancefromtheparties involved in thedispute.For that tohappen, theplanmustnotchangethepoliticalstatusofthestateforsometimetocome;otherwise,itwouldnotbeacceptabletoIndia.Italsomustnot suggest that thepresent LOCwillbecome the internationalboundary. Thatwould not be acceptable to Islamabad. Even with these two constraints, there is enoughspaceleftwithinwhichaplancouldbeformulated.Thatnoted,theplanwouldhavetobeambitiousandbroadenoughtoincreasetheeconomicwelfareforthecitizensofKashmir,to

5

4� Kashmir

initiate a process that could ultimately lead to the resolution of the dispute, and to drawforeignsupportforitsimplementation.

For this tooccur, theplanmust fully involve thepeopleofKashmir, thegovernmentsandpeopleof IndiaandPakistan,andtheinternationalcommunity.Themainfocusoftheplanwouldbe todevelopexchanges—that is, themovementofpeople,goods, and services—amongKashmir, India,andPakistan.Theaimwouldbetodevelopanintegratedmarket intheregion,whichcoulddevelopintoacommonmarket.SuchamarketcouldlaterencompassotherpartsofSouthAsia.Infact,aplanofeconomicandtradeintegrationinvolvingKashmirandthecontiguouspartsof IndiaandPakistancouldbecomeastepping-stonetowardtheestablishmentofthefree-tradeareainSouthAsiaenvisionedintheIslamabaddeclarationofJanuary6,2004.

Theplancouldbebuiltaroundfivecentralelements:developingthestate’swaterresourceswithaviewtowardgeneratingelectricpower;rebuildingandexpandingthetourismindustry;developingforestryandhigh-value-addedagriculture;improvingphysicalinfrastructure;anddevelopinghumanresources toengagetheyoung in themoreproductivesectorsofwhatwouldessentiallybeaneweconomy.

Hydroelectricity

The first element would involve reinterpreting rather than renegotiating the Indus WaterTreatyof1960,whichdistributed thewatersof the IndusRiver systembetween IndiaandPakistan.Themainaimofthetreatywastomakeenoughwateravailableintheeasternriversso that the irrigation system that reliedon these riversand servedmanypartsofPakistanwouldnotgodry.Thetreatywasremarkablysuccessfulinthatitpreventedamajorconfronta-tionbetween India andPakistanon the issueof theuseofwater from the Indus system.Kashmir’saccessiontoIndiahadplacedIndiaatthetopoftheBritish-builtsystemofirrigation.IndiahadplanstouseitsupperriparianstatustoirrigatethedesertsofRajasthanwithwaterdrawn fromthe Indus tributaries.Soonaftergaining independence, itbeganworkon theBhakara dam project to bring new land under cultivation in Rajasthan. This would haveresultedinaseriousreductionintheamountofwaterflowingintoPakistan.Withthetreatyinplace,IndiacouldachievethatobjectivewithoutreducingtheavailabilityofwaterflowingthroughPakistan’sriversandcanals.

From Kashmir’s perspective, the treaty froze the development of water and hydroelectricpowerresourcesforitsownpeople.ThequestioniswhetherthetreatycouldbereinterpretednottoreducetheflowofwatertoPakistanbuttojointlydevelophydroelectricitytobenefitPakistan,thenorthernstatesofIndia,andKashmir.Thiscouldbedoneonthebasisofacare-fulstudyofthepowerpotentialoftheIndussystemforthepurposeofdevelopingitsothatitbringsbenefittothepower-shortregionsofKashmir,Pakistan,andthenorthernpartsofIndia.Animportantcomponentofthisplanwouldbetobuildanintegratedpowergridtoservethethreeareas.Thisplancouldaimtogeneratebetween5,000and7,500megawatts

FosteringPeaceinKashmirwithintheSAFTAFramework 4�

ofadditionalpowerforuseinthethreeareas.Thetotalcosttobeincurredoveraten-yearperiodwouldbeabout$10billion.64

BothIndiaandPakistanareworkingseparatelytodevelopthehydroelectricitypotentialoftherivers flowing through theirpartsofKashmir.The Indianeffortshavecreatedconsiderableapprehension in Pakistan andabelief that the authorities inNewDelhi are attempting tosubverttheIndiantreaty.Inparticular,IslamabadhasseriousconcernsabouttheWullarLake,BagliharDam,andKishengangaDamprojects,whichitseesasattemptstodrawmorewaterfromthetributariesoftheIndusRiverthanIndiaisallowedunderthe1960treaty.Asaresult,Pakistanhasinvokedaprovisioninthe1960treatythatallowsforexternalarbitrationincaseadisputeconcerningwaterdistributioninthesystemcannotberesolvedbythetwogovern-mentsontheirown.IthasalsospeededupitsplantoconstructadamontheNeelumRiverdownstreamoftheKishengangasite.

Thereis,therefore,anopportunitytosummonexpertsfrombothsidestodevelopaplanthatwouldtapthepowerpotentialoftheriversinKashmirwithoutdisturbingthewaterdistribu-tionagreementoftheIndusWaterTreaty.Thisisbestdonewithinthescopeofasubregionaltreaty,sincetheamountofpowerthatcouldultimatelybegeneratedisfarinexcessofthefuturedemandofthestateofKashmir.Therewillbeaneed—andanopportunity—tosellthesurpluspowerthrougharegionalgridtoIndiaandPakistan.

