regional co-operation for development: pakistan, iran and turkey

REGIONAL CO-OPERATION FOR DEVELOPMENT: PAKISTAN, IRAN

AND TURKEY BY NURUL ISLAM

THE scope and techniques of regional economic co-operation in Asia have attracted a great deal of attention in recent years amongst both policy makers and professional economists. The experience of the European Economic Community and EFTA as well as that of regional economic co-operation in Latin America has stimulated both thought and action in this field. The first attempt at regional or sub-regional economic co-operation in Asia was the Association of South Asian States (ASA) in the early sixties, comprising Thailand, the Philippines and the Federation of Malaya which has made very limited progress owing to the political and other difficulties among the participating countries. The second experiment in economic co-operation is the Regional Co-operation for Development (RCD) among Pakistan, Iran, and Turkey. The founding members of the RCD have kept their doors open to the other countries in the region. Pakistan has since then entered into an agreement for cultural and economic co-operation with Indonesia, which may develop into some sort of a closer link with the group as a whole at some future date.

The organizational structure of the RCD is designed for speedy decisions and quick actions. The supreme policy-making body of the RCD is the ministerial council which is composed of the countries’ foreign ministers, and other ministers as and when their attendance is necessary. The Regional Planning Council, consisting of the heads of planning organizations, is the next important policy-making organ ; it examines and recommends specific actions and policies to be ratified by the ministerial council for subsequent implementation by the respective governments. Specific areas of co-operation and policy measures are examined by the various committees on trade, transporta- tion, joint purpose enterprises, shipping, airlines, roads, tourism, banking and insurance, and technical co-operation.

The following are the major objectives of the RCD :

(a) liberalization of movement of goods through such means, among others, as the conclusion of trade agreements;

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284 J O U R N A L OF C O M M O N MARKET STUDIES

(b) closer collaboration among existing Chambers of Commerce and the establishment of the Joint Chamber of Commerce;

(c) formulation and implementation of joint purpose projects ; (a) improvement of transport and communication links between the

member countries through : (i) reduction of postal rates; (ii) improvement of air transport services and establishment of a

(iii construction and improvement of rail and road links; (iv closer co-operation in the field of shipping, including the

establishment of ‘conference’ arrangements or a joint maritime line.

A great deal of emphasis is placed on the strengthening of the institutional framework, especially on the improvement of transport and communication facilities as a means of encouraging the flow of intra- regional trade and investment. In the past these facilities have been oriented more towards linking each of the partner countries with the advanced countries of the West than with each other. Since the middle of 1964 the three member countries have concluded a number of agreements for the improvement of road, rail and telephone links. There has been a substantial reduction in rates for inter-country postage (including air surcharge) and telephone services. Considerable progress is being made in improving road and railway links and the Karachi- Tehran-Ankara highway is expected to be completed by 1968. Travel and customs restrictions have also been liberalized to encourage the flow of tourists.

One of the important institutions established for the purpose of increasing economic co-operation is the RCD Joint Chamber of Commerce. Its main aims are to foster intra-regional trade by providing information, establishing uniform trade practices and procedures, and by providing arbitration in the settlement of disputes. In addition it will undertake market surveys and research, and organize trade fairs and exhibitions. Its function is also to make studies of and advise on investment opportunities among member countries, to promote joint ventures and to foster co-operation between individual Chambers of Commerce and Industry, as well as between these Chambers on the one hand and international business and economic organizations on the other.’

joint airline;

1

ECONOMIC STRUCTURE AND PATTERN OF TRADE OF RCD COUNTRIES

The extent and nature of mutual benefits from economic co-operation between the RCD countries will largely depend on the character

RCD Secretariat, Reporf oftbe Regioraal Plannitig Cormcil, Islamabad, March 1965, pp. 4447.

REGIONAL CO-OPERATION FOR DEVELOPMENT 285

and the stages of development of their respective economies, which determine their present and future complementarity or competitive- ness. A brief analysis of their economic structure and the present pattern of their foreign and intra-regional trade helps reveal the scope and nature of possible expansion of economic co-operation including intra- regional trade. The economic structure of the RCD countries can be seen from the following table:

TABLE I

ECONOMIC STRUCTURE OF RCD COUNTRIES2

Pakistan I. Gross Domestic Products ($ i d i o n ) :

1961 . 6,846 1963 * * 8,034

2. Population (million) 1963 - . 98.6

3 . GDP per capita 1963 (Dollars) . . . 81.5

4. Relative sector participation in CNP Income per capita 1961 . . 72

(1961-62): (a) Agriculture . f 52 (6) Industry and Mining . . I 0

Turkey

4993 3 6,567

30'3 217.4 I73

42 23

(c) Services . * 38 3 5

5 . Foreign Trade as per cent of GNP (year 1961) :

(a) Exports . . 5'7 7'0 (6) Imports . . 9.6 10.3

Iran

4,356 n.a.

