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Research Report

India and Pakistan:: The Opportunity Cost of Conflict

Shuja Nawaz
Mohan Guruswamy
Copyright Date: Apr. 1, 2014
Published by: Atlantic Council
Pages: 22
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Table of Contents

  1. (pp. [ii]-[ii])
    George P. Shultz

    Mohan Guruswamy and Shuja Nawaz have produced an important paper on a topic of vital importance. They show carefully and convincingly how much the people of India and Pakistan have lost by way of income and security because of the hostility and military competition between them.

    Of course, the cost of the military itself is substantial, particularly in countries where poverty is widespread and needs are acute. But the cost of arms and armies is only part of the problem.

    Here we have two countries full of competent people and many complementary capabilities. In this setting, trade should be booming,...

  2. (pp. 1-1)

    IN the space of sixty-six years since both countries became independent, India and Pakistan have fought three major wars and at least two limited battles that could easily have led to expanded war had there not been intervention by third parties leading to cease fires and negotiations. In the process of military competition, both have invested heavily in acquisition of new and more lethal weapon systems, including ominously the development of nuclear weapons. Yet, what the economist A.C. Pigou called “the shadow of war”¹ on peace continues to be a cause of concern, raising the question: what are both India...

  3. (pp. 2-2)

    India and Pakistan began their lives and independent states with a conflict in the territory of Kashmir. The Maharaja of Jammu and Kashmir vacillated on whether to accede to India or Pakistan, both of which claimed Kashmir as their own. To force the accession, elements in Pakistan’s military headquarters fomented an incursion of tribal fighters into Kashmir. This was followed by the deployment of Pakistan Army regulars on October 22, 1947. When the Maharaja wanted India to intercede, India insisted upon a formal accession before it sent troops to defend against the “raiders” from Pakistan. Indian forces entered the fray...

  4. (pp. 3-3)

    It was the Nobel Prize-winning economist, Paul Samuelson, who in 1948 first labeled productive and unproductive activities “butter” and “guns” respectively.

    In coining the terms, Samuelson had the experience of Nazi Germany in mind, where the government was committed to increasing military expenditures (guns) at the expense of civilian production and consumption (butter). That is, the choice between butter and guns was a matter of economic policy. Not surprisingly the classical assumption of theoretical models of conflict implies the trade-off between productive activities (butter) and unproductive activities (guns). As guns increase, butter must decrease; there is no alternative allocation for...

  5. (pp. 4-4)

    The India-Pakistan story is an old one now. No two countries share the intense animosities as they do. Their post-partition engagement has not been very different than between the two great antagonists of the Cold War. They have fought five times and prosecuted unceasing campaigns to destabilize each other by somewhat unconventional means. This has certainly imposed costs on both of them. One does not have to labor too much over the fact that South Asia is the poorest region in the world with the greatest concentration of poverty in the world,6 highest incidence of poverty,⁷ and abysmal Human Development...

  6. (pp. 5-5)

    What if the region had not persisted in the relatively high defense expenditures since the 1950s? A leading Pakistani economist, Parvez Hasan, who held senior positions in Pakistan and then at the World Bank, did an exercise that is best described in his own words:

    “One is tempted to speculate on what might have happened if defence spending, which at its peaks in the late-1980s, reached 7 per cent of GDP, had been half the level [emphasis added], and that these resources had been allocated to social and economic development and potential economic gains from regional economic co-operation had been...

  7. (pp. 6-8)

    There are two aspects to this discussion. The first relates to the external environment, regional politics, and geopolitical aspirations. The other aspect pertains to the internal security environment and capacity to cope with the complex and often conflicting aspirations of the world’s densest and largest population grouping. The first aspect is easier to deal with as it mostly pertains to military expenditures. We have to deal with the more complex question: is military spending out of control or is it just adequate?

    Military expenditures in South Asia, given its myriad social and economic problems, evoke a great sense of outrage...

  8. (pp. 9-9)

    Military expenditures are an outcome of many factors. Some of these are national notions about one’s place in the world: neighborhood situation; internal political dynamics; assessment of long-term interests and perceptions of geopolitical evolution; and lastly, the internal security situation within a country.

    National notions are seldom related to any real security threat. Take the United Kingdom for instance. What plausible threats does that country face for it to maintain large and expensive military forces and a nuclear arsenal? Does it face a threat from France or Russia? Quite clearly Britain’s military posture is dependent on its notions of its...

  9. (pp. 10-11)

    Intraregional trade accounts for roughly 65 percent of European Union’s total trade; it is 51 percent in the North American Free Trade Agreement (NAFTA) area, 25 percent in ASEAN and 16 percent in the Latin American trade bloc, Mercosur. However, this ratio is about 5 percent in the South Asian Free Trade Area (SAFTA) despite the existence of logistical advantages. As South Asia’s biggest economy India would have been expected to show its trade with neighbors as an important economic activity. But not so. While the share of South Asia in India’s exports has risen somewhat modestly from 4.70 percent...

  10. (pp. 12-13)

    Whatever this figure might eventually be determined to be, direct trade with India may hold significant benefits for both countries. India is one of the largest world exporters of cut diamonds. Most of the diamonds imported by Pakistan are cut in India. According to Dineshbhai Navadiya, president of the Surat Diamond Association, “Presently, India does not export diamonds to Pakistan directly. Pakistani diamond buyers, however, import Indian-cut and polished diamonds via Dubai or Hong Kong. Industry reports suggest that diamonds imported to Pakistan via Dubai or Hong Kong cost nearly 10-15 per cent more than direct import from India.”


  11. (pp. 14-15)

    Militarily, both India and Pakistan could reduce the proximity of their land forces by increasing the distance from borders of their respective forces. Pakistan has already culled some of its eastern forces to enhance its military presence on its western front. Greater direct exchanges between the two militaries would build confidence in each other’s intentions and capabilities both. Visits to each other’s training establishments would allow them to verify shifts in thinking and also create the possibility of sharing experience in fighting irregular groups and insurgents.

    The nub of the India-Pakistan conflict is the dispute over Jammu and Kashmir. Its...