Tourism

Tourismcouldalsoprovetobethesourceofasignificantamountofcapitalflowintothestateandofemploymentforthearea’sworkforce.Theinsurgencythathaslastedforadecadeanda half has both undermined the infrastructure that supported tourism and turned peopleawayfromthestateonaccountoflackofsecurity.

KashmirbecameamajordestinationforIndiantourisminthe1980s;by1981thenumberofvisitorsfromIndiahadreached600,000(seetable18).Thestatealsoattractedsomeforeign-ers, but not as many as it could have given its beauty. The proportion of foreign touristsremainedaboutone-tenthofthetotal.Theyearbeforethebeginningofthecurrentinsurrec-tion,touristsvisitingthestatenumberedalmostthree-quartersofamillion.Thatwasthepeakyearfortourisminthestate.Thereafter,thenumberofvisitorsdeclinedrapidly,contributingtoKashmir’seconomicproblems.TheplanproposedhereaimstoturnKashmir,alongwithPakistan’snorthernareas,intoaninternationalandregionaltourismdestination.

Tourism is the fastestgrowingpartof theservice sector in theglobaleconomy;newcon-sumersareenteringthesectoraspopulationsageandpersonalincomesincrease.Therearereportsthatsome100millionChinesemaybepreparedtojointhetouristtradeasconsumers.Pakistan’snorthernareasandKashmirwouldofferattractiveplacesfortheChinesetovisit,asmuchofthatcountry’sancienthistoryhasrootsintheseareas.Thesameappliestotour-istsfromJapanandotherEastAsiancountries.Beforetheseareascanbecomeanattractive

4� Kashmir

touristdestination,however,considerable investmentwillbeneededfirstbothtodeveloptheinfrastructureandtotrainthepeopletomanagetheindustry.Theneededinfrastructureincludesroadsthatcantakeheavytraffic,airports,hotels,andrestaurants.Newmuseumswouldalsoneedtobebuilt,andthesitesthathavespecificappealtoEastAsiantourists—Kashmirwasonce thecenterofBuddhism—willneed tobedeveloped.An investmentofsome$5billionwouldberequired—mostof it fromtheprivatesector—toget tourists inlargenumberstocometothearea.BenefitswouldflowtoKashmirandthenorthernpartsofIndiaandPakistan.

Forestry and Orchards

Kashmir’sthirdmajoreconomicassetisitsforestryandorchards.TheproductsofferedbythissectorareinconsiderabledemandnotonlyintheWestbutalsoinChina.Kashmiralsohasthe rawmaterial and skills needed todevelopahigh-value-added furniture industry.Withsecurityreturningtothearea,itshouldbepossibletoengagemajortransnationalcorpora-tions that specialize in manufacturing and distributing furniture in developing this part ofKashmir’seconomy.Muchoftheinvestmentrequiredinthissectorcouldcomefromthesecorporations;theywouldalsobeabletoprovidemanagementexpertiseanddesigncapacityforasuccessfulexport-orientedfurnitureindustry.Resourcecommitmentbythepublicsectorwouldnotneedtobelarge,althoughthestatewouldhavetoestablishtraininginstitutionstodeveloptherequiredskills.Indiacouldhelpinthisrespect,usingitswell-developedinstitu-tionalinfrastructuretoprovidetechnicalassistance.

The state’swell-earned reputation as an“orchardof the East,”meanwhile, is basedon acombinationofgoodsoils,appropriatealtitude,andproperclimatethatmakesthelandsuit-ableforcultivatingawidevarietyoffruitsthathavemarketsintheWestandtheMiddleEast.

Table ��. Tourists Visiting Kashmir

Indians Foreigners Total % of Foreigners(in 000s)

1951 9 1 10 10.0

1961 63 11 74 14.9

1971 176 20 196 10.2

1981 599 44 643 6.8

1988 662 60 722 9.6

1991 1 4 5 80.0

2001 67 6 73 8.3

Source:JasbirSingh,The Economy of Jammu & Kashmir(Jammu:RadhaKrishanAnand,2004),table6.1,pp.235–236.

Toachievefullpotentialinthisarea,thegovernment,withhelpfromtransnationalcorpora-tions,willneedtodevelopanintegrateddevelopmentprogramwithdetailedcostsandcostsharing.Thetotalamountofexpenditureenvisagedforthissectorisabout$4billion.

Physical Infrastructure

Before India and Pakistan gained independence, Kashmir’s physical infrastructure—mostlyroads—catered to tourism.Thestatewasnotpartof thearea theBritishhad regardedaseitherstrategicallysensitive(aswasthecasewithPunjab,theNorthwesternFrontierProvince,and,toalesserextent,Balochistan)oreconomicallyimportant(aswasthecasewithPunjabandSindhprovinces).Asaresult,strategicandeconomicconsiderationsresultedinmassiveinvestmentsby theBritish todevelop roads, railways,and irrigation systems inPunjabandSindh.NosuchincentiveswerepresentintheprincelystateofKashmir.Thesmallamountsofinvestmentsmadewereaimedtofacilitatethemovementoftourists,mostofthemBritish,into the area. The tourist infrastructure existed aroundSrinagar, the state capital, and themainlinktoitwasfromRawalpindi,aBritishgarrisontowninthenorthwesternpartofPunjabprovince.