22'2 n.a.

211

28 28

(industry) I1

(mining) 44

18.7 14'9

Per capita income is the highest in Iran with Turkey and Pakistan following in that order. Iran has the highest percentage of the GNP originating in industry and mining, but mining constitutes about I I per cent of the GNP because of the great importance of the oil industry. In terms of the industrial development only (excluding mining) Turkey is ahead of the other two members.

a Most of the figures relate to the year 1961 in order to make them comparable since figures for the later years are not available for all the countries. GDP figures are from UN Monthly Bulletin of Statistics, January 1965, pp. 1958-61 (converted into dollars). Foreign trade figures are from UN Year Book oflnternational Trade Statistics, 1963, p. 1219 and p. 336. Figures for Iran are converted into dollars using the conversion ratios provided in the U N Year Book. Population figures are from UN Monthly Bulletin of Statistics, January 1965, pp. 1-4. Sectoral breakdown of GNP for Turkey is from Turkey, State Planning Organization First Five Year Development Plan, 1963-67; for Iran from ECAFE, Economic Survey ofAsia and the Far East, 1964, p. 232; and for Pakistan from Government of Pakistan, Interim Report of the NatioNal Income Commission.

286 J O U R N A L OF COMMON MARKET STUDIES

The industrial structure of the three countries has broad similarities. The consumer goods industries predominate and constitute 47.5 per cent, 67-6 per cent, and 64’6 per cent of the industrial output in Iran, Turkey, and Pakistan, respectively. A comparative backwardness in intermediate and investment goods industries is indicated by the fact that the intermediate goods industries constitute 38.6 per cent of the total industrial output in Iran, 15.2 per cent in Turkey, and 15.1 per cent in Pakistan. Investment goods industries constitute 13.8 per cent of the industrial output in Iran, 17.0 per cent in Turkey, and 20.4 per cent in Pakistan. But for the overwhelming importance of the petroleum industry in Iran, the relative importance of the intermediate goods industry in Iran would be far less than in the other two countries. Within the group of investment goods industries, the distribution of output between different branches of this sector is broadly similar in Turkey and Pakistan.

The existing volume of intra-regional trade is very limited. In 1962 imports from the member countries constituted 0.7 per cent of Iran’s total commodity urchases abroad whereas her sales to the area

respective percentages were 4 per cent and 0.3 per cent in 1963. In the case of Turkey the percentage of imports was 2-2 and that of exports was negligible.* The trade of Turkey with the other members, especially with Pakistan, is the least developed, whereas Pakistan and Iran have closer trade relationships. Though data on the detailed composition of intra-regional trade are scanty, it is clear that all but a small proportion of it consists of trade in agricultural goods. The countries sell to each other those products which, on account of favourable physical and climatic conditions, they are particularly well-suited to produce. A number of factors have linked trade between the three countries in the past, in particular the relations each one of them has maintained with countries outside the rouping, difficulties of com-

markets. The scope for the future expansion of intra-regional trade may be

properly evaluated in the context of an analysis of the existing composition of total as well as intra-regional trade. The largest single import commodity group in the three member countries is machinery and equipment, which constitutes about 35 per cent, 40 per cent, and 3 3 per cent of the total imports of Pakistan, Turkey, and Iran respectively. The next important category of imports is constituted by intermediate goods-semi-finished manufactures-which serve as inputs for the local

constituted 4 per cent o P her total exports. In the case of Pakistan, the

munication, and the resultant lack o B knowledge of each other’s

a Appendix, Table 3.

REGIONAL C 0 -OPER AT ION FOR DEVELOPMENT 287

industries. The major exports of the RCD countries are not competitive. Pakistan’s major exports are raw jute, jute manufactures, fish, rice, raw cotton, and cotton manufactures, constituting together around 80 per cent of that country’s trade. Iran’s major export commodities are petroleum and petroleum products-about 88 per cent of her exports, whereas Turkey’s major sales abroad involve cotton, tobacco, fresh and dried fruits, and sugar, representing together 70 per cent of her total exports. These major exports find their man markets in countries outside the RCD group, mainly in the advanced countries. Only in raw cotton are Pakistan and Turkey competitive, but they are both marginal suppliers in the world market. There is already some trade between the member countries in these commodities, but despite the complementarity of exports, it is clear that, insofar as exports of primary products constitute the main source of foreign exchange for the RCD countries it will not be in their interest to divert trade away from the advanced countries from whom they obtain their much-needed capital goods. Exports of manufactured goods are as yet very limited, and are based on the availability of specific raw materials, such as wool for carpets in Iran, pig-iron in Turkey, and leather in Pakistan.

