Considering the effects of a large market, regional cooperation will invariably lead to a larger market size for the products of the region as it will allow free movement and lower tariff rates
The terms economic union and economic cooperation have gained momentum. The implemented and impending policies for forming trade alliances have their source in the discipline of international trade and economics. To study wider regional cooperation, it is important for a person to have knowledge of international economics, to know what international trade theories are and how they specifically apply to Pakistan and India trade relations.
First of all, the economic theory of comparative advantage explains that two countries can trade to their mutual benefit even when one is more efficient than the other in producing everything and the producers in the less efficient economy can compete only by paying lower wages. To examine how this model applies to Pakistan and its neighbours first consider that Pakistan is a country that is of fairly medium size compared to its neighbours vis-à-vis India, China and Russia according to its resources and population. As we are producing cement, textiles and ceramics due to our labour expertise and resource availability, it is very hard for us to compete with India in the software sector and with China in electronics and gadgets. Now it is equally expensive for these countries to compete with Pakistan on the aforementioned sectors. Thus, according to an economist’s point of view, there is very little room for fears of Indian hegemony or of China destroying our markets. Trade and economic cooperation with these countries is going to be extremely beneficial only if Pakistan develops the right sectors at right time and then exports its surplus.
Secondly, let us look at the Heckscher-Ohlin Model and its implications for possible Pakistan India joint ventures. According to the Heckscher-Ohlin Model the biased effect of increase in resources on production possibilities is key to understanding how difference in resources give rise to international trade, stimulates it and makes it beneficial to all concerned. Through economic cooperation in the region the supply of land and labour is going to increase disproportionately for both India and Pakistan as compared with the production of silk or petroleum goods. Now, if China on one hand is good at producing silk and the Middle East is good for petroleum products again the point is that it would be beneficial for both India and Pakistan to supply food and cloth to international markets and take petroleum and silk in return.
According to the theory of economies of scale and economic cooperation, the more the firms there are in an industry, the higher the average cost because the average labour input decreases as we increase total output. Thus, this theory advocates joint ventures between the firms of groups of countries that produce the same product and production on large-scale to ward-off high costs.
Similarly, considering the experience curve theory, a country that has extensive experience in an industry may have lower unit cost than another country with little experience. Regional alliances can also help to get the same industries to learn experiences from an old industrialised country. Once trade barriers are lifted these specialised items can become cheaper in the countries that do not produce them. At the level of India and Pakistan such an alliance may come with the relatively new Pakistani film industry and a mature, more experienced Indian film industry.
Considering the effects of a large market, regional cooperation will invariably lead to a larger market size for the products of the region as it will allow free movement and lower tariff rates. An increase in the size of the market allows each firm to produce more and thus have lower average cost. The firms and economies of the region can be extremely beneficial from such alliances; for example the combined population of all countries in the South Asian Association for Regional Cooperation (SAARC) region is more than 1.650019 trillion and the demand for a product can rise by the factor of n.
If economic integration occurs among SAARC countries, the economies of scale will dictate that each country produce its specialised range of products in a specific region, i.e. fan industry in Gujrat (Pakistan) and automobile industry in Pune (India). The effectiveness of such specialisation can be observed in the future with the end result of Pakistan supplying India with better quality lower cost fans and India exporting locally made cars. On the same footing Pakistan can produce seats or other automobile parts for the Indian car industry at a lower cost, opening doors for intra-industry trade in specialised goods. This is indeed the scenario of the future when more industrialisation occurs in the region. This will pave the way for external economies of scale to locate specialised suppliers in the same region. The specialised labour market can be found in the vicinity i.e. the I.T. professional from Pakistan could travel to Bangalore and contribute expertise to this developed sector over there. Also, the technical staff present in the area can gain from knowledge spill overs that occur if many firms of the same industry can be localised in a specific region.
Thus, most trade policy measures are undertaken primarily to protect the income of producers. In such a case it is the duty of politicians to go for an optimum tariff rate that should be lower than the rate the producers actually demand. All the regional organisations of which Pakistan is a part are trying to do the same. Secondly, the domestic failure argument in favour of such measures is very strong. At best, economists believe that internal market failures should be corrected by domestic policies aimed at problem sources and that the public in trading economies should be well guided as to the true costs of trade policy instruments.
As we have covered all the important economic theories of international trade, the lesson is that these theories only give a general idea for policy direction. Policy implementation is the most important and difficult part in how the government acts for the betterment of its people. The theories of economics guide us to have more free trade within the region. The policies emanating from these theories should be put to action keeping in view the special case of India and Pakistan and the holistic view of the management and development of economies within the local market. Increase in supply of goods would cut down costs in the local market and export gains can be made but the question remains: are the countries and industrialists within these countries ready for this change to act jointly? If fruit should be reaped from economies of scale, better joint ventures of firms appear to be the norm. Again the question is: are the two countries and other countries in the region ready to unite for joint productions? These questions are indeed important. Theories dictate having open borders and free trade but, at the same time, our policy makers should not overlook and forget the problems and hurdles associated with policy and try to address them for the economic stability of regional nations as a whole. Pakistan and India must continue to increase their economic activity irrespective of border and political disputes. As in other parts of the world like the European Union, economic integration and interests can lead to a resolution of political conflicts.
Danish Ahmed Khan is assistant professor, Department of Management Sciences, COMSATS Institute of Information Technology. He can be contacted at firstname.lastname@example.org. Dr Abdur Rehman Cheema is assistant professor, Department of Management Sciences, COMSATS Institute of Information Technology (CIIT). He can be contacted at email@example.com
This post is written by: Danish Ahmed Khan and Dr Abdur Rehman Cheema