TheroadfromRawalpindiclimbedsteeplytowardMurree,huggingthefoothillsoftheHima-layas.Afterreachingaheightof7,000feet, itwounddowntowardMuzaffarabad,asmallcity in the western part of Kashmir situated on the confluence of two mighty rivers, theNeelumandtheJhelum.(MuzaffarabadwasalmosttotallydestroyedbytheearthquakeofOctober 8, 2005.) From Muzaffarabad the road crossed the Jhelum and went on first toBaramulaandthentoSrinagar.Therewerealsoroadlinks,albeitlesstraveledones,betweenJammuandSialkotinPakistan.TheonlyrailwaylinkwasbetweenSialkotandJammu.OntheIndianside,therailwaysystemterminatedatPathankot,shortoftheboundarywithKashmir.Thus,Kashmir’snaturalcommunicationlinkswerewithPakistan.

Aprogramforinfrastructuraldevelopmentinthestatewouldhavetwocomponents:thedevel-opmentofcommunicationswithinthestatetoservethemajorcentersofeconomicactivitycenteredaroundhigh-valueagriculture,forestry,andtourismandbetterconnectionswiththeworldoutside.MostofthisdevelopmentwillhavetobethroughPakistan,exploitingtheroadandrailwaynetworksthatalreadyexistinthatcountry.Pakistan’swell-developedKarakorumHighwaythatlinksIslamabadwithKashgarinwesternChinaprovideseasyaccesstoKashmirviatheroadstoRawalpindiandalongtheNeelumRivertoAbbolabad.TherailwaylinkbetweenSialkotandJammu,whichisnowinastageofadvanceddisrepair,couldbeputbacktouse,linkingthestatewiththerailwaysystemsofIndiaandPakistanthroughthecityofLahore.

Pakistan’srecentinvestmentinamodernairportinLahorecouldbringinfeederservicesfromSrinagar,Jammu,andothercitiesinthestatetopointsinIndiaandtheworldoutside.Lahorealreadyhasawell-developedfacilityforhandlingaircargoforexportoftheitemsthatwouldbeofinteresttoarevivedKashmirieconomy.Woolenshawls,animalskins,andwoodenarti-factsaredelicateproductsthatneedtobeairfreighted.ThiscouldbedonethroughLahore.

FosteringPeaceinKashmirwithintheSAFTAFramework 49

�0 Kashmir

Theprogramofinfrastructuredevelopmentproposedinthisstudyislessambitiousthanthatfor the development of energy resources and will cost roughly $3 billion over a ten-yearperiod.Thisdoesnot,however,includethemassiveinvestmentthatwillbeneededtorestoretheinfrastructuredestroyedbytheearthquake.

Human Resources

Another important component of the plan would be to improve the quality of humanresourcesinKashmirbyprovidingeducationandskillstotheyoungtohelpthemparticipatein the modern economy. The quality of human resources there has suffered a significantdeclinesincethebeginningoftheinsurgency.OnewayofassessingtheimpactistousethehumandevelopmentindexdevelopedbytheUnitedNationsDevelopmentProgrammeforitsHuman Development Reports.AccordingtotheIndianPlanningCommission,therankingofthestateofKashmirdeclinedfromnineteenthamongthirty-twopoliticaljurisdictionsin1981totwenty-first in1991.TheCommission’sHuman Development Report, 2001,didnotesti-matethevalueforKashmir.In1981,theHumanDevelopmentIndex(HDI)forthestatewascalculatedat0.337comparedwiththeIndianaverageof0.302.Chandigarh,withavalueof0.550, had the highest ranking, whereas Bihar had the lowest ranking at 0.237. In 1991,Kashmir’sHDIwasestimatedat0.402,withChandigarhstillinfirstplaceat0.674andBiharstillinlastplaceat0.308.TheoverallvalueforIndiawas0.381.65

Kashmirdidparticularlypoorlyintermsofliteracy.ThisisespeciallyunfortunateasthestatehadoneofthehighestratesofliteracyamongthevariouspoliticaljurisdictionsofBritishIndia.In2001,forexample,theliteracyratewasonly54.5percentfortheentirepopulation:60.1percentformalesand41.8percentforfemales.Onthisscore,thestaterankedthirty-thirdamong thirty-five jurisdictionsof India.The Indianaverage for thatyearwas65.4percent:75.9percentformalesand54.2percentforfemales.66

Beforethestartoftheinsurgency,Kashmir’seconomyhadaverysmallmoderncomponent.The development of the modern sector suffered because the uncertainty created by theinsurgencydiscouragednewinvestment.Buttherevivalofthestate’seconomy,ifundertakenaccordingtotheplanproposedhere,wouldcreateentrepreneurialandemploymentoppor-tunities in several sectors.Toprepare thepopulation toparticipate in these sectorswouldrequirelargeamountsofadditionalinvestmentineducation.Itwouldalsoneedtheestab-lishmentofspecialized institutions linkedwith thosealreadyworking in IndiaandPakistanaswellasinmoreadvancedcountries.Thetotalcostofthiseffortisestimatedat$2billionovertenyears.

Kashmir and a Subregional Trading Arrangement

The$20billionprogramofdevelopmentproposedherewouldaddsignificantlytothestate’sgrowthrateifitwereaccompaniedbyatradingarrangementthatallowsaccesstoPakistan.

Thiscouldbeachievedwithinasubregional tradeagreement involving India,Pakistan,andKashmir.SuchanarrangementcouldbeacorollarytoSAFTA.