The following manufactures of regional origin seem to have shown a promise of trade expansion: jute manufactures, pneumatic cycle covers, rubber tyres and tubes, newsprint, electrical fans, passenger vehicles (chassis), surgical instruments, and sports goods.

TRADE LIBERALIZATION-SCOPE AND METHOD

The RCD committee on trade was asked in 1964 to study (a) ‘tariff preferences in regard to certain commodities taking into consideration the principles of legitimate interests of member countries’, Yd (b) ‘a gradual reduction of customs and quota barriers for certain commodities leading to their fmal elimination’.4 Two main questions may be raised in respect of trade liberalization. Firstly, given the present volume and structure of the trade and production of the RCD countries, what are the prospects of trade expansion? Secondly, what are the techniques of trade liberalization which are both practicable and acceptable to member countries?

The RCD study group on the promotion of trade was assigned the task of studying ‘the present difficulties which stand in the way of expansion of trade within the region, recommend steps for the removal of these difficulties, and defme, inter a h , items in which increased trade can be promoted by the removal of existing quantitative restrictions’.

Report ofthe Regional Planning Cortncil, Scpt. 7-9, 1964, pp. 1?-14.

288 JOURNAL OF COMMON MARKET STUDIES

It was also called upon to ‘examine the list of commodities that each country is now importing from areas outside the region and identify the commodities in which expansion of trade within the region is possible under the existing import and export regulations of each co~ntry’ .~ The RCD Trade Committee recommended measures of liberalization which may be introduced gradually. Which commodities should be the subject of preferential arrangements would be a matter for negotiation between the governments of the member countries. In considering the ways in which tariff and quota restrictions could be reduced, the Trade Committee distinguished between preferential arrangements applying to existing productive activities which would benefit from access to wider markets, and arrangements applying to ‘new products’. The immediate impact of an agreement limited to the second type of arrangement would be small. An unconditional commitment by an individual country to surrender its right to protect all new products to be developed in the future against competition from member countries is not to be expected.

Aside from tariff reductions, it is possible to conceive of three broad methods of trade liberalization to be used either singly or in combination: (a) bilateral trade agreements, (b) free lists for the import of selected commodities, and (c) regional quotas for selected commodities.6 If trade between two countries is subject to quantitative restrictions and exchange control, in the absence of any lowering of the other trade barriers, then a single reduction in tariffs will not produce any substantial increase in trade. For this reason the establishment of ‘free lists’ for the selected commodities is considered to be an effective method of trade liberalization. The initial lists could be reviewed at regular intervals in order to adjust any net trade imbalance which may result from the operation of the ‘free lists’, as well as to adjust the original lists to changes in demand and supply conditions should this be necessary. In addition to the ‘free lists’, or as a substitute for them, regional quotas could be established for the partner countries. Each country would be able to issue licences to the full extent of the regional quotas for the import of the goods in question from the partner countries. The commodities covered by the quota could vary from one member country to another, and the regional quotas could be reviewed at the end of each period. If a member country had already liberalized its imports, it would be able to undertake a commitment not to re- introduce uantitative restrictions on commodities which it had already put on the 4 iberalized list. Moreover, it should be possible for the states

5 Report ofthe Study Group of the R C D Committee on Trade, Ankara, February 1965, p. 1. ECAFE. Report ofthe Ad Hoc Working Group of Experts on Trade Liberalization in the ECAFE

Region, Bangkok, November 1964.


to combine both the above-mentioned methods of liberalization, i.e. ‘free lists’ for some commodities and ‘regional quotas’ for some others. A member country should be free to adapt the ‘free lists’ while its partners establish regional quotas.

The trade liberalization measures discussed above are unlikely to lead to a significant increase in trade, specially in the short period, if they are to be of a self-balancing nature. If provision is made for credit facilities to assist the member country or countries experiencing an imbalance as a result of the liberalization, progress in the development of intra-regional trade is likely to be faster. A payments union could be one of two types: one in which credit facilities would be made available for the financing of deficits in total intrazonal trade; or one in which credit facilities would only cover deficits arising from the additional trade between the member countries. If the total surpluses and deficits are sizeable, the first type of arrangement would put a great strain on the resources of the creditor countries, irrespective of their overall balance-of-payments positions. The second type of union would circumvent the need to provide for the existing imbalances, but in the definition of additional trade it raises a difficult problem.’ The resources of the regional payments arrangements could be derived from contributions of the members as well as from the developed countries outside the group.

