Ishrat Husain Dean & Director, Institute of Business Administration, Karachi and

Former Governor, State Bank of Pakistan

Distinguished Speaker SeriesDistinguished Speaker SeriesDistinguished Speaker Series Special LectureSpecial LectureSpecial Lecture

Towards a South Asian Economic Union

Centre for Pakistan Studies MMAJ Academy of International Studies

Jamia Millia Islamia

Distinguished Speaker Series

The Distinguished Speaker Series is an offshoot of the Chaophraya Dialogue — a track-two initiative between India and Pakistan, being organised by the Islamabad-based Jinnah Insti-tute (JI) and Melbourne-based Australia India Institute (AII) for the last several years. This initiative has brought together highly placed Indians and Pakistanis (retired officials, senior journalists, respected academics, analysts and other civil society members), at an unofficial level, to deliberate on ways and means to improve India-Pakistan relations. JI and AII in col-laboration with the Centre for Pakistan Studies, Academy of International Studies, Jamia Mil-lia Islamia have initiated the Distinguished Speaker Series. The idea behind the Distinguished Speaker Series is to facilitate the visit of highly respected and distinguished personalities from India and Pakistan to each other's country at frequent intervals to engage a wider audi-ence in New Delhi and Islamabad respectively. In India the programme is facilitated by the Centre for Pakistan Studies, Academy of International Studies, Jamia Millia Islamia. In the recent past under the Distinguished Speaker Series, the Centre for Pakistan Studies has hosted distinguished personalities like Prof. Akmal Hussain, Distinguished Professor, Beaconhouse National University, Lahore; Mr. Javed Jabbar, former senator and film pro-ducer; Mr. Salim Raza, former Governor of the State Bank of Pakistan, and Ambassador Sherry Rehman, former Ambassador of Pakistan to the US. The fifth public lecture under the series was delivered by Dr. Ishrat Husain, former Governor of the State Bank of Pakistan and currently Dean and Director of the Institute of Business Administration, Karachi on Friday, 11th September 2014 at 2.30 p.m at the Tagore Conference room, Dayar-e Mir Taqi Mir in the Administrative Block, Jamia Millia Islamia.

Profile of Distinguished Speaker, Dr. Ishrat Husain

Dr. Ishrat Husain, a former civil servant of Pakistan joined the World Bank in 1979. He be-came the Bank’s Director for Poverty and Social Department and in 1997 was named the Country Director for Central Asian Republics. He was appointed the Governor of Pakistan’s State Bank in December 1999. During the next six years, he implemented a major pro-gramme of restructuring of the State Bank and steered the reforms of the banking sector. As a member of the economic management team of the Government, he played a key role in the impressive economic turnaround of Pakistan. In recognition of his meritorious services he was conferred the prestigious award of “Hilal-e-Imtiaz” by the President of Pakistan in 2003. During 2005-06 he was appointed by the Board of IMF as a member of a three person panel to evaluate the IEO and was also a member of the Mahathir Commission 2020 vision for the Islamic Development Bank (IDB). He was appointed the Chairman, National Commission for Government Reforms in May 2006 with the status of a Federal Minister and held that posi-tion for two years reporting directly to the President and Prime Minister of Pakistan. In March 2008, he took over the charge of the office of the Dean & Director, Institute of Busi-ness Administration, Karachi – the oldest graduate business school in Asia. He is currently also a member of the Middle East Advisory Group of the IMF and the Regional Advisory Group of the UNDP. He is also the Chairman of the World Economic Forum Global Advisory Council on Pakistan. He has authored 12 books and monographs. His book Pakistan: The

Economy of an Elitist State published by Oxford University Press in 1999 is a highly ac-claimed book. He obtained a Master’s degree in Development Economics from Williams Col-lege and Doctorate in Economics from Boston University in 1978. He is a graduate of the Ex-ecutive Development programme jointly sponsored by Harvard, Stanford and INSEAD.

T he topic which I wish to discuss

this afternoon is a sad commentary on the past and present rela-tions between the two neighbouring coun-tries but is based on a promising hope for the future.

As a student of comparative development eco-nomics I am appalled at the low level of trade that takes place within the South Asian region. On the other hand, East Asia has developed mechanisms that have promoted economic, trade and investment ties, increased cultural exchanges and deepened non-traditional secu-rity cooperation such as disaster prevention and mitigation. The main obstacle in the way of a vibrant South Asian Economic Union, in my view, is the tensions that have persisted be-tween India and Pakistan for a very long time.