An India–Pakistan–Kashmir regional tradepactcouldgobeyondthatenvisagedwithinthecontextofSAFTA.Itcouldfocusnotjustonallowingtariff-freeaccessamongtheparticipantsforthegoodstheyproduce.ItcouldalsoincludethesectorsexcludedforthetimebeingfromSAFTA.Ofparticularrelevanceforsuchanarrangementwouldbeservicesandmovementofpeople.Asdiscussedabove,tourismisofspecialsignificanceforthestate.IncludingitwithinasubregionaltradearrangementwouldallowfreeaccesstopotentialtouristsfromPakistantoKashmirandIndia,andfromIndiaandKashmirtoPakistan.TheChineseshouldalsobeabletousetheestablishedlandlinksbetweentheircountryandPakistantogainaccesstotheattractionsKashmirhastooffer.

ThefreemovementofpeoplebetweenKashmirandPakistanwouldreversetheconstraintsontravelthatresultedfromthe long-enduringconflict involvingthestate.SuchmovementcouldintegratethesizeablehandicraftindustrythatexistsonbothsidesofthecurrentdivideinKashmir.BeforethepartitionofBritish IndiaandtheconflictoverKashmir, theKashmirihandicraft industry, including wool weaving and woodworking, had strong links with thehandicraft industry in the border cities of Rawalpindi and Sialkot. Those links could bereestablished.

Wouldsuchanarrangementbepractical?WouldIndiaandPakistanbepreparedtoworkonitasawayoffindingalastingsolutiontotheconflict?Atthistime,Indiaseemsinclinedtomovetowardsuchanoption.InlateNovember2004,inawide-rangingdiscussionwiththepressfollowingthevisittoDelhibyShaukatAziz,PakistaniprimeministerNatwarSinghsaidthat “the two countries could settle the Kashmir dispute only if they strengthened ties,increased tradeandbroughtpeopleon the two sides closer toprepare them toacceptacompromise.”Indeed,asubregionaltradearrangementinvolvingIndia,Pakistan,andKash-mircouldbeconcludedonlyifDelhiwaspreparedtograntthestateeconomicandpoliticalpowers that go beyond those given to the other states. This would imply much greaterautonomy than that given to Kashmir in Article 370 of the Indian Constitution, but Indiaseemswillingtoofferthat.Pakistanseemstobemovinginthesamedirection.“Wehavemadeitclear...asfarasregionalautonomyisconcerned,[the]skyisthelimit,”Singhtoldthe news conference.67 “General Musharraf talks of offering the people of Kashmir ...‘somethingbetweenautonomyandindependence,likeself-governance.’Thiscouldbe‘over-watched’byallthreeparties.”68

Whatwouldbetheimpactofthis$20billiondevelopmentplanonKashmir(seetable19)—onthestate’srateofeconomicgrowth,onemployment,ontheincidenceofpoverty,andonbringingaboutagreater integrationofthestatewiththeglobaleconomy?Usingasimplemodel, this levelof investmentspreadovera ten-yearperiodonbothsidesof thepresentdivide should yield $40 million of additional income a year. This would correspond to anincreaseof9.5percenta year in theGSDPofbothpartsofKashmir. Thecombinedgrossproductofthetwosidesisapproximately$4.2billion—$3.3billionforthepartheldbyIndia

FosteringPeaceinKashmirwithintheSAFTAFramework ��

�� Kashmir

and$900millionforthepartsheldbyPakistan—sothistargetisnotimpossibletoachieveconsideringthattheeconomyofbothpartsofKashmirhasgrownataratewellbelowtheIndianandPakistaniaverage,respectively.

Table �9. The Plan for Kashmir’s Economic Development (�00�–�0��)

Amounts in $ billion

% of the total

Hydroelectricity 7.0 35

Tourism 3.0 15

Highvalueagriculture 4.0 20

Infrastructure 3.0 15

Humandevelopment 2.0 10

Total 20.0 100

ThetotalpopulationofKashmirin2004was14million,11millionontheIndiansideoftheborderand3milliononthePakistaniside.Thepopulation is likelytoreach17.5millionby2015. A 9.5 percent growth in GSDP would mean that the size of the economy wouldincreaseinconstanttermsto$10.4billion,whichwould,inturn,increasepercapitaincometo$745andbringitclosetotheanticipatedincomesinbothIndiaandPakistan.

��

Conclusion

Inearly2004,IndiaandPakistandecidedtostartwhattheycalleda“compositedialogue”toresolvetheiroutstandingdisputes.ByfarthemostimportantproblemoftheeightthatwereidentifiedintheIslamabadsummitwastheissueofKashmir.However,theirrespectiveposi-tionshavehardenedovertime,andnobreakthroughcanbeexpectedinthisarea.Giventhat,I havedeveloped two themes in this study. The first is that it isuseful todemonstrate theenormouseconomic, social, andpolitical costs thathavebeen incurredby the two sides—inparticular,byPakistan—asaresultofthecontinuingproblemofKashmir.Specifically,IhavedevelopedananalyticalframeworkforestimatingtheopportunitycostoftheKashmirproblemforPakistan.HadKashmirnotbecomesuchadivisiveissue,Pakistan’seconomywouldhavefaredconsiderablybetterthanithas.Therecognitionofthisfactshoulddevelopaconstituencyforpeace,particularlyinPakistan.