There is as yet no need for a payments arrangement in the RCD countries. The expected increase in trade in the existing items of trade, as well as in the other items that are selected, will be limited. On the basis of intra-regional trade in 1962 and 1963, it appears that Iran has a surplus in its trade balance with both Pakistan and Turkey, whereas Pakistan has a deficit with Iran and a surplus with Turkey (except in 1962). The amounts involved are small in relation to their total foreign exchange transactions. Thus it appears that the need for payments arrangements may only arise after a considerable expansion of trade. However, short of a fully-fledged payments union, it might prove useful to institute a clearing house arrangement, providing facilities for offsetting debits and credits and requiring a payment in foreign exchange for the net balance at the end of the specified accounting period. Though the RCD countries have so far paid no attention to this problem, a clearing union would facilitate the ’ There are, however, alternative ways of defining sup lementary trade. Supplementary trade

could be considered to be the difference between the Ease period trade and its current level, base period trade being defined as the average level of exports and imports of each member country in the recent past, say, in the past three years. Alternatively, the base period could be a moving average in the sense that the volume of trade for the base period would be revised periodically in the light of trend values of exports and imports.

290 J O U R N A L O F C O M M O N MARKET STUDIES

settling of accounts and would appear to be a feasible and practicable proposition.

Two considerations are important to bear in mind when considering techniques for the expansion of trade: the extent of the international obligations affecting trade policy which have been entered into by the member countries, and the existing systems of import and exchange regulations in force in the member countries. There is a wide divergence in the import and foreign exchange regulations of these countries. While Pakistan and Turkey make extensive use of both quantitative import restrictions and tariffs, Iran relies mainly on tariffs, commercial profits tax and a system of ‘advance deposit requirements’ for regulating the volume and composition of imports.*

As regards the international obligations of the RCD countries, each has entered into a number of trade agreements with third countries which involve a commitment to exchange specified quantities of particular commodities. Turkey, for example, has undertaken to purchase certain items like hides and skins, hessian goods, and jute bags are to be purchased from the U.S. as part of an aid agreement with that country. This partly explains her limited purchase of jute goods from Paki~tan.~ Moreover, Turkey has sought a closer economic link with the EEC, as reflected in her Association Agreement of September 1963. Though the implementation of the association agreement with the EEC is still in the preparatory’O stage imposing as yet no obligations on Turkey’s freedom of action, this economic link may become an important limitation on her attaining full membership in the RCD.ll Pakistan, the biggest member of the RCD, is a member of the Commonwealth Preferential System. It is true, however, that the effects of Commonwealth preference have been considerably eroded (a) by multilateral tariff reductions under the auspices of the GATT, and (b) by a rise in world commodity prices. In terms of the obligations under the U.S. Public Law 480 aid agreement Pakistan cannot export agricultural commodities competing in world trade with commodities provided under the PL 480 programme (coarse rice vis-&is wheat).

The imports are classified by the Government into prohibited imports, unauthorized imports and authorized imports. Thus there is import restriction by an outright prohibition or by the inclusion of an item in the unauthorized list. For the authorized items there is no system of quota to regulate quantities of various items imported. Even though imports of non-essential goods are restricted either by putting them on the unauthorized or prohibited lists or by higher rates of taxes and advance deposit requirements, their imports are allowed from countries which offer concessions and facilities for Iranian exports. Encouragement is given to export the surplus production of various regions of Iran to the markets of neighbouring states. UN/ECAFE, Trade Barriers in Countries ofthe ECAFE Region-A Working PaperfDr the A d Hoc Group of f iper t s on Trade Liberalization, November 1964, Bangkok, pp. 38;40; I.M.F., Sixteenth Annwl Report on Exchange Restrictions, Washington 1965, pp. 270-72. Iran’s New Trade Policy-l%5-66’, Pakistan Trade. Karachi, July 1965, pp. 23-24.

0 Pakistan Trade, Karachi, August 1964, pp. 11-12. lo Bulletin ofthe European Economic Community, September-October 1963 (sixth year), pp. 21-23. l1 Report of the RCD Committee on Trade (RCD/64/RPC/18) Annex IV, p. 23.

