The Economics of Pakistan–Afghanistan Relations: Implications for the Region

Introduction

Pakistan and Afghanistan have been twinned by US politicians as ‘AfPak’. The short name has been resented by both (Chatterjee 2013; Syed 2011). However, despite sharing a lot of history, they are proud of their uniqueness and independence. This article is an attempt at finding out the economics of their bilateral relations: Would these two countries benefit from any improved relations and who in particular? And what would be the effect of these relations on third countries?

The article starts with an analysis of the trade relations between Pakistan and Afghanistan, moves on to all other economic relations between the two neighbours, to the economic effects on the whole of the two economies and finally to the impact on third countries within and outside the region. The sorry state of affairs in both the counties is responsible for the fact that only few statistics are available and these are far from reliable; there is also a lack of good academic studies dealing with Pakistan–Afghanistan relations.

Economic Relations

Economic relations between two countries are basically the exchange of goods, services, capital, ideas and persons. Natural resources may also be exchanged, partly on a commercial basis like minerals and fuels, but also without any organised trade, as is the case of flow resources, especially water. The exchange may be official and unofficial, controlled and uncontrolled, and legal or illegal in both the countries or only in one.

Going by official statistics, bilateral merchandise trade has risen from US$111 million in 2000–2001 to US$2,165 million, with Pakistan exports exceeding those of Afghanistan many times: Pakistan’s exports to Afghanistan rose from US$30 million to US$2,337 million and imports from US$26 million to US$177 million. Major exports of Pakistan were rice, petroleum products, cement, pharmaceuticals, vegetables, fruits, plastic articles, chemical products, electrical and other machinery (PILdAT 2011, 17). Afghanistan stood fourth among Pakistan’s export destinations in 2012–2013 (July to April) with a share of 8.6 per cent in all exports; for imports, Afghanistan was not among the top 20 (PBS 2013, Tables 14.6 and 14.7). As a major agricultural producer, especially of food-grains and the producer of simple manufactured goods, Pakistan has an advantage over other exporters to Afghanistan. Besides trade, the transit route through Pakistan is a lifeline for Afghanistan and will continue to be so for the foreseeable future.

Pakistan’s trade in merchandise goods by far exceeds that of Afghanistan, even if the shortcomings of statistical reporting (drugs) are taken into consideration. In 2011–2012 (July–June) Pakistan exported goods worth US$23.6 billion and imported almost twice as much (US$44.9 billion) (GoP 2012–2013, Table 8.3). Major exports were cotton and cotton products (45 per cent) and rice and other food items (13 per cent). Major import items were fuels (34 per cent) and electrical goods, non-electrical machines and transport equipment (19 per cent). SAARC countries (including Afghanistan) received 5.3 per cent of exports; 3.7 per cent of imports came from SAARC countries (GoP 2012–2013, Tables 8.6–8.8).

Afghanistan’s trade in merchandise goods is much smaller and characterised by a most probably unparalleled imbalance: Official external trade in 2011–2012 had a volume of US$6,766 million: exports of goods worth US$376 million and imports worth US$6,390 million. Export earnings, thus, could only pay for one-seventeenth of all imports! The Statistical Yearbook explains that export ‘does not include smuggled and re-exported goods…The imports also exclude smuggled and duty-free goods’ (ASYB 2011–2012, 219). It means that actual imports were much more and that most of the imports were paid by earnings from the drug trade. Since most of the drugs are exported, there should be no scarcity of foreign exchange. Dried fruits make out almost half of all export earnings (2009–2010: 45 per cent), followed by carpets (37 per cent) and medical plants (7 per cent). All major exports are agriculture based. Imports are more varied. Petroleum (22 per cent), machinery and equipment (21 per cent), ‘dishes’ (household goods) and medicine (19 per cent) and food items (18 per cent) are the most important groups of imports (ASYB 2011–2012, 222–223, 227–229). According to the CIA’s Fact Book, Pakistan was Afghanistan’s most important trading partner, receiving 48 per cent of Afghan exports (followed by India with 19 per cent) and attributing 13.7 per cent to Afghanistan’s imports—more than any other country (CIA 2013).