Thesecondlineofargumentadvancedinthisstudyisthattheconstituencyforpeacecouldbeenlargedandstrengthenedifthetwocountriesweretosetuparegionaltradearrange-ment involving them and the two parts of Kashmir. Within such an arrangement, a largedevelopmentprogramcouldbeimplementedthatwouldbringhandsomeeconomicrewardstothecitizensofthestate.Suchaprogramshouldbeabletoattractresourcesfromthedonorcommunity, particularly given the importance of Kashmir for bringing political, social, andeconomicsecuritytoallofSouthAsia.Iestimatethecostofthisprogramat$20billionoveraten-yearperiodandsuggestthatthatwouldbringtherateofGDPgrowthinthetwopartsofKashmirtoabouttheaverageforSouthAsia.ThisinitselfshouldincreasethedesireforapeacefulsolutiontotheproblemofKashmir.

6

��

Notes

TheKashmirdisputehasattractedagreatdealofacademicinterestnotonlyamongscholarsinIndia,Pakistan,andKashmirbutalsoamongforeigners.Amongthemorenotableworks,listedinalphabeticalorderbythenameofauthors,areM.J.Akbar,Kashmir Behind the Vale (NewDelhi:Penguin,1991);AjitBhattacharya,Kashmir: The Wounded Valley (Delhi:UBSPD,1994);SumantraBose,Kashmir: Roots of Conflict, Paths to Peace (Cambridge,MA:HarvardUniversityPress,2003);SisirGupta,Kashmir: A Study in India-Pakistan Relations (Bombay:AsiasPublishingHouse,1966);JosephKorbel,Danger in Kashmir(Princeton,NJ:PrincetonUniversityPress,1954);AlistairLamb,Kashmir: A Disputed Legacy (Karachi,Pakistan:OxfordUniversityPress,1993);BalrajPuri,Kashmir: Towards Insurgency (Delhi:OrientLongman,1993);MushtaqurRahman,Divided Kashmir: Old Problems, New Opportunities for India, Pakistan and the Kashmiri People (London:LynneRiennerPublishers,1996);VictoriaSchofield,Kashmir in the Crossfire (London:I.B.Tauris,1996);TavleenSingh,Kashmir: A Tragedy of Errors (Delhi:Penguin,1995);RobertG.Wirsing,India, Pakistan, and the Kashmir Dispute (London:PalgraveMacmillan,1997);RobertG.Wirsing,Kashmir in the Shadow of War: Regional Rivalries in a Nuclear Age (NewYork:M.E.Sharp,2002).

Thisisaverycontroversialsubjectandviewsvarywildly.Foraselectionofdifferentapproachestothissubject,seeAlexNinian,“HinduandMuslimStrifeinIndia,”Contemporary Review 280,no.1637(June2002),340–343;YoginderSikand,“AnotherAyodhyaintheMaking:TheBabaBudhangiriDargahControversyinSouthIndia,”Journal of Muslim Minority Affairs20,no.2(2000),211–227;RadhaKumar,“India’sHouseDivided:UnderstandingCommunalViolence,”Foreign Affairs81,no.4(July/Aug.2002):171–177;PaulR.Brass,The Production of Hindu-Muslim Violence in Contemporary India(JacksonSchoolPublicationsinInternationalStudies)(Seattle:UniversityofWashingtonPress,2005);StevenI.Wilkinson,Religious Politics and Communal Violence,CriticalIssuesinIndianPolitics(NewYork:OxfordUniversityPress,2005);AshutoshVarshney,Ethnic Conflict and Civic Life: Hindus and Muslims in India (NewHaven,CT:YaleUniversityPress,2003).

ThescopeofSAFTAchangedevenbeforeitwasformallylaunched:AfghanistanwasinvitedtojointheSouthAsianAssociationforRegionalCooperation,SAARC,atthethirteenthmeetingoftheorganization’ssummitheldinDhakainNovember2005.ItwillbecometheeighthmemberofSAFTA.

AlexanderEvans,“TheKashmirInsurgency:AsBadAsItGets,”Small Wars and Insurgencies11,no.1(Spring2000),69–81;SumantraBose,“Kashmir:SourcesofConflict,DimensionsofPeace,”Survival41,no.3(Autumn1999),87–98;VictoriaSchofield,Kashmir in Conflict: India, Pakistan and the Unfinished War (NewYork:I.B.Tauris,2000);AmirMohammadRana,Jihad-e-Kashmir Aur Afghanistan (The Jihad in Kashmir and Afghanistan) (Lahore,Pakistan:MashaalBooks,2002).InUrdu:TheclaimsofstateexcessesperpetratedbyNewDelhiarenumerousandwellfounded.See,forexample,“India:ImpunityMustEndinJammuandKashmir,”April21,2001,AmnestyInternational.Availableathttp://web.amnesty.org/library/Index/ENGASA200232001?open&of=ENG-(accessedOctober21,2003).Alsosee“India:ATrailofUnlawfulKillingsinKashmir:ChithisinghporaandIts

1.

2.

3.

4.

�� Kashmir

Aftermath,”June15,2000.Availableathttp://web.amnesty.org/library/Index/ENGASA200242000?open&of=ENG-IND(accessedOctober21,2003).However,Pakistan’sownsupportofmilitantsattackingcivilianscomesunderfirebythesameorganization.See,forexample,“India:AttacksUnacceptable,”August26,2003.Availableathttp://web.amnesty.org/ENGASA200222003?open&of=ENG-IND(accessedOctober21,2003).