REGIONAL CO-OPERATION F O R DEVELOPMENT 291

There exist at present bilateral trade agreements between Pakistan and Turkey, between Pakistan and Iran, and between Iran and Turkey. These agreements provide the partners with most-favoured-nation treatment and transit facilities for trade and restrict the re-export of goods imported from partner countries. The Iran-Pakistan agreement goes a step further, and indicates a list of commodities in which an expansion of trade is considered desirable by the signatory countries.12 It thus provides a framework and guidance for traders in their search for markets and sources of supplies for the commodities concerned. The existing bilateral trade agreements between RCD member countries are not intended to create preferential arrangements in trade. The next step in the RCD arrangement is expected to be in the direction of bilateral agreements committing the signatory states to purchase from each other a specified value of listed goods over a given period of time. While increases in import targets may be negotiated bilaterally, it is not considered necessary to balance the increases of trade on a bilateral basis, but to strive for a multilateral balancing of new trade opportunities so that the flow of trade is determined by the comparative efficiency of producers in the member countries.

During the last year or so, the RCD Trade Committee has been engaged in identifjring the commodities in which a further expansion in intra-group trade is both desirable and feasible. Most of the increase in intra-regional trade will probably occur in manufactured goods, a field in which these countries are facing difficulties in expanding their exports in advanced economies. The manufactured goods proposed for trade expansion are mostly capital goods and intermediate products. The main exceptions are the export of sugar from Turkey to Iran and Pakistan, of woollen textiles from Turkey to Iran, and the trade in pharmaceutical products. In this last category each country is expected to export some special products depending upon the excess capacity existing in the chemical industry. With respect to some products, two countries are expected to export the same commodity to the third country in competition with each other; for example, in supplying refrigerators, cement and cutlery to Pakistan, Iran and Turkey are expected to be competitors, as are Pakistan and Iran when it comes to the export of hand tools, glycerine and drugs to Turkey. A pattern of trade of this kind could encourage intra-regional competition and help improve efficiency. Also encouraged by the RCD is a joint export and marketing policy for commodities which all or any two countries

la ECAFE, ‘A Summary of Trade and Payment Agreements between Countries of the ECAFE Region’--Working Paperfor the A d HOG Working Group ofExperts on Trade Liberalization, Bangkok. November 1964, pp. 12-14. Text ofthe Trade Agreement Between the Imperial Government of Iran and the Republican Government of Turkey, Shahriver, 3,1943, quoted in Bank Murkazi Iran Bulletin, Vol. 3, No. 17, Jan.-Feb. 1965, p. 752.

292 JOURNAL OF COMMON MARKET STUDIES

of the grouping export to the rest of the world. Chrome ore, carpets and cotton textiles are exports common to all, whereas dried raisins, pistachio nuts, and dried apricots are the exports common to Iran and Turkey, and rice is the export common to Iran and Pakistan. The main advantage to be gained from joint action in exporting would arise from economies of scale in handling, marketing and advertising.

The lists of commodities in which an expansion of intra-regional trade is sought may be compared with the present composition of intra-regional trade as well as the present share of the intra-regional trade in the total exports and imports of these items. In the absence of data on the share of RCD trade in each member country’s total trade, an analysis has been made only of Pakistan’s trade with the RCD countries uis-&is her total trade. This reveals that the majority of the commodities in which a further expansion of imports from the RCD countries into Pakistan is contemplated constitute a small fraction of her total or global imports of these commodities. The commodities in which a substantial portion of Pakistan’s imports is obtained from the other RCD countries are not surprisingly those in which others enjoy advantages of natural resources and of a certain specialization of skill developed over a long period (natural asphalt, seeds, petroleum and petroleum products, liquid gas, carpets and rugs and household equipment). In some of these items the imports from the RCD countries enjoy a comparative advantage because of the geographical contiguity and consequent saving in transport costs. A tariff preference or an increase in quotas for these items is then likely to cause a significant expansion of trade. In the case of imports from the RCD which are of secondary importance in Pakistan’s total imports, the presumption is that the cost disadvantage of the RCD countries is signhcant. A deliberate diversion by bilateral quota or ‘country’ uota will, of course increase imports. Since in both these categories o P products there is a great excess demand in all countries, increased imports from member countries are not likely to affect imports from third countries. In view of the existing divergences between import regulations,

it is recognized that the pursuit of a uniform policy by all countries in the matter of techniques and instruments of trade expansion is not feasible. As regards the commodities included in the ‘free lists’ in Turkey and Pakistan, a liberalization in these items of trade has already taken place, both within the RCD and between the RCD and the outside world. Pending attempts to harmonize their economic policies the RCD countries have tended to encourage the flow of trade mainly via the bilateral channels. Pakistan and Turkey, for example, have used single ‘country’ quotas to facilitate trade in specific items, and have

REG1 ON A L C 0 - O P E R AT1 ON FOR DEVELOPMENT 293

also indicated certain national amounts up to which some of the items listed could be imported from each other.

