Pakistan is entering a significant period in its history and has the chance to break away from the patterns of underdevelopment. With the prospect of another milestone consecutive democratic government looming large, there is an opportunity to break away from the patterns of weak democratic and institutional practices that have characterized the last 70 years. Pakistan has the perfect opportunity to strengthen its weak institutions and focus on pro-growth policies. Pakistan holds a crucial geostrategic location, which it can capitalize on by becoming a trade and transit hub.
Global connectivity is an important topic of discussion in the contemporary world. The importance of connectivity acquires even more significance in Pakistan, since South Asia is the least integrated region in the world and Pakistan in particular is the least integrated country in South Asia. However, Pakistan’s geostrategic position at the intersection of Central Asia and the two largest economies in the region, in China and India, gives it the opportunity to capitalize on this by becoming a trading and transit hub.
There is a need for Pakistan to move towards a more development-centric approach, away from its current security-centric policies.
The recent conference “Pakistan @ 100” held last week of March jointly by LUMS and the World Bank discussed the importance of connectivity, or economic integration, for South Asia in general and for Pakistan in particular. An argument was made that in order to fully exploit potential economic opportunities stemming from economic integration, Pakistan should rethink its overall geopolitical strategy by moving away from a security-centric approach to a more development-centric approach.
Trade with China and especially India, is predicted to result in the most gains according to this study using the gravity model of trade.
A study was conducted with the objective of quantifying the potential for trade expansion between Pakistan and its geographical neighbors, India, China, Bangladesh, Sri Lanka, Iran, Afghanistan and the Central Asian Republics (CARs). This study employed the gravity model of trade which has had remarkable success at predicting trade flows between countries. When applied to trade between Pakistan and its neighbors, the model predicted the largest potential for gains with India, while the scope to increase trade with China was shown to be much more limited. Trade with Iran and Afghanistan was shown to already be near its potential. Some room for expansion was also predicted for trade between Pakistan and the CARs.
Another issue which may arise when attempting to predict potential gains for Pakistan, if it were to expand trade with larger neighbors India and China, is economic and it is known as the home market effect.
Put briefly, according to this argument, goods whose production entails increasing returns to scale and higher transportation costs tend to be located in the larger country. Hence in a trading partnership, the larger country (in this case China or India) would end up exporting those goods, which tend to have higher value-added content, to the smaller country (in this case Pakistan), while the latter would export goods with weaker economies of scale and lower transportation costs (generally primary commodities) to its larger trading partners. Notice that if this argument holds this trade pattern would be observed even if all regional geopolitical tensions were suddenly to go away and tariffs and non-tariff trade barriers were to quickly be lifted.