My review of the history of these relations has led me to believe that India-Pakistan Economic relations have remained subservient to the other contentious issues that fall within the po-litical and security domains. The natural ingre-dients of continuity, geography, infrastructure links, cultural similarities, linguistic overlap and common history that could have bound other neighbouring countries more strongly have not been able to offset the vituperative discourse and deep-rooted trust deficit between the two countries that has been allowed to flourish dur-ing the last six decades. This period has been marked by some positive breakthroughs at vari-ous points of time e.g, the Indus Water Treaty, the Tashkent Declaration, the Simla Agreement, Lahore Declaration and the Musharraf-Manmohan Singh Formula (that was not con-summated). So if there are visionary leaders in both the countries we are able to untie the knots. But the bitter memories of the Partition, the 1965 war, the 1971 breakup of the two wings of Pakistan, the 1998 nuclear tests, the Kargil crisis, the 2002 mobilisation of troops,

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the Mumbai incident have done more to sour these relations.

There are hawks and doves on both sides of the fence and it would be interesting to use their prism to see the nature of this relationship.

The hawks in Pakistan argue that until Kashmir – the core dispute between India and Pakistan is resolved amicably; the prospects for peace be-tween India and Pakistan would continue to re-main tenuous. To them, “the recent election of Mr. Modi is a clear sign of bellicosity in India when it comes to dealing with Pakistan; the hys-teria of the Indian media and propaganda against Pakistan whenever there is an incident on the border or LOC; and the proclivity of In-dian Army Chiefs to threaten Pakistan every now and then all suggest that India is spoiling for a fight. There are strong perceptions that India’s massive rearmament programme that has gathered speed with induction of new weapon systems, in particular, new anti-missile weaponry is aimed at Pakistan.” It is alleged that India plans to weaken and bleed Pakistan by supporting anti-Pakistan elements in Af-ghanistan and Balochistan. India’s support to Tehrik-e-Taliban Pakistan (TTP) and cross-border raids on Pakistan by TTP elements are a major source of concern. There are serious ap-prehensions that in the post-2014 period, the Pakistan-Afghanistan border region will be transformed into an Afghanistan-India-Pakistan battleground with India actively backing Af-ghanistan. They accuse RAW of “providing funds, training and arms from camps in South-ern Afghanistan to separatist insurgents of Ba-lochistan.” The Indian strategic objective, there-fore, is weakening Pakistan militarily and isolat-ing it diplomatically.

The doves in Pakistan, being on defensive, re-spond that India has ambitions of becoming a regional and economic power. The integration of India in the world economy, the growing size of its middle class and market, the favourable demographics, a larger English speaking highly talented professional class comparable to the advanced countries, long tradition of democ-

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ratic governance and a paradigm shift in its for-eign policy in the recent years along with a vi-brant private sector make the attainment of this objective feasible. Indian policy-makers would therefore want to see a peaceful, stable, secure neighbour at its borders. Diversion of resources and preoccupation with irritants would either slow down this quest by India or impair its ca-pacity. Economic growth and development re-quire long periods of political stability, peace and external security. The signaling effect of a bellicose and belligerent India picking up cudg-els with its neighbouring country off and on is going to create uncertainty and negative vibes. Logic and reasoning therefore do not lead one to conclude that India in the 21st Century will pursue the old trodden agenda that has not helped it in the past and might have hurt it. The International Community would also feel at ease if the relations between these two nuclear armed countries in the region get normalised and friendly. They are likely to heave a sigh of relief as one of the major causes of anxiety on the global security scene is eliminated. The his-torical legacy of hostility and adversity has given only pain to Pakistan and it is in our na-tional interest to grant Most Favoured Nation (MFN) status to India sooner than later and to ease the visa regime to promote people-to-people exchange.

A significant development in Pakistan to be noted is that all the major political parties fought the 2013 elections on an explicit mani-festo of normalising trade with India and im-

proving relations in general. This consensus did not exist even in 2008. The media blows much less heat than what it used to do in the past. The realisation has dawned upon them because of continued economic stagnation for last six years, while other countries in the region are moving ahead and overtaking Pakistan in the global markets. This consensus is built upon the premise that Pakistan can benefit by accessing a much larger Indian market of 300 to 400 million middle class consumers with growing appetite for goods and services. At the same time the Pakistani producers will gain by sourcing their raw materials, inputs and components from In-dia. The diversion of informal trade taking place through Dubai and Singapore if channeled di-rectly can effect reduction in costs to the end-users.