Pakistan’s services balance traditionally shows a deficit. Main services included are transport and tourism. In 2011–2012 (July–June) services were exported to the tune of US$5.8 billion and imported were of US$8.3 billion, with a balance of (–) US$2.5 billion (GoP 2012–2013, 110). Afghanistan’s balance is much smaller, (–) US$423 and also negative (ADB 2013, 6). There are no separate figures available for exports and imports of services. The costs of trade and transport of smuggled and illegal goods are most probably not included.

Interest income in Pakistan reflects the debt burden. In 2011–2012 debit (interest payments) was US$4.1 billion vis-à-vis credit (interest income) of US$0.8 billion; the balance was (–) US$3.2 billion (GoP 2012–2013, 110). There are no separate figures available for Afghanistan, but due to generous grants and soft loans, there is only a light debt burden of US$1.2 billion in 2011 (IMF/IDA 2012, 5).

Transfers of (2011–2012) US$13.2 billion net helped Pakistan to fund the massive trade deficit. Transfers are mainly home remittances of workers abroad, amounting to US$10.9 billion (GoP 2012–2013, 110). The actual figure is much higher, as workers bring home also foreign exchange in cash and—more important—send the money home through the so-called hundi system, a highly efficient, quick and inexpensive way of transferring money through informal channels (SECP 2003). After 9/11 the US tried to eliminate the system in order to cut terrorists from funding, but the hundi system is reported to have survived. The business runs into billions of dollars in a year. One trader was found to have monthly turnovers of US$340 million to US$440 million alone (Rizvi 2008).

In Afghanistan transfers are even more important than in Pakistan. In 2011 they amounted to (net) US$6.7 billion officially (ADB 2013, 6) and were in the same range as merchandise imports. In the 1960s and 1970s, the Kabul money market was famous for its speed and efficiency; in the 1980s it had moved to Peshawar and obviously is as efficient as ever after its return to Kabul. During the years of turmoil, it guaranteed that the millions of refugees in Pakistan and Iran could send their money safely to their families in Afghanistan. The need to send money home from abroad guarantees the steady supply of foreign exchange and a demand for the Afghan currency that also can be used to meet the financing needs of drug barons and war lords and help to keep the Afghan economy afloat. Home remittances especially from Pakistan and Iran can be expected to go through the informal banking system and remain unaccounted.

Money earned by workers abroad and by the drug trade (re-)enters both economies also as foreign investment. Official direct investment has been low in Pakistan in recent years (2011–2012: US$1.3 billion in 2011–2012 after US$2.1 billion in 2010–2011) (GoP 2012–2013, 110). There are no official figures for Afghanistan.

Trade Routes

In the past, the passes of the Hindukush were part of a system of trade routes that became known as the Silk Road. The Communists, first the Soviets and later the Chinese, closed their borders. After the opening of China and the collapse of the Soviet Union, the wars in Afghanistan made international trade between the newly independent Central Asian Republics and South Asia impossible. On top of it, the border between Pakistan and India has remained closed, more or less, since 1965. This also hindered road transport from Europe and the Middle East to India via Afghanistan that was developing well until the late 1970s. It was ended by the Saur Revolution in Afghanistan in 1978 and the Iranian Revolution and the Soviet invasion into Afghanistan in the following year.

Pakistan and Afghanistan are separated by a 2,500-km long border that stretches from China to Iran. Almost all of the border area is mountainous, inhospitable and thinly populated, although by the same people, namely Pashtuns in the northern and middle sections and Baloch in the western section. They speak Pushtu (and Khowari and other smaller languages in the northernmost section), Brahui and Balochi. Many of them are nomads, who are used to migrate (not only seasonally) across the border and settle on both sides.

Whereas the main economic centres in Pakistan (Karachi, Lahore) are far away from the border, the main centre in Afghanistan (Kabul) is much closer. Karachi is the main harbour in Pakistan and—given geography and strained relations with her major two neighbours—the only major outlet for international trade. Afghanistan, however, as a landlocked country, lacks such an outlet.