Percapitagrowthratesaremoreindicativeofdevelopmentthanaggregategrowthrates,whilegrossandnetestimatesareequallyusefulforastatesuchasKashmir.Grossdomesticproduct(GDP)isestimatedbyfactoringinincomesfromoutsidetheborder,whichareofconsiderableimportanceforthestateasalargenumberofpeopleliveoutsideitsbordersandremittingincomestofamilies,friends,anddependents.Thetablesuseestimatesfromtwodifferentseriesofstatedomesticincomes;thefirstuses1980–81pricesasthebase,andtheseconduses1993–94prices.Accordingtothe1980–81baseseries,percapitaincomesinKashmirincreasedbylessthan1percentinthethirteen-yearperiodbetween1980–81and1993–94.Thisincreasewasonly25percentoftheIndiannationalaverage.Theincreaseinpercapitaincomeaccordingtothesecondserieswasslightlymorethan50percentofthenationalaverage.Intermsofnetproduct,Kashmir’spercapitaincomeincreasewaslessthan50percentofthenationalaverageaccordingtothefirstseriesandlessthan75percentaccordingtothesecondseries.

IamworkingonaneconomichistoryofPakistanfor1947–2007.

ThereisagrowingliteratureonthesubjectofAsiansintheUnitedKingdom,includingthosefromthePakistanipartofKashmir.See,forinstance,AlisonShaw,Kinship and Continuity: Pakistani Families in Britain(London:Routledge,2000);RobinCohen,The Cambridge Survey of World Migration(Cambridge,UK:CambridgeUniversityPress,1995);andRozinaVisram,Asians in Britain: 400 Years of History(London:PlutoPress,2002).

GovernmentofPakistan,Medium-term Economic Framework, 2005–2015 (Islamabad:PlanningCommission,2004)providesestimatesforincrementalcapitaloutputratio(ICOR)inPakistanandhowtheyareexpectedtochangeovertime.

ThisfacthasbeenrecognizedbyanumberofIndiansources.See,inparticular,JasbirSingh,The Economy of Jammu and Kashmir (Jammu,RadhaKrishnaAnandandCo.,2004),themostdetailedpublishedaccounttodateonthedevelopmentoftheeconomyofthepartofthestatecontrolledbyIndia.

ThisincidentiswellcoveredbyOwnBennetJonesinPakistan: Eye of the Storm (London,YaleUniversityPress,2002,34–56).

SeeStanleyWolpert,Nehru: A Tryst With Destiny (NewYork:OxfordUniversityPress,1997).

TheroleofagricultureinthedevelopmentofKashmir’seconomyiswellcoveredinJasbirSingh,The Economy of Jammu and Kashmir(Jammu:RadhaKrishnaAnand,2004),73–119.

M.GovindaRao,“StateFinancesinIndia:IssuesandChallenges,”Economic and Political Weekly 37,no.31(August3,2002),375–390.

ThetermHindutvameans‘Hinduness’andreferstoapoliticalmovementthatwouldliketoseeIndiabecomeaHindustatewithHinduismadoptedasthestate’sofficialreligion.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

Notes ��

ThispointofviewisstronglypresentedbySumitGanguly,anAmericanscholarofIndiandescent,inhiscontributiontoaForeign AffairsspecialsectionontheriseofIndia.SeeSumitGanguly,“TheKashmirConundrum,”Foreign Affairs (July/August2006,45–56.

Ganguly,“TheKashmirConundrum,”51.

IncrementalcapitaloutputratioorICORisameasureoftheproportionofGDPthatneedstobeinvestedintheeconomytoproducea1percentincreaseingrossdomesticoutput.ThelowertheICOR,themoreefficienttheeconomy.

TheWorldBank,World Development Indicators, 2005(Washington,DC,2005),table5.8,298–301.

InestimatingtheimpactongrowthrateofGDP,Ihaveusedtheincrementalcapitaloutputapproach.Pakistan’shistoricalICORwasusedtoestimatethelikelyincreaseinGDPgrowthifinvestmentscouldbeincreasedasaresult,say,ofreducedexpenditureondefense.

ForthewaythefirstgenerationofPakistanileadersviewedtheattitudeoftheirIndiancounterpartstowardtheircountry,whichwasstrugglingtofinditsfeet,seeChaudhriMuhammadAli,The Emergence of Pakistan(NewYork:ColumbiaUniversityPress,1967).Ali,aseniorMuslimbureaucrat,wasaprominentparticipantinthenegotiationsthatledtothecreationofPakistanin1947andwentontobecomePakistan’sprimeministerin1956.HisaccountoftheseveralattemptsmadebytheadministrationheadedbyJawaharlalNehru,India’sfirstprimeminister,isalsoreflectedinStanleyWolpert,Gandhi’s Passion, The Life and Legacy of Mahatma Gandhi (NewYork:OxfordUniversityPress,2001).

SeeNiallFerguson,Empire: How Britain Made the Modern World (London:AllenLane,2003),50–56;EricStokes,“AgrarianRelations:NorthernandCentralIndia”andElizabethWhiteombe,“Irrigation,”inThe Cambridge Economic History of India, Vol. 2, c1757–c1970, ed. DharmaKumarandMeghdadDesai(Delhi:OrientLongmans,1982),36–86,677–736.

SeethestudiesbyStokesandKumarandDesaicitedinnote21.

WilliamR.Cline,Trade Policy and Global Poverty(Washington,DC:CenterforGlobalDevelopmentandInstituteforInternationalEconomics,2004),280.

SeeUnitedNationsConferenceonTradeandDevelopment(UNCTAD),World Investment Report (Geneva,2005)foradetailedanalysisoftheperformanceofvariousworldregionswithrespecttoflowsofFDI.SouthAsiaisstilldoingmuchmorepoorlythanEastAsia.