The hawks in India have become much more assertive since the unfortunate Mumbai inci-dent. They believe that Pakistan has become the epicentre of terrorism and its non-state actors – mainly the Jihadists trained nurtured and aided by Pakistan’s Inter-Services Intelligence (ISI) - have been consistently attempting to destabilise and hurt India by their acts of terrorism. The ISI is accused of “sponsoring Taliban attacks on In-dia’s Embassy in Kabul and on Indian doctors and contractors working in the capital and else-where.” The Pakistani elected governments are perceived to be so weak that despite their best intentions and efforts they are unable to exert any control on the ISI and Pakistan Army. Many Indians believe that whenever a civilian govern-ment makes serious overtures to improve rela-tions with India some unforeseen incident takes place that sets back the process. The Pakistan Army is using proxies to execute its strategy of keeping India under constant threat.

The doves in India articulate cogently that it is in India’s larger national interests to end the era of past hostilities. India of 2014 is very much different than India of 1990 – in terms of self-confidence, economic and military strength and its standing in the world community. It does not behoove a larger country that accounts for 80

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per cent of South Asian Regional GDP to shirk playing its leadership role in the region. That can happen only if the relations with Pakistan can be set on the right footing in an “uninterrupted and uninterruptible” manner. The rest will automatically follow. Other coun-tries in the region which are smaller in eco-nomic size will also gain by the removal of this big obstacle from the way.

The above perceptions are not going to evapo-rate in the air soon. The political differences be-tween the two countries are not going to disap-pear overnight. The past and present policies and practices have not eased the tensions be-tween the two countries. Looking towards the future, my plea is that there is a need for a para-digm shift from the domination of political is-sues towards economic issues in forging the re-lations between the two countries. For the past sixty seven years, there has been very little pro-gress in the resolution of political disputes that has vitiated the atmosphere for peace and rec-onciliation. Why not change the sequence and attempt to work diligently on strong regional economic cooperation, promote people-to-people exchange, build the constituencies for

India in Pakistan and for Pakistan in India and hope that it will eventually lead to strengthen-ing the prospects for peace.

There are those in both the countries who hold firm belief that unless political disputes are re-solved first, sustained economic relations are not possible. My answer to them is that we have been treading that road for quite a while with-out reaching our destination. Why not try an alternate route? After all, China and Taiwan have become large trading partners without giving up their respective positions on the po-litical disputes between them. China and India are now trading goods with $65 billion annu-ally. Have they resolved their political disputes? Are they not holding on to their respective stands on these disputes? Why not follow these examples in case of India and Pakistan?

In order to pursue this path leading ultimately to a South Asian Economic Union there are at least three building blocks which deserve seri-ous attention.

First, India and Pakistan should move the last mile on the journey towards the normalisation

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is estimated that for the world as a whole the import content of exports is about 30 per cent. An UNCTAD study has concluded that 80 per cent of the $20 trillion trade takes place though Global Value Chains. China’s market share in global trade of over 10 per cent compared to India’s share of 1.8 per cent can be partly attrib-uted to the former’s active participation in Global Value Chains: 90 per cent of tariff on products traded between China and ASEAN have been eliminated.

South Asia is an exception to this pattern of pro-duction except Bangladesh where garments have significant value addition on raw materials and intermediate goods procured from India and Pakistan. Higher tariffs are in fact a tax on downstream processing parts of the value chain. South Asian countries therefore have to keep tariffs low on imported goods. This raises the political economy issue of protecting do-mestic import substitutes that will suffer if the tariffs are lowered or made zero. Thus, SAFTA with 5 per cent tariff rate should be made effec-tive immediately so that South Asia is able to increase its intra-industry trade and develop Regional Value Chains. It may be pertinent to mention here that exports from South to South now exceed 50 per cent of the South’s total ex-ports. The share of emerging and developing economies in world trade has doubled from 16

of trade. By replacing the positive list by the negative list in 2012 Pakistan has already al-lowed 85 per cent of tariff lines to be open for trading between the two countries. Why not phase out the remaining 15 per cent and thus automatically conferring the MFN status on In-dia? At the same time, India should not insist that its NTBs are not aimed at Pakistan and take some confidence-building measures to remove the barriers that are not permitting Pakistani exporters to sell their goods in the Indian mar-ket. Businessmen in India are reported to have been approached by the Intelligence agencies as to why they are distributing Pakistani goods. Opacity, bureaucratic hassles and suspicions have to give way to a more open and transpar-ent way of dealing with trade on both sides. The stop-go policies do not inspire confidence among the businessmen as they require predict-able and consistent environment for their in-vestment.