There are no railway lines in Afghanistan, except two short pieces in the north:

A 15 km line was built from Termez in Uzbekistan to a transhipment point at Kheyrabad, near Hariatan on the south bank of the river. Termez has rail access eastwards to Dushanbe in Tadzhikistan, and westwards via Kerichi in Turkmenistan to the Uzbek cities of Bukhara and Samarkand…The second Soviet line into Afghanistan ran for 9.6 km from Kushka in Turkmenistan to Towraghondi…both lines fell out of use with the Soviet withdrawal in 1989, and Uzbekistan closed the Friendship Bridge on 24 May 1997, following the rise to power of the Taliban in Afghanistan…On 9 December 2001 Uzbekistan re-opened the Friendship Bridge across the Amu-Darya. (Grantham 2002–2006)

The colonial power had brought the military railways up to the Afghan border, from Dalbandin in Iran to the Khyber, but they were not allowed to extend them into Afghanistan to Kandahar and Kabul. Today, these lines are in little use, but could be brought to service without much difficulty. In the north, Pakistan has bored a tunnel through the Hindu Raj below the Lowari Pass for a better connection to Chitral that could also benefit Wakhan. ¹ Iran is building a railway line from Masched to Herat along the main entry route to Afghanistan from the West; the section up to the Afghan border already has been constructed. Half of the part on the Afghan side is to be finished in 2013. ²

Afghanistan’s refusal to give up her claims on Pashtunistan and her support for regional autonomy in Pakistan, plus large-scale smuggle repeatedly led to a closure of the border. Good relations between Pakistan and Afghanistan clearly have been in the strategic interest of the USA since the days of containment of the red flood. After a trade and transport agreement was concluded in 1958, the United States International Cooperation Administration (later US-AID) signed an agreement ‘for the improvement of the Pakistan North Western Railway to Afghanistan, followed by a similar agreement with Afghanistan’ (Smith 1973, 347). These plans came to naught after the next disruption of trade in 1961. At the same time, the US Corps of Engineers drew up a plan of a direct road link from Peshawar to Karachi on the right bank of the Indus. The plan was abandoned for fear that it might give the Soviet Union a quick access to the Indian Ocean, as was told to the author by officials of the Indus Super Highway Board in Islamabad, when Zulfikar Ali Bhutto tried to revive the project in the 1970s.

The main connections to Afghanistan are the Quetta-Kandahar and the Peshawar-Kabul roads from Pakistan and the Masched-Herat road from Iran. There is also a small road connecting Zaranj in the south-west corner of Afghanistan with the Iranian ports Bandar Abbas and Bandar Beheshti via Zabul and Zahedan and the Pakistani port of Gwadar.

But these roads are difficult to use. Not only the tribes that control the passes but also the Pakistan government always have demanded their toll: After the Soviet invasion of Afghanistan, Zia ul Haq made it a condition that all US supplies were handed over the Pakistan Army and its Inter Intelligence Services (ISI), to be forwarded to the mujahiddin (Coll 2005, 63). ‘Taxing the CIA’s transit trade in the end helped Pakistan to fund her nuclear programme’ (Coll 2005, 70). During the ongoing war in Afghanistan, the supply line more than once was blocked, obviously in order to remind the US of Pakistan’s crucial role in the War against Terrorism. Tens of thousands of containers with commercial as well as military goods have disappeared on the way (Hasan 2011). As a result of more stringent conditions like furnishing of guaranties, rising transport cost, increasing extortion fees, torching and looting of containers in the tribal area, the volume of transit trade has halved recently: After a volume of US$200 million in 2001, it rose to US$2.5 billion in 2010–2011, before plummeting to less than US$1 billion one year later. India is helping to develop infrastructure in and around the Iranian ports of Chabahar and Bandar Abbas and Pakistan may lose its share in Afghan transit trade ((InpaperMagzine 2013). As the USA and NATO have started to organise their withdrawal from Afghanistan, the same tactics are applied to generate more reward for allowing the hardware to be transported back. Germany, thus, has decided for the northern route via Central Asia and Russia, saving the German forces (stationed in northern Afghanistan) the passage through Pakistan.

Political Factors

The difficult economic relations of the two Islamic Republics can only be understood against the backdrop of history: Afghans love to tell that Pakistan once was a part of Afghanistan. The Pashtu commander of Nadir Shah of Persia, Ahmad Shah Abdali of the Durrani tribe from Multan, had established his own empire after the death of the Shah in 1747. But they soon lost control over the eastern part of their new won empire. First the Sikhs and then the British drove them back. Although they accepted the Durand Line (1893) that cuts through the Pashtun homeland, they never really have given up their claims on ‘Pushtunistan’, the area right of the Indus. ³ The tribal areas along the Afghan border had retained a semi-independent status and were administered by political agents. ⁴ With the India Independence Act of 1947 (clause 7, paragraph c) they were released into Independence, contrary to the common notion that they had to decide between India and Pakistan (Khan 2010, 68–69).

