By Ajay Shah, on November 3rd, 2011
For once, I am pleased at how India played it: India gave Pakistan MFN status way back, in 1996, without getting into the silliness of reciprocity. A hallmark of professional competence in international trade is the idea of unilateral liberalisation: Even if another country is silly enough to have barriers against us, we should not have trade barriers against them. Removing barriers against India’s globalisation is a favour to us, regardless of what it does to anyone else. India often gets into cul de sacs by obsessing on reciprocity – e.g. we won’t open up to imports of agricultural products because the Europeans won’t. We won’t allow foreign banks to operate in India because some other countries have barriers against the operations of Indian banks. And so on. But for once, in this case, our guys seem to have played it right (and way back in 1996, too!).
And now, we have a nice next step: Pakistan will give India MFN status. What might happen next? Here are some conjectures:
- At present, there is significant Indo-Pak trade; it merely gets routed through Dubai. Once Pakistan gives India MFN status, the entrepot trade that was going Bombay -> Dubai -> Karachi will go Bombay -> Karachi. This is bad news for Dubai and for individuals and firms which are invested in the future of Dubai as an entrepot centre. Trade data should show a fairly sharp decline in India’s exports to UAE and a fairly sharp rise in India’s exports to Pakistan.
- There will be a boom in shipping, communication and trade serving the direct Bombay -> Karachi route. Similarly, the ports of Gujarat will do a lot of business directly to Karachi.
- At first blush, little changes: the goods that used to go via Dubai would now go directly to Karachi. But a recurring theme in economics is the extent to which apparently small frictions loom large. The removal of fairly modest frictions matters a lot for business activity. So when the cost of shipping goes down by roughly 3x, even though the cost of shipping may be small in absolute terms, this would have a big impact on trade. Another dimension of cost is the cost of the middleman in Dubai. The establishment cost of this middleman in Dubai would be eliminated.
- Important dynamics will now set in amidst firms in Pakistan. Firms that compete with exports from India will suffer. Firms that consume imported inputs from India will thrive. Creative destruction will take place; resources will shift from one group of firms to another. Exporters will be better able to export to India, both because of access to cheaper labour and capital that’s freed up by firms that die owing to import competition, and because of improved competitiveness that comes from cheaper raw materials. Exports from Pakistan to India will go up significantly.
- Large Indian and Pakistani corporations will look much more seriously at the opportunities that lie just beyond the national border. Over time, human capacities and human networks will build up on both sides, supporting cross-border operations. This will take time to ripen, but when it does, the effects will be large. A huge fraction of global trade is intra-firm trade, so it’s very important to have large firms of both countries having operations in both countries, in order to get growth of trade.
- The biggest gains in India will be in Gujarat, given the myriad ports in Gujarat which are a short distance away from Pakistan. But in the future, if road and rail links open up, then there are big opportunities in Punjab also. Wouldn’t it be nice to have a NHAI style road running from Ahmedabad to Karachi, and from Amritsar to Lahore?
To the extent that we’re merely rerouting trade, bypassing Dubai, this will impose no new stress on ports and airports in Pakistan. But to the extent that new trade is created – as I expect it will (and as argued above) – then new work will be required in Pakistan on enhancing the capacity of ports and airports. I would personally be surprised if the effects are not large.
In the intuition of economists, there is a gravity model in the affairs of men. Proximity and low transactions costs are incredibly important. The natural opportunity for India to grow international integration on all dimensions (goods, services, people, ideas, capital) lies in our immediate neighbourhood. India’s connections into the region are shockingly below those seen for all other large countries. Doing better on connections with Pakistan would be a nice step forward.
Consider a product like cement, which is ordinarily considered a non-tradeable. Transportation of cement is so hard, there isn’t a unified national market in India. There are a series of regional markets. But even in this, modifications of transportation have mattered greatly. E.g. when Gujarat Ambuja came up with the innovation (back in the mid 1990s) of sending cement from Saurashtra to Bombay, by sea, this was a very big deal. By that same logic, cement from the coast of Saurashtra can go to Pakistan (or vice versa, depending on who produces at a lower price). We should not see trade in goods in isolation. All dimensions of globalisation are intimately connected to each other. To do more trade in goods and services, we need more movement of people. Ergo, the silly visa restrictions that both countries impose on each other need to be eased. Finance follows trade: So where trade in goods and services leads the way, bigger financial integration will inevitably follow with trade financing, cross-border banking, payments, purchases of information, operations of multinationals and FDI, INR/PKR currency risk management, and investment flows. More will need to be done on investment guarantees, export/import trade financing, etc.
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By Ajay Shah, on May 20th, 2011
Thomas E. Ricks (in Foreign Policy) and Lawrence Wright (in New Yorker) on Pakistan.