UNCTAD,World Investment Report.

GovernmentofPakistan,Pakistan Economic Survey, 2004–2005(Islamabad:MinistryofFinance);tablesinthestatisticalannexhavedataonnationalincomeaccountsinbothcurrentandconstantterms.

KhozemMerchant,“‘Tataeffect’lookssettoweaveitseconomicmagiconBangladesh,”Financial Times(November2,2005),3.

15.

16.

17.

18.

19.

20.

21.

22.

23.

24.

25.

26.

27.

�� Kashmir

BasedonIjazNabi’scommentsonanearlierdraftofthisstudy.NabiisaneconomistintheSouthAsiaregionoftheWorldBank.

SeeBobWoodward’saccountoftheexchangesbetweenU.S.StateDepartment’sseniorleaders(SecretaryColinPowellandDeputySecretaryRichardArmitage)andPakistan’sPresidentPervezMusharrafandLt.GeneralMahmoodAhmad,directorgeneralofInterservicesIntelligence(ISI),whichresultedinatotalchangeinPakistan’sAfghanistanstrategy.BobWoodward,Bush at War (NewYork:SimonandSchuster,2002),58–59.

Author’sconversationwithPresidentPervezMusharraf,March2005.

TheWorldBank,World Development Indicators, 2004,tables1and2.

See,forinstance,UNCTAD,Trade and Development Report, 2002(Geneva,2002).

UNCTAD,whoseannualTradeandDevelopmentReportexaminesinvestmentflowsacrossborders,hasidentifiedfactorendowments,presenceofappropriatehumancapital,reasonablephysicalinfrastructure,andinvestmentenvironmentasthemaincontributingfactorstodecisionsconcerninginvestmentsbytransnationalcorporations.Forthemoment,TNCinterestisconfinedtothewesternpartsofIndia.Myargumentisthatwitharegionaltradearrangementinplace,SouthAsiacouldbegintoattractTNCinvestments.

TheWorldBank,World Development Indicators, 2005 (Washington,DC,2005).

SeeUNCTAD,Trade and Development Report, 2002 (Geneva,2002).

RobinCook,“AStrongEurope—orBush’sferalUScapitalism,”The Guardian(October29,2004),26.

Todate,theonlyextensivesurveyoftheimpactofSAFTAonSouthAsiaandvariouscountriesintheregionwasconductedbyateamofeconomiststhatIheaded.TheprojectwasfinancedbytheU.S.AgencyforInternationalDevelopment(USAID).TheimpactofSAFTAontheeconomiesofIndiaandPakistanisanalyzedintwochaptersAmitaBatra,“CountryPerspectives:India,”andShahidJavedBurkiandMohammedAkbar,“CountryPerspectives:Pakistan”inSouth Asian Free Trade Area: Opportunities and Challenges (Washington,DC:USAID,2005).

NiallFerguson,Empire: How Britain Made the Modern World(London:AllenLane,2003),53.

Ferguson,Empire.

MushtaqurRahman,Divided Kashmir: Old Problems, New Opportunities for India, Pakistan and the Kashmiri People(London:Boulder,1996).

Foradetailedchronicleofthedevelopmentofthedisputeanditsultimateresolution,seeAloysMitchell,The Indus River(NewHaven,CT:YaleUniversityPress,1969).

VictoriaSchofield,Kashmir in the Crossfire(London:I.B.Tauris,1996).

TheSterlingAreawasmadeupofthecountriesofBritishcoloniesthathadlinkedtheircurrenciestotheBritishpoundsterling.TheSterlingAreaisroughlyequivalenttoday’sCommonwealth.

28.

29.

30.

31.

32.

33.

34.

35.

36.

37.

38.

39.

40.

41.

42.

43.

Notes �9

Foranelaborationofthisview,seeShahidJavedBurki, Pakistan: A Nation in the Making(Boulder,CO:WestviewPress,1980).

TheWorldBank,Trade Policy in South Asia: An Overview,ReportNo.29949(Washington,DC,September7,2004),20.

HowZulfikarAliBhuttototallyrestructuredthePakistanieconomyisanalyzedinsomedetailinseveralbooksonPakistan.SeeShahidJavedBurki,Pakistan Under Bhutto, 1971–77(London:Macmillan,1980);ShahidJavedBurki,Pakistan: A Nation in the Making(Boulder,CO:WestviewPress,1986);PervezHasan,Pakistan’s Economy at the Crossroads. Past Policies and Present Imperialists (Karachi,Pakistan:OxfordUniversityPress,1998).

JagdishBhagwati,In Defense of Globalization(NewYork:OxfordUniversityPress,2004).

JosephStiglitz,Globalization and its Discontents(NewYork:W.W.Norton,2002).

TheWorldBank,The East Asian Miracle: Economic Growth and Public Policy(Washington,DC,1993).

WorldBank,The East Asian Miracle,13. AmongthisgroupofanalystswastheOxfordeconomistIanLittle.SeeIanM.D.Little,Economic Development(NewYork:BasicBooks,1982).

Little,Economic Development,table1.6,39.

TheWorldBank,World Development Indicators, 2004, 1

TheIndianeconomistJagdishBhagwatiisoneofthemostarticulateproponentsofthispointofview.Forhisapproachtointernationaltrade,Bhagwati,In Defense of Globalization.

TheWorldBank,Global Economic Prospects: Trade, Regionalism and Development(Washington,DC,October2004),2–12.