As the ‘owners’ of the Khyber Pass, the Afridi maliks were interested in keeping up this major trade route between Central Asia and India and also in being compensated to provide this service. Therefore, they were neither interested to deal with the Congress Party nor with the Muslim League, but ‘accepted Pakistan as their new suzerain on the same terms as had existed with the British’ (Khan 2010, 69). The tribal areas have kept their special status to this day, guaranteed by the 1973 Constitution (articles 246 and 247). Almost all areas along the Afghan border are either provincially or federally administered areas, the major exception being the (old) Quetta district.

There are no such areas with a special status on the Afghan side of the border. Afghan rulers and governments always considered the area across the Durand Line as part of Afghanistan. Prime Minister (1953–1963) and later President Mohammed Daud (1973–1978) was a strong defender of Afghan claims to Pashtunistan. It was only in the years in between, i.e., the late 1960s and early 1970s that the border was so much easier to cross. This was the time, when young backpackers from Europe were travelling overland to India, with Kabul serving as a popular stop. Goods transport by road across Afghanistan also picked up.

For British India the western borderlands were of little economic, but of high strategic value. Whereas the population of the plains had to pay taxes, the hill tribes were paid a subsidy. According to Dalrymple the British failures to conquer and hold Afghanistan resulted from their attempts at saving money: Too little money spent to guarantee an overpowering military presence and also too little money to bribe all the tribes. As he observes: ‘Occupying Afghanistan is always a very expensive business…and far more than the profits of the East India Company’s…trade could support’ (Dalrymple 2013, 266).

On Indian maps, India and Afghanistan are neighbours, as the Maharaja of Jammu and Kashmir acceded to India in October 1947. This opinion is not shared by Pakistan, where the state is considered ‘disputed territory’. De facto the 100-km long border beyond Chitral between the Wakhan district of the Afghan province of Badakshan and the Ghizer district of Gilgit-Baltistan (formerly ‘Northern Areas’) is controlled by Pakistan. It runs over high mountains with no major roads. Building a direct road from India to Tajikistan via Gilgit and across the Wakhan panhandle should be possible technically, but it would be a very demanding project, even if politically feasible.

Because of their special status, the Federally Administered Tribal Area (FATA) of Pakistan are a virtual free trade zone with open borders on both sides, where no taxes are raised and which do not levy any custom fees. Federal jurisdiction does not apply; legal matters are settled by customary and/or Islamic law with the exception of the narrow strip of the road from Peshawar to the border. This situation led to the sight of caravans moving parallel to the road and smuggling goods between the two countries. Tribal people, however, see trade and transport without any customs duties and taxes paid and goods not inspected as customary rights and not at all illegal (Liwal 2010; Nichols 2008).

Pakistani codified law does not apply to the Tribal Areas. The tribal people are subject to the Frontier Crimes Regulation, introduced by the British in the 1850s that gives far reaching rights and ‘stripped tribal citizens of three basic rights—appeal, wakeel, daleel (the right to appeal their detention, the right to legal representation and the right to present reasoned evidence)’ (Ali 2011). It was amended in 2011, although without fully abolishing collective responsibilities (blockage of hostile or unfriendly tribe) in para. 21 (FCR 2011).

Trade Agreements

In 1950 Pakistan and Afghanistan signed a transit agreement that allowed Afghanistan duty free import via Karachi. In order to counter large scale smuggle, Pakistan closed the border in 1950 and for the same reason and in reaction to Afghanistan’s claims on Pashtunistan, again in 1955 and Afghanistan turned to the Soviet Union for supply. The USA helped Pakistan and Afghanistan to sign a transport and trade agreement in 1958. The border was closed again 1961 to 1963, this time by Afghanistan, while US shipments for Afghanistan were piling up in Karachi (Smith 1973, 346–347). In 1965 the two neighbouring countries concluded the Afghan Transit Trade Agreement (ATTA). ‘Under the agreement, five transit routes are available for transit trade from Pakistan: These are as follows: (a) Peshawar-Torkham and vice versa; (b) Chaman-Spin boldak and vice versa; (c) Ghulam Khan Kelli; (d) Port Qasim and (e) Karachi Port’ (Sachdeva 2013; Poulad 2011). On 18 July 2010 the commerce ministers of Afghanistan and Pakistan signed an Afghanistan Pakistan Transit Agreement (ATTPA) that allows Afghan exports to India via Wagah, although not Indian exports to Afghanistan. The agreement was, however, only a ‘record note’, needing cabinet approval (Sachdeva 2013). The transit has been used for smuggling on the largest scale. Originally, goods imported to Afghanistan via the official transit routes were re-exported to Pakistan via the tribal areas to such an extent that in the 1990s Pakistan banned the transit of air conditioners, which were imported by Afghanistan en masse in times when there was no electricity supply. Trucks headed straight for the tribal areas or were unloaded while still on the way in Pakistan. The trucking business was dominated by Pashtuns until the 1980s, when Afghan transporters living in Pakistan took over much of it, while supplies for the mujahiddin were transported by trucks of the newly established National Logistics Cell (NLC), one of the many economic enterprises run by the Pakistan army and by ex-army personnel.

