A new South Asia vision

MICROVIEW

Last week, the Prime Minister talked about the importance of South Asian countries developing "greater economic stakes in each other" so that "we can put aside mistrust and dispel unwarranted suspicions."

If we can do this consistently for the next 10 years "" keep chipping away at barriers to trade and investment "" the subcontinent will be transformed. The Prime Minister's vision of a common currency, mutual security cooperation and open borders will also not be too far away from reality. It's good to have a great vision, but it is even better to have a sound understanding of how to make it work.

Lower tariffs, freer trade and regional economic liberalisation are all great ideas, but it would be stupid to believe that merely developing economic stakes in each other will end all problems. To make the South Asian vision work, the Prime Minister will have to move simultaneously on all fronts "" political, economic and social. He has to do a lot of spadework and develop a critical mass of support in all these constituencies. Both at home and abroad.

The truth about trade is that it brings as many problems as it solves. Let's start by accepting the reality that the rupture in South Asia "" with India-Pakistan animosities at the core of it "" is the result of political, religious and socio-cultural factors.

Next, let's say we open up trade with Pakistan steadily. What do you think will happen? As tariff barriers start coming down, some industries in the two countries will start closing down or downsizing as comparative cost advantages start kicking in.

Once this happens, trade can quite easily be converted into a political football. Just imagine what political rabble-rousers will do in Pakistan if some units there have to close down because of Indian companies. The same can happen in India "" though probably, to a lesser extent "" if the reverse happens.

Next, consider the huge labour influx from places like Bangladesh. Demographically, Bangladeshis have nowhere to go but India for earning a living at this stage in their development. Open trade will bring in more Bangladeshis rather than less. Even otherwise, Bangladesh is bad news for Indian labour.

Given the lower wage structures in Bangladesh, Indian or India-based MNCs seeking to lower costs will probably seek to shift services that are offshoreable to Bangladesh. Can one smell the potential for a political storm in all this?

Consider what is happening in the West: Once gung-ho about free trade, politicians, labour leaders and the media are having a field day today picking flaws in the idea of globalisation because it is beginning to hurt them now.

In recent months, every single business magazine has talked with some regret about America's declining clout and the rise of Asia, including India. Business Week has been running cover story after cover story on the negatives of trade, with headlines like 'Where free trade hurts', or 'Mexico: Was Nafta worth it?' One villain it has identified is Wal-Mart ('Is Wal-Mart Too Powerful?'), where the argument runs thus: since Wal-Mart sells dirt cheap products, it tends to source supplies from the cheapest sources "" mainly China.

This leads to job losses in the US. Fortune magazine recently did a story on India's tech prowess, where it ruefully observed that broadband's 'killer app' is India. The reference was to the use of broadband connectivity to deliver tech services from cost-effective offshore bases, which again is taking high-tech jobs away from America.

There's no doubt about it, trade does not benefit all the people all the time. It does not even distribute pain equally between two partners. It will hurt, it will create winners and losers. The losers will kick up a political storm, and in a politically volatile situation, no one can be sure that free trade will come out trumps.

Which brings me to the main point: when it comes to liberalising trade in the South Asian context, it helps to hasten slowly. Moreover, trade should not move too far ahead of political opinion. It is worth remembering that even in Europe, the political commitment to create a common market, or a single currency, always preceded the economic one.

To move towards the vision of a South Asian economic union, politicians will have to address several thorny economic and political issues, including the following: the job losses resulting from shifts in comparative advantage, the free movement of labour (how to enable it, without causing social disruptions in India), the impact of trade on agriculture (and agricultural employment), etc.

On the political side, we have our work cut out. No economic union will succeed without a political meeting of minds. We need a South Asian human rights charter, and politicians must agree to steadily roll back state-run sectarianism (leading, ultimately, to the adoption of secular constitutions in Pakistan and Bangladesh).

Besides, there must be a commitment to build strong, independent institutions like a free judiciary and a robust press. Trade is always a good place to begin, but it cannot be a substitute for efforts in other areas.

rjagann@business-standard.com