Making Real Change in Pakistan Through Trade and Investment
SOURCE: AP/Anjum Naveed
Pakistan’s historic election on May 11, 2013, has given Prime Minister Nawaz Sharif’s center-right political party, the Pakistan Muslim League, a decisive mandate to form a new government. The former and now re-elected prime minister can learn from his considerable experiences in government and as a successful businessman to embrace the country’s enormous potential by focusing on trade, infrastructure, and reducing tensions on Pakistan’s borders.
This critical moment in South Asia must be seized for both the young college graduate in Lahore looking for employment and for the rest of the world that looks at headlines from this region with increasing trepidation. While the challenges facing the nation remain daunting, the first transition of power between two democratically elected governments in Pakistan’s history gives hope for a new, more enlightened course of action that will improve the quality of life for hundreds of millions of people and create hope for more amicable interactions between India and Pakistan.
Enhancing trade is a tried-and-true starting point for achieving real change within a country. As history teaches us, strengthening bilateral economic relationships between countries is an important tool in addressing seemingly intractable difficulties. There are countless examples of nations developing a much different and more positive perception of a neighboring country as soon as goods and services begin to flow across their respective borders. After World War II, Western European leaders overcame a decade of conflict by developing a series of interlocking trade organizations. More than a half-century later, these economic ties have proven resilient through numerous recessions, political controversies, and changes in governments. Knowing that India and Pakistan have a tortured past, bettering trade relations between the two countries could ameliorate previous disputes and improve the situation both within each country and for global allies.
Over the past year a fair amount of progress has been achieved. In August 2012 the Reserve Bank of India announced that it would allow Indian entities to invest in Pakistan for the first time. The Reserve Bank of India, the country’s central bank, announced that it would work with India’s Finance Ministry to determine the exact rules for making investments in Pakistan and that representatives from the two nations would continue to work together over the coming years to improve trade relations between the two countries.
Discussions are also progressing between India and Pakistan to grant each other “most-favored nation status,” which would reduce key barriers to trade such as tariffs and quotas. India granted full status to Pakistan in 1996. The Pakistani cabinet approved the same status for India in principle in 2011 but has yet to fully execute the decision. Both countries have also simplified the visa requirements for business meetings, facilitating conferences taking place across borders. These actions have to be implemented entirely—and quickly—in order to fundamentally enhance the relationship between the second-most and sixth-most populated countries in the world.
Influenced by an estimate that cross-border trade could potentially grow somewhere between $30 billion to $50 billion if such actions are carried out, there is a strong desire by government leaders and business executives in both countries to develop a more organic and productive relationship. Last spring the Confederation of Indian Industry, which includes more than 40 Indian business leaders, traveled to Pakistan to push for increased bilateral trade, which was reported to be less than $3 billion in 2011. The confederation finds Pakistan’s markets particularly attractive because they are less restrictive from a regulatory standpoint and offer opportunities to meet the strong demand for quality goods in a variety of sectors. Conversely, Pakistani manufacturers can benefit from access to a significantly larger market and cheaper technology and machinery from India.
This enthusiasm for a changed relationship is also demonstrated in recent public statements by Pakistani Prime Minister Nawaz Sharif and Indian Prime Minister Manmohan Singh, who both said that they want to bring their countries closer together. Prime Minister Singh has invited Prime Minister Sharif to visit India, which bodes well for the implementation of the trade policies announced by the previous Pakistani government. These leaders understand that while India and Pakistan have had difficult phases in their relationship, there are cultural, economic, and linguistic bonds between their people that have evolved over thousands of years. Some disputes have persisted, but there is much that brings the countries together.
This basic truth becomes more and more apparent every time I visit Pakistan. Recently, I visited a small market between Lahore and Islamabad. As an Indian, the entire experience—the crowds, the double-parked cars, the commotion, and an exchange between a merchant and a customer—felt very familiar. The topics on people’s minds involved day-to-day issues, from the appropriate use of fertilizers to the sturdiness of various crops. The commonalities of the people of India and Pakistan are far more compelling than their relatively recent religious or political strife. This is a culturally rich joint civilization that dates back to the Bronze Age.
Clearly, India and Pakistan have an important stake in increasing trade with one another and promoting commerce within the region. So too does the rest of the world. The question then becomes: How can the United States, working in close collaboration with other nations, help create a more prosperous regional economic climate and contribute to better political relations between two nuclear-armed countries with a very difficult recent past?
The solution begins with the international community embracing a new global economic imperative and making a decision to engage in era-altering change. Two common-sense focal points for such activity in Pakistan are infrastructure and small and medium-sized enterprises. Both can create employment and provide a “virtuous cycle” of economic benefits for the people of Pakistan.
The U.S. Congress has fostered growth in these two areas by allocating $80 million of assistance to be invested in venture-capital funds through the Pakistan Private Investment Initiative. Yet in order to achieve lasting success, this won’t be enough. There needs to be a larger and more global effort, both from a financial and a policy standpoint, to create a productive, well-integrated regional marketplace with the capacity to sustain a combined population of 1.4 billion people.
Given the economic disparity between the two countries, a special emphasis must be placed on the many needs of Pakistan to ensure its people are not given the short end of the stick. We must look beyond the current political and religious divisions between India and Pakistan and find a way to support Pakistani leaders in their quest to provide their people with what they really want: a decent and sustainable life. A widescale effort should be designed to invest in core needs such as energy, telecommunications, water, transportation, and education.
The private sector will, by necessity, be an integral part of such an era-altering effort. In the past developing economies relied on the public sector to run these nation-building programs. As was discovered time and again, this approach usually results in suboptimal outcomes, as governments do not focus on such essential criteria as return on capital employed—a measure of the profitability of a company’s investments. We should instead depend on private enterprises to be the lead equity and debt holders in these economic projects. (For disclosure, my firm has investments in a provider of wireless Internet access in Pakistan, as well as a Pakistani-based multinational educational company.)
The primary role of the national and provincial governments in both India and Pakistan should be to ensure smooth approvals of private business requests, simplify tax regimes, and avoid red tape on these projects. Multilateral agencies, such as the World Bank, Asian Development Bank, International Finance Corporation, and Commonwealth Development Corporation, as well as the pension funds in the West and sovereign wealth funds, should all have a major role in these initiatives.
Smaller projects in manufacturing and services, such as restaurants, health care, and computer tablets, can easily be handled by existing venture capital and private-equity players. Pakistan, similar to many developing nations, is supply constrained. To make it all work, Pakistan needs to rapidly set up a legal framework and regulatory regime conducive to private capital. This should attract investors, help domestic production, eliminate supply constraints, and increase exports.
Shakespeare once wrote, “There is a tide in the affairs of men / Which, taken at the flood, leads on to fortune.” For Pakistan, the tide is now, and hopefully Prime Minister Sharif will fully leverage this moment to drive his 100-day plan and make a compelling argument to the rest of the world for rallying around the cause of greater prosperity in the region.
Parag Saxena is the founding general partner and CEO of New Silk Route, which has been one of the largest foreign investors in Pakistan over the past six years. He is a panelist for the Center for American Progress’s June 24, 2013, event, “U.S. Economic Statecraft in South Asia.”
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