Afghanistan and Pakistan are both members of the South Asian Association for Regional Cooperation (SAARC) and the Economic Cooperation Organization (ECO). Thus, two of the largest regional co-operations in the world connect them with six South Asian and eight Central and Southwest Asian countries. ⁵ Pakistan is a founder-member of both organisations since 1985, while Afghanistan joined ECO in 1992 and SAARC in 2007. Pakistan is also a founder member of the World Trade Organization (WTO) since 1995, while Afghanistan plans to join the WTO by the end of 2014 (Baraki 2013; WTO 2013). All these organisations are to facilitate trade, in principle. In practice, however, there are many trade restrictions.

The Need of Reliable Data

The analysis of the economies of both the countries, but more so of Afghanistan suffers from the lack of reliable data. The share of unaccounted trade is enormous and most likely more than the recorded one. It is certainly true for data on economic relations. But even more basic data suffer from a wide margin of error, as shall be demonstrated with the example of population.

In Pakistan, the 1991 census was never finished because of large-scale manipulation: Numbers were grossly exaggerated in order to get more seats in parliament, larger shares of revenue, more seats in educational institutions and more government jobs; it was finally conducted in 1998. The next census was only started 2011 (Census 2011). By mid 2013, there were no official figures available. The World Bank gives the population number as 176.7 million for 2011 (WBD/PT) at a growth rate of 1.8 per cent (WBD/PG). Accordingly, there would be 183.1 million in 2013. This is less than was expected by the Bank in the World Development Report 2012. ⁶ The CIA gives a higher number of total population for 2013, namely 193.2 million and a lower population growth rate of 1.52 per cent (CIA 2013). Earlier projections were 200 million to 244 million by 2020 (Sathar 2001, 14–10); 200 million have been expected for the immediate future ((Weekly Voice 2013). ⁷ At the moment, the various population numbers differ by up to 20 million or around one-tenth.

The Afghan Statistical Office gives 26.5 million people for 2011–2012 and a growth rate of 2.03 per cent in 2003/2005. Accordingly, there would be 27 to 28 million people in the country in the year 2013. Afghanistan has one of the youngest populations in the world; the dependency rate ⁸ stands at 103 per cent, that is, every person in working age has to support one either too old or too young to work (ASYB 2011–2012, 6–20). Population figures given in international sources, however, are much higher: Whereas the Asian Development Bank (ADB) follows the Afghan Statistical Office and gives the population number as 26.5 million for 2011 (ADB 2013, 1), the World Bank puts it at 34.4 million for 2010 in their latest World Development Report of 2013 (WDR 2013, 342), 3.4 million more than in their report of 2012, when they put the population number for the same year (2010) at 31 million; in the same report they gave the population growth rate for the year 2000 to 2010 at 2.6 per cent (WDR 2012, 392). Accordingly, in 2013 Afghanistan would have a population of 37.2 million and 33.5 million, respectively.

This huge difference of around 10 million or more than a third (as compared to the official Afghan source) can be explained by differences of design and enumeration. The open borders made it easy for Afghan refugees to flee their country. The number of Afghan refugees in Pakistan has been estimated up to 5.4 million ⁹ and in Iran at 2.5 million. ¹⁰ Whenever the situation in their home country improved, many of them came back, often only to flee again when they found the situation unbearable. There are also an unknown number of Afghan refugees all over the world plus the many migrant workers in neighbouring countries and in the Gulf area. The UNDP figure of 1.9 million migrant workers abroad in 2007 might not include many unregistered workers (HDR 2009, 158). There also had been massive migration within the country. The number of this domestically displaced population must have been in the millions. It is the question, how they are counted, especially if relief is granted in proportion to household size.