PLANS FOR INDUSTRIAL REGIONAL CO-OPERATION

The gains from trade liberalization on the basis of the existing pattern of trade in the RCD would admittedly be limited. What is more important are the effects of regional specialization on the economic development of the member countries in the future. So long as e6- ciency in production depends on the possession of the necessary skills, the development of techniques and the realization of economies of scale, both internal and external, there is scope for specialization between the member countries.

Moreover, the geological and mineral explorations which are under way may lead to the discovery of new resources and thus widen the areas of potential specialization. The dynamic effects of regional co-operation relate to: (a) the expansion of markets beyond the limits set by national frontiers, the establishment of optimum industrial units and the more efficient development of infant industries; and (b) an increase in productive efficiency, due to an increasing competition between producers within the RCD countries. Moreover, increased efficiency is likely to strengthen their ability to compete in the world market.

An abolition of trade restrictions alone will not lead to the development of a pattern of specialization. Free trade and market forces do not necessarily secure the optimum distribution and location of economic activities within the member countries. The limitations of free trade arising from the imperfections of markets, the divergence between social and private costs and external economies are too well known to be repeated at length here. It is clear that there will be differences in the development of infra-structure as well as in skill and experience between the countries. It is the ‘prospective’ comparative advantage rather than the perpetuation of the present built-in advantages that have to be attended to, since it is probable that the advantages enjoyed by some at present are capable of being more widely shared. Moreover, since large sectors of the economy in Pakistan and Turkey are owned by the state, and since the cost and pricing policies of public enterprises are under the direct control of public agencies, a co-ordination of industrial policies is necessary. The liberalization of trade without an agreement for the harmonization of development plans of member countries would not be acceptable.

The development of joint purpose enterprises constitutes an important part of the programme of co-operation in the RCD countries.

294 J O U R N A L OF C O M M O N MARKET STUDIES

The joint purpose enterprises are expected to draw on the resources and skill of all the participating countries, even though they may be located in one country only. They may also be financed by one country, though based on the single large market. The most important steps in the formation ofjoint purpose enterprises are, firstly, to identift those industries which may qualify as joint purpose industries and secondly, to decide the areas of specialization for each member country, i.e. the location of industries as between the members. The development of joint purpose industries would create a planned complementarity in the field of industry and, through an exchange of the output of the joint purpose industries, lead to an increase in trade within the RCD. The following industries have been identified as possible joint purpose industries, and studies are now in progress to determine their optimum size and suitable location:

Countries to which study

Pakistan . . . I . Motor vehicles including commercial vehicles is allocated Joint Purpose Industries

2. Electrical machinery 3 . Heavy engineering goods, including fabrication of

4. Machine tools 5. Pulp and paper (Pakistan in co-ordination

with Turkey) 6. Bank note paper 7. Agricultural machinery and equipment:

(a) tractors and tractor drawn implements ( b ) other agricultural implements

machinery

Turkey . . . I . Locomotives 2. Shipbuilding 3. hon and Steel 4. Cement 5. coal 6. Sugar

2. Chemicals 3. Aluminium 4. Electronics 5. Dyestuffs 6. Drugs and Pharmaceuticals

Iran . . . . I. Lubricating oils

The industry studies are expected to examine the desirability of the establishment of new capacity on a regional basis, either for consumption in the region or for export, in the light of an assessment of prospective demand, the present or planned capacity of the industries and their requirements of various inputs. The studies are to suggest


possible forms of regional co-operation, such as the division of productive capacity between member countries by way of vertical or hori- zontal specialization, the establishment of co-ordinated production programmes and the establishment of ancillary or subsidiary industries.ls There is an attempt to evolve common industrial standards through mutual co-operation between the national institutions, as well as to disseminate knowledge of investment laws in the member countries, in order to encourage a greater flow of intra-regional investment.14

In order to determine the suitable location of a specific industry or a project it is necessary to undertake inter-country comparisons of the costs of production. The cost estimates are to be prepared on the basis of alternative levels of output in order that the economies of scale can be calculated. Most important of all, a comparison of costs between the member countries is to be based on (u) a forecast of an appropriate exchange rate for each country for the period of planning, thus enabling the conversion of local currency costs into comparable currency units, and (b) analysis of the costs involved in transporting both the materials and the finished product from the points of production in any one country to the centres of consumption in the member countries. Prospective comparative costs, as against static or present comparative costs, are themselves a function of the availability of external economies, i.e. the development of economic infrastructure. The identification of the appropriate industrial complexes for each member country is a necessary step in the process of harmonizing the industrial development plans.