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Sebastian Sosa (on voxEU) say that the potential payoff from exchange rate misalignment is small.
A working paper: Liquidity considerations in estimating implied volatility by Rohini Grover and Susan Thomas.
A working paper: Improving the legal process in enforcement at SEBI by Dharmishta Raval.
A working paper: Has India emerged? Business cycle facts from a transitioning economy by Chetan Ghate, Radhika Pandey, and Ila Patnaik.
Mobile trucks that sell food, and link up to customers using twitter: is India is ready for this? See Caroline McCarthy on CNet News.
A first response on the killing of UBL by Steve Coll.
Robert S. Boynton has an article in the Atlantic about how modern communication technology is actually making a small difference to breaking down the North Korean government.
Henry Shukman has a great story in Outside magazine about the 3000 square kilometres of `Chernobyl Exclusion Zone’ which has turned into a miracle for biodiversity. I often wonder what would happen if 3000 square kilometres of prime Gangetic land became true forest.
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Michael Lewis has a persuasive sounding article, about how a Richter 7.9 earthquake that hits Tokyo will devastate the world
economy. This was written in 1989. By and large, these things did not happen in the recent Richter 9.0 earthquake. Yes, the
recent quake did not frontally hit Tokyo, but then Richter 9.0 is way bigger than 7.9 (this is log scale). It is a useful exercise,
for everyone interested in finance, to read this article and understand how such journalistic thinking goes wrong.
Is research funding going into randomised trials yielding a good bang for the buck? My personal view is that a better use of money is to build datasets like this which are then placed into the public domain, and used by hundreds of researchers.
By Ajay Shah, on August 18th, 2010
Tom Wright and Siobhan Gorman in the Wall Street Journal on new thinking by Pakistan’s ISI about who is enemy #1.
Tamal Bandyopadhyay in the Mint on the campaign against C. B. Bhave. Also see Ashok Desai and Mahesh Vyas on these issues.
A. K. Bhattacharya in the Business Standard on the crisis of project management in government. This is what animates Nandan Nilekani’s TAGUP group and I hope this induces fundamental change in Indian public administration. Also see.
Fascinating new research by Devesh Kapur, Chandra Bhan Prasad, Lant Pritchett and Shyam Babu, written by Ila Patnaik in the Financial Express.
Jayanth Varma is dismayed at RBI’s lack of modern finance knowledge in thinking about CDS.
India on the FATF high table by K. P. Krishnan, in the Economic Times.
Neelasri Barman and Parnika Sokhi in DNA about the most important question in RBI reforms: that of HR practices. Roughly 30
years ago, RBI used to do direct recruitment at middle management levels. When the union became powerful and recruitment became restricted to the entry level, it had greatly damaging consequences on the organisation’s capability. If the HR falls
into place with really top quality people, then all the needed RBI reforms will rapidly get done.
William Dalrymple in the New York Times on Sufis.
Jeffrey Goldberg in the Atlantic magazine about the task of stopping Iran’s nuclear capability.
Jeff Frankel says that we have a lot to learn from small countries.
Damon Darlin in the New York Times tells the story about how Netflix worked on video over the net even though this directly
competed with its profitable DVD-by-post business.
Javier Blas and Greg Farrell in the Financial Times on the interesting role of agricultural commodity futures in the recent
flareup of prices.
By Ajay Shah, on June 3rd, 2010
C. Raja Mohan in The American Interest on India’s strategic directions.
A Reuters report on how Pakistanis are responding to the global backlash against Pakistan.
Writing in the Wall Street Journal, Matt Ridley has some great insights into economic development.
M. K. Venu on corruption in Indian telecom.
Sanjeev Sanyal in the Business Standard on how to think about the role of the university in the city.
When Israel graduated into OECD, it got dropped from the MSCI Emerging Markets index, which helped India gain a bit of weight there.
Economic Opportunities and Gender Differences in Human Capital: Experimental Evidence for India by Robert T. Jensen finds that when the BPO industry brings economic opportunities to women in India, this positively impacts investments in girls – who are more likely to gain body mass and go to school.
The global university and the future of human capital by Andrew Kelly in The American.
Thailand’s grief: Thomas Fuller in the New York Times, a set of pictures at boston.com, and another one.
How to save the news by James Fallows in the Atlantic magazine: an important article that everyone interested in the future of newspapers should read.
5 Ways Steve Ballmer Can Save Microsoft’s Mobile Bacon by Galen Gruman: A careful and thorough guide to Microsoft about how to come back into the mobile phone game.
Robert Samuelson says the story of Greece tells us something about the sustainability of the European-style welfare state. Martin Feldstein has a suggestion for how to achieve fiscal prudence in Europe (and by analogy, in India). Also see Feldstein on the Euro crisis.
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