There never has been a population census that covered the whole country. At various instances the population has been counted only partly. There have been micro censuses and sample surveys that were used to calculate numbers for the whole country. As can be seen from the discrepancy of figures in major sources, we are far from having any reliable figures. If we look at other countries we see, that extrapolating trends of the past into the future bears the risk of being out of step with demographic and social change. In Bangladesh the latest census yielded 22 million persons less than expected (Ahsan 2013). Even Iran, where population growth rates until recently were among the highest in the world, fertility rates have come down dramatically. ¹¹ Therefore, as millions of Afghans were exposed to life abroad, it has to be expected that birth rates have come down in Afghanistan, too.

Economic Potentials

With a much smaller population and a lower gross domestic product per capita, Afghanistan’s economy is only a fraction of that of Pakistan. How much smaller is difficult to say, because official figures are unreliable, especially in the case of Afghanistan. Most probably, Pakistan’s economy is at least ten times as big as Afghanistan’s: Provisional results for 2012–13 (July to June) for Pakistan’s gross domestic product (GDP) at market prices are US$248 billion. ¹² Afghanistan’s GDP was only US$19 billion in 2011–2012 (21 March 2011 to 20 March 2012) (ASYB 2011–2012, 126–137). There are various explanations possible for the differences:

Production in less developed countries has to be measured indirectly. Most information comes from sample surveys. Their quality depends on the size and randomness of the samples. As long as large areas of both countries are not under government control, they cannot be enumerated, even sample surveys are impossible. Therefore, figures on production and income are informed guesses at best.

The size of the so-called informal economy can be estimated on the basis of the number of persons employed or self-employed and their average value added, whereas it is not possible to know the size of the black, illegal economy. This especially applies to Afghanistan, where billions of US dollars are earned by producing, processing and trading drugs. Afghanistan is believed to be the largest producer of opium in the world, ‘accounting for approximately 63 per cent of global poppy cultivation’ (UNODC 2012, 27). It is also a major producer of marihuana (UNODC 2012, 3). A large portion is traded via Pakistan and since the trade margins are higher downstream, the narcotics-related economy in Pakistan also must be substantial. Relatively, however, the share of illegal and unrecorded economic activities in GDP should be much higher in Afghanistan.

War-related activities constitute an industry of itself, but only partially enter the national accounts (own defence expenditure, war related civilian activities). The USA alone have been spending on the Afghan War in the range of US$100 billion per year, ¹³ five times as much as Afghanistan’s official GDP. Part of this money has been spent in Pakistan, but it is not known how much. The new US embassy alone in Islamabad is estimated to cost US$1 billion. It certainly will be much bigger than under normal circumstances (Dawn 2012).

The Economics of Bilateral Relations

Bilateral relations are more than just bilateral trade. Therefore the extensive reference to geography and history. As has been brought out, the relations have been far from cosy and it has to be seen, whether they will improve after the exit of US and NATO troops from Afghanistan. Like in the 1980s, there has been a war dividend for Pakistan since 2001. This time, however, the war not just brings money, but has crossed the border itself and the number of casualties in Pakistan has started nearing that in Afghanistan. As long as the war looms on, all the dreams of Pakistan being first in line in benefiting from a booming trade with Central Asia will remain just dreams. This especially applies to the plans to lay one or more pipelines to transport gas and oil from Central Asia to the sea. Afghanistan and Pakistan are twinned, indeed, in this respect, as neither of the two could enjoy this business alone. The leaders of Turkmenistan, Afghanistan and Pakistan agreed in December 2010 to move forward the plan to build TAPI, a gas pipeline that would ultimately also supply to India (Dawn 2010). Plans for an IPI Iran-Pakistan-India pipeline with possible extensions to Qatar and China are even older, but were impossible to realise, despite any agreements (Dixit 2005). A much needed new Salang tunnel has been planned since long, but neither USA-AID, World Bank, nor Asian Bank are ready to sink more money in infrastructure in Afghanistan (Salang tunnel 2013).