AddittyaaMattooandPierreSauve,“RegionalismandTradeinServicesinWesternHemisphere:APolicyAgenda,”inIntegrating the Americas, ed. A.Estvadeodal,DaniRodrik,AlanTaylor,andAndresVelasco(Cambridge,MA:HarvardUniversityPress,2004).

TheresultsofthestudyarereportedinTheWorldBank,Global Economic Prospects, 2005(Washington,DC,2004),5–12.

ThesemodelsdrawtheirnamefromNewtonianphysicsinthattradeflowsbetweentwocountriesincreaseinproportiontotheireconomicmass(asmeasuredbytheirrespectiveGDPs)andareconstrainedbythefrictionbetweenthem(proxiedbythedistancebetweenthem)duetothetransactionandothercosts.

See,forinstance,J.A.Frankel,E.Stein,andS.J.Wei,Regional Trading Blocs in the World Economic System(Washington,DC:InstituteforInternationalEconomics,1997).

SeeS.Lahiri,“Controversy:RegionalismVersusMultilateralism,”The Economic Journal108(1998),1126–1127.

44.

45.

46.

47.

48.

49.

50.

51.

52.

53.

54.

55.

56.

57.

58.

59.

�0 Kashmir

Thissectiondrawsheavilyonmychapter,“PotentialoftheSouthAsianFreeTradeArea”inUSAID,South Asian Free Trade Area: Opportunities and Challenges(Washington,DC,October2005).

http://www.saarc-sec.org

PerhapsthemostauthoritativeworkanalyzingtheimpactofSAFTAonthememberstatesofSAARC,aswellastheopportunitiesandchallengespresentedbyit,isintheUSAID-sponsoredreportreferredtoinnote59.Thisreportwasproducedbyateamofseveneconomistsworkingundermysupervision.Iwrotethe“overview”chapterofthereportaswellasthechapteranalyzingtheimpactofSAFTAonPakistan.ThelatterwaswrittenwiththeassistanceofMohammedAkbar,aneconomistbasedinPakistan.

DetailsarefromtheSAARCMinisterialDeclaration,January2004.

Theseandotherestimatesprovidedinthispartofthestudyareroughandtentative.Theywillhavetobefirmedupbyexpertswhowilluseengineeringandproperprojectanalysistocomeupwithcostsestimates.

PlanningCommission,Human Development Report, 2001 (NewDelhi:GovernmentofIndia,2001).

OfficeoftheRegistrarGeneralofIndia,NewDelhi.

V.P.Rajesh,“IndiaSuggestsGreaterAutonomyforKashmir,”The Washington Post, November26,2004.

“IndiaandPakistan:InfromtheCold,”The Economist,May28,2005,44.

60.

61.

62.

63.

64.

65.

66.

67.

68.

About the Author

ShahidJavedBurkiisaformervicepresidentoftheWorldBank,whereheworkedfrom1974to1999.HealsoservedasfinanceministerofPakistanin1996–97. In2004hewasattheWoodrowWilsonCenterforInternationalScholars,wherehebeganworkonhislatestbook,Historical Dictionary of Pakistan,whichwaspublishedbyScarecrowPressin2006.

About the Author ��

�� Kashmir

About the Institute

TheUnitedStatesInstituteofPeaceisanindependent,nonpartisaninstitutionestablishedandfunded

byCongress. Itsgoalsaretohelppreventandresolveviolentconflicts,promotepost-conflictpeace-

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David Zweig (No. 44, June 2002) n Training for Peace and Humanitarian Relief Operations: Advancing Best Practices, by

Robert M. Schoenhaus (No. 43, April 2002) n The Role of International Financial Institutions in International Humanitarian Law, by

Laurie R. Blank (No. 42, January 2002) n Controlling Weapons of Mass Destruction: Findings from USIP-Sponsored Projects, edited

by Deepa M. Ollapally (No. 41, September 2001) n Passing the Baton: Challenges of Statecraft for the New Administration, with remarks by

Samuel R. Berger and Condoleezza Rice (No. 40, May 2001) n From Revolutionary Internationalism to Conservative Nationalism: The Chinese Military’s

Discourse on National Security and Identity in the Post-Mao Era, by Nan Li (No. 39, May 2001)

n El Salvador: Implementation of the Peace Accords, edited by Margarita S. Studemeister (No. 38, January 2001)

Of Related Interest

A number of other publications from the United States Institute of Peace examine issues related to Kashmir and India–Pakistan relations:

Recent Institute reports include:

n India and Pakistan Engagement: Prospects for Breakthrough or Breakdown? by C. Christine Fair (Special Report 129, January 2005)

n The Political Economy of the Kashmir Conflict: Opportunities for Economic Peacebuilding and for U.S. Policy, by Wajahat Habibullah (Special Report 121, June 2004)

n Quickstep or Kadam Taal?: The Elusive Search for Peace in Jammu and Kashmir, by Praveen Swami (Special Report 133, March 2005)

Recent books from USIP Press include:

n Interfaith Dialogue and Peacebuilding, by David R. Smock (2002)n Religious Perspectives on War: Christian, Muslim, and Jewish Attitudes toward Force

(Revised Edition), by David R. Smock (2002)n Perspectives on Pacifism: Christian, Jewish, and Muslim Views, by David R. Smock (1995)

To order books, call 800-868-8064 (U.S. only) or 703-661-1590, or fax 703-661-1501.

United States Institute of Peace

1200 17th Street NW • Washington, DC 20036 • www.usip.org Peaceworks 59