The production pattern has significantly changed in the last decade or so. Production of manufactured goods is organised through re-gional and global chains with goods processed in multiple countries that are part of the chain. We are in an era of Vertical Specialisation where a large share of the price of the finished or as-sembled export reflects the value of the prod-uct’s imported inputs, parts and components. It

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tract many Indians from India and overseas to visit Pakistan. Similarly, India has many places of historical, religious and cultural interest to Pakistan – the Mughal monuments, Ajmer Sharif, Nizamuddin Aulia, etc. Pakistani singers and film actors have become popular in India while Bollywood actors are adored for long in Pakistan. Exchange of artists, musicians, sing-ers, actors would together be a natural conse-quence. India-Pakistan cricket matches draw largest crowds in the world. Premier league tournaments involving Indian and Pakistani players can be a big source of entertainment for millions of fans. All this requires ease in visa issuance and removal of restrictions such as entry and exit from the same place, reporting to the police, limited duration, and single-entry visits only. The students and faculty members should also be given special unrestricted privi-leges to enter each other’s country. These peo-ple-to-people exchanges will remove many of the misperceptions and misunderstanding and promote better awareness of each other’s per-spective and point of view.

in 1991 to 32 per cent in 2011 and is projected to grow faster in the coming decade. South Asia has not been able to derive any benefits from this trend in any substantial way.

Increasing trade of goods and services leads to the next logical step i.e, direct investment flows. If the intra-regional trade results in specialisa-tion in certain locations the investors – both re-gional as well as extra-regional would find it at-tractive to invest in those industries in the spe-cific locations catering to growing demands of regional supply chains. Cross-border facilitation of trade has to be followed by ease in cross-border flows of finance. Bank branches, cross-listing of shares, joint institutional investors and Private Equity funds etc. Long drawn out proc-esses of approvals, clearances and permits have to be done away with. In 2012, the Chinese had invested $12.6 billion in Europe and $7.5 billion in North America to merit as it draws upon the supplies from these locations.

The second area of cooperation is in the context of global climate change agenda. India, Pakistan and Bangladesh draw their sustenance from the vast river network that originates in the Hima-layan ranges. The forecasts about melting ice caps and glaciers, rising sea levels, stressed wa-ter supplies, heavy rains, flooding and droughts and heat waves create the incentive for the South Asian countries to work together and take part in adaptation and mitigation exercise in a coordinated manner. As water supplies for agri-culture crops become inadequate and the yields of all the major grains are likely to be reduced because of the accumulation of ozone, high tem-perature and faster photosynthesis helping growth of more weeds , the chances for incrimi-nation, blame game and creating adversaries would become much high. An evidence-based cooperative solution that minimises the losses and distributes the pain equitably should be ex-plored and a beginning must be made now rather than waiting for over.

The third area of economic cooperation is tour-ism. Pakistan has many holy shrines of Sikhs, Hindus and Buddhists. Heritage tourism can at-

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Centre for Pakistan Studies, Jamia Millia Islamia

Centre for Pakistan Studies MMAJ Academy of International Studies Jamia Millia Islamia New Delhi 110025

URL: http://www.jmi.ac.in

About the Centre for Pakistan Studies

The Centre for Pakistan Studies, at the MMAJ Academy of Interna-

tional Studies, Jamia Millia Islamia, New Delhi was established as

a programme in 2004. It was upgraded to a Centre in April 2014.

Pakistan is not only India’s most important neighbour and im-

pinges heavily on India’s national consciousness and security but

also is an interesting case study of political development in South

Asia. Its internal social, economic and political dynamics are

complex. Its attempt to create a national identity, social cohesion

and uneven economic development are reflective of the prob-

lems faced by many of the Third World countries. Pakistan’s en-

gagement with Islam and ideology, civil-military relations, its

strategic ambitions and regional policies present interesting

challenges to scholarship. Despite a shared history, cultural and

linguistic heritage, Pakistan is also one of the most difficult secu-

rity challenges for India. Pakistan is not only of interest to schol-

ars but also policy makers. The Centre for Pakistan Studies hopes

to not only promote a greater understanding of Pakistan but also

inform public policy. The Centre encourages interdisciplinary re-

search focusing on history, sociology, contemporary politics,

trade and economics, geopolitics, security and foreign policy and

also popular culture and literature of Pakistan.

The objectives of the Centre for Pakistan Studies are to:

• Promote Indian understanding of Pakistan in historical and

contemporary perspectives.

• Develop scholarship, build capacity and expertise on Pakistan.

• Stimulate debate in public domain in India for policy-making.

• Network with similar institutions.

• Publish regular research findings.

The Centre for Pakistan Studies offers the following three op-

tional courses in the M. Phil programme: Political Development

and Foreign Policy of Pakistan; State and Civil Society in Pakistan;

and Military and Politics in Pakistan. In the last few years, the

Centre has organised several seminars, panel discussions, round-

tables, guest lectures by scholars and other eminent personali-

ties from Pakistan to develop a greater understanding of the re-

gion and Pakistan.

The coordinator of the Centre is Prof. Ajay Darshan Behera.