An important aspect of bilateral economic relations are the millions of Afghans that come to Pakistan as refugees, workers, consumers and (via the sales tax) tax payers and of the billions of Rupees the Afghans in Pakistan remitted home to support their families. Like no other country Pakistan allowed and still allows the Afghan refugees to move freely in the country, take up jobs and earn money, usually, however, the worst and worst paid ones, especially in construction. Most of the Afghans in Pakistan have been and still are Pashtuns. This allows them to mingle easily with the local population, especially in the Pashtu speaking area.

Whether the excitement over Afghanistan’s natural resources is based on hard facts or just a pretext to enhance the country’s importance appears to be impossible to say. The press reports iron ore deposits worth US$8,421 billion, copper worth US$274 billion and other resources worth US$214 billion (Nelson 2011).The Afghan government is careful in her adjustment:

Long term economic development in Afghanistan may relay in natural resources. The country produces natural gas, salt and other minerals…Deposits of minerals, including copper, chromium, marble, salt, gold and silver have been discovered. There is still large unexploited mining territory in the country. Geological surveys of the land are incomplete… (ASYB 2011–12, 128)

The political/military situation in Afghanistan has been a very mixed blessing, indeed, for Pakistan or vice versa. Similarly, any destabilising in Pakistan would make it even more difficult for Afghanistan, as it would have even less access to the Indian Ocean and to India (Afghan Embassy 2013). It would have to depend even more on Iran and China that already is thinking of building a tunnel under the Wakhan as a direct link to Afghanistan (Khan, 2013).

Blessed with fertile alluvial soils, Pakistan’s agriculture has enormous potential. In order to use it, already four fifth of cropped area is under irrigation, more than anywhere else. Rain is highly seasonal and insufficient in most parts. Canal water is diverted from rivers that come from neighbouring countries. This also applies to the Chitral/Kunar and Kabul Rivers. The more water is used for irrigation upstream, the more is lacking downstream, a problem that will become more accentuated as irrigation networks are extended. The Chitral or Kunar River flows into Afghanistan, before emptying into the Kabul River. Pakistan and Afghanistan are mutually upper and lower riparians.

Conclusion

Economic theory emphasises the gains from trade: A division of labour among economies (states) lowers production costs and/or brings out a greater variety of products; competition eliminates overpriced and shoddy products. Still, trade hurdles remain high between neighbours in the former third world. Improved transport and communication has lead to a ‘death of distance’: Transaction costs have become more important than transport fees. Entrenched potential losers of any trade liberalisation, however, are usually much better organised and efficient to defend their protection than potential winners, usually the consumers and taxpayers. As long as rent seekers control the transit trade through Pakistan and Afghanistan we are unlikely to see much improvement of trade with Central Asia via this route.

Future bilateral relations will depend on the extent and kind of outside forces engaging themselves in the two countries, politically, militarily and economically. At present, the various Talibans in Afghanistan and Pakistan come along as nationalist as well as religious—and to some extent—social movements. It has to be seen, how they can mobilise public support once the infidel enemy disappears and the financial sources of outside support dry up.

The setting is complicated by the fact that Afghanistan is considered by Pakistan providing ‘strategic depth’ vis-à-vis India, while India supports Afghanistan in order to sandwich Pakistan. The proxy war in Afghanistan between India and Pakistan (Nelson 2011) has become another stumbling block on the way to more intense economic relations between South and Central Asia. Yelena I. Rudenko from Kazakhstan quotes D. Ritz that, ‘while India and Pakistan fight each other for the expansion of their prospective influence in Central Asia, other states gain actual economic and political power in this region’ (Rudenko 2013, 425), more precisely: ‘Thus, to consider the problem of lack of adequate transport corridors between Central and South Asia…will depend entirely on the fact whether these corridors reach India or not’ (Rudenko 2013, 427).

In their meeting in Islamabad in August 2013 Afghanistan’s President Hamid Karzai and Pakistan’s new (and former) Prime Minister Nawaz Sharif sought an ‘early and full implementation’ of the Transit Trade Agreement and ‘vowed to reinforce energy and communication links…through transregional initiatives’. These include the early completion of the Torkham-Jalabad carriageway, an early implementation of the Central Asia-South Asia Electricity Transmission and Trade Project (CASA 1000), a joint hydel project on the Kunar River and rail links to connect Torkham and Jalalabad as well as Chaman to Spin Boldak ((Economic Times 2013).