An analysis of the comparative costs, especially the prospective costs of 1970 and further into the future, is a difficult exercise. Moreover, in the case of heavy engineering and machinery products the horizon of planning should preferably be more than five years since most of these projects have very long gestation periods. Again, there is an accelerated increase in demand for them as industrialization gets well under way and as the industrial structure gets increasingly complex. A short-term view ahead may result in an under-estimation of demand and thus arrive at a miscalculation of costs since the cost estimates are expected

13 Each country has been allocated a number of industries for study. The assumption is that the country concerned may have a comparative advantage in the industries assigned to it for study. but the final location is not necessarily going to be in the country undertakmg the study unless this is suggested by the results of the study. The studies are not to contain any specific recom- mendation with regard to the final location of the projects, but are to indicate various alternatives. The final decision is to be taken by the Ministerial Council on the basis of recommendations by the Regional Planning Council.

l4 A study is now in progress of (a) investment laws and opportunities in member countries, and (b) procedures for setting up regional industries by the nationals of the partner counmes. This may eventually help evolve uniform regulations and institutional arrangements to fadlitate intra-regional investment.

F

296 JOURNAL OF C O M M O N MARKET STUDIES

to be different for different levels of output. Excepting sugar and pharmaceuticals, all the industries selected for joint purpose ventures are either intermediate products (chemicals, lubricating oils, aluminium, dyestuffs, iron and steel, cement, coal, pulp and paper) or machinery and equipment (transport equipment, electrical machinery, and engineering products).

The most important form of co-operation under contemplation is the planning of the productive capacity in each country with a view to meeting the requirements of the rest and to encourage the joint participation of the importing countries in the equity capital.16 Long- term agreements extending over a period of five to ten years are being contemplated to ensure the necessary production, as well as the intra- regional exchange in specified quantities, at prices which will be mutually agreed upon, after taking into account quality, cost of production, facilities provided by securing a protected market, international prices and cost of transport?e Long-term agreements are considered essential in the case of capital and intermediate goods industries, since they involve large investments and the designing and manufacture of the plant and equipment takes a long time. An alternative approach would be to establish regional free trade in the products of joint ventures, with common tariffs and quota protection against the rest of the world. However, this would leave the determination of the quantities exchanged between the members to market forces and would give rise to uncertainty. Moreover, in many of these fields, the public sector will have to play an important role as supplier of capital, because the private sector, which is hesitant enough when it comes to investment in the separate domestic markets, is likely to be an even less enthusiastic investor in the regional one. The participation of the public sector may stimulate the private capital which, to begin with, may not have assessed the prospects of regional co-operation very favourably. A guarantee that the regional arrangements are of a long-term nature and are unlikely to be nullified or changed abruptly, will be provided to the private investor.

It is noteworthy that the integration efforts are limited to new industries and mainly to the capital and intermediate goods industries. All the RCD countries have carried out a considerable amount of

l6 The following possibilities are being studied: Iran is to plan production capacity or to utilize existing capacity to supply (a) carbon black to both Turkey and Pakistan, (b) refined sugar to Pakistan, (c) capralactum to Pakistan and Turkey for the manufacture of Nylon, ( d ) synthetic rubber to Pakistan and Turkey. Iran is examining the establishment, on the basis ofjoint participation, of a project to supply ammonia for the requirements of all. Pakistan is to supply out of its planned or existing capacity: (a) polyster fibre to Iran and Turkey, (b) Polyacrylontrite fibre to Iran, (c) formaldehyde to Iran, ( d ) polystyrene to Iran. Turkey is to supply: (a) carbon black (furnace black) to Iran and Pakistan, and ( b ) Polystyrene to Iran.

RCD Secretariat, Report o j the Regional Plantring Council, Islamabad, March 1965, pp. 10-11.

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import substitution in the field of consumer goods industries under high tariff walls and with the help of quantitative restrictions. The RCD countries do not as yet contemplate any action for enlarging the scope of intra-regional competition in these fields. A liberalization of trade, which exposes the highly protected industries to intra-regional competition, may cause a dislocation and waste of already invested resources wherever one member country is significantly less developed than the others. The example of the East African Common Market shows that it may hamper the process of industrialization in a relatively less developed member country. But in certain of the consumer goods industries-those which have reached a high stage of development in all the countries through a long protectionist policy-there may be scope as well as need for increased intra-regional competition with a view to increasing efficiency. Moreover, it is doubtful whether the differences in the stages of development and in external economies are so significant as to preclude any gain from an increase in competition in any of these fields, even though specific industries in a member country may need special treatment.

The encouraging possibility of fruitful intra-regional competition is a subject to which the RCD countries have not paid adequate attention, partly because of the existence of vested interests. In so far as the joint purpose enterprises may simply involve the substitution of regional monopolies for domestic ones, attention to the benefits which can be derived from intra-regional competition acquires added urgency.

The success of the efforts at integration will depend in part on the ability of the RCD grouping to find an adequate number of projects for each member so that benefits can be widely shared and the support generated for further co-operation. To ensure an equitable distribution of industries among member countries, the Central American Common Market provided for the cstablishment of ‘integration industries’ by an agreement among the member countries. The ‘integration industries’ are defmed as those in which efficient production requires access to the whole Central American market. The products of these firms are granted (u) duty free access to markets of member countries, and (b) preferences in government purchases. No member country can acquire a second ‘integration industry’ under the agreement unless each of them has its first such industry. Competing plants in these industries, even if their establishment is allowed, are not to be entitled to these privi- leges. The RCD countries may consider it advisable to study Central American experience in this field.

The most important single joint enterprise which has been established so far in a field other than manufacturing is the RCD Shipping Services, a conference arrangement between the shipping lines of the

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three countries for the pooling of tonnage, the determination of tariffs and routes, both internationally and for the region itself. The share entitlement of each country in the total pooled trade is as follows: Pakistan 50 per cent, Turkey 35 per cent, and Iran 15 per cent. The three governments of member countries have undertaken to ensure, as far as practicable, that 50 per cent of their import and as much of their export trade as possible should move in the ships of the three countries. The RCD member countries are to invite tenders from the region while purchasing new ships and given competitive prices accord preference to the shpbuilders in the area. It is expected that the experience of the working of the conference arrangement will provide a basis for the establishment of a joint maritime company. Proposals for the establishment of a joint airline are also under consideration.

In the field of banking and insurance, it was agreed that the bank of one country should, as far as possible, use as their correspondents the local banks of the other two countries, and that they should accord preferential treatment to their correspondent banks in the form of concessional interest rates. A proposal for the establishment of an RCD commercial bank, with capital to be subscribed equally by the three counties in their local currencies, is under study. Greater contact and collaboration between the national banking systems should facilitate intra-regional payments and hence trade. An RCD insurance centre has been established to stimulate collaboration in the field of insurance. Three reinsurancc pools have been established on fire, marine, aviation, accident, and miscellaneous risks with a view to improving insurance services within the region as well as to save on foreign exchange payments to insurance companies outside the area. The regional projects may require an aniount of capital beyond the financial ability of the member countries. While the number and scope of the regional projects are as yet not large or widespread enough to justify the establishment of a regional bank along the lines of the Inter- American Development Bank, the recent establishment of the Asian Development Bank is expected to facilitate the frnancing of regional joint ventures.

INDUSTRIAL CO-OPERATION AND NATIONAL PLANNING

The establishment of the joint purpose enterprises will have implications for the national plans. The problem of the integration of the joint purpose enterprises with the national plans in the present context assumes an added importance, since many joint purpose projects already constitute important parts of national plans which have been framed prior to or independently of the possibilities of the joint purpose ventures. For example, in Iran’s future programme the aluminium

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industry figures very prominently, independently of the RCD. Iran also intends to develop such industries as the manufacturing of diesel engines, cast-iron foundry, metal-processing industries, many of which appear on the list of joint enterprises to be developed by one or the other country.17 The Turkish plan envisages self-sufficiency by 1967 in the following industries : refrigerators, sewing machines, sugar, washing machines, agricultural implements. In the case of cement, domestic production is expected to outstrip the demand, thus creating an exportable surplus, while the iron and steel industry is expected to have a net export surplus by 1967. In certain items of production in the chenlical and electrical industries, Turkey expects self-sufficiency, even though the total value of imports of both categories is expected to increase. Its import requirements for machine tools and heavy engineering products are to be reduced by 1967 to one-quarter and one-half respectively of what they were in 1962 .~~ In Pakistan near self- sufficiency is planned by 1970 in a number of fields in which joint regional projects are under consideration, e.g. sugar, paper articles, synthetic fertilizers and certain varieties of chemical products. In non- metallic minerals, imports are expect to constitute only about 5 per cent of the domestic production and in electric goods the percentage will be about 17 per cent by 1970."

For the commodities to be produced on the basis of joint purposc ventures located in one member country for supplying to the rest, self- sufficiency objectives on the part of any one country are inconsistent with the integration effort. Production and import targets need to be adjusted in accordance with the choice of location and the levels of the total output of the joint purpose industries. Each country has to give up some type of production in exchange for an expanded production of some other item. In view of the interdependence between sectors and between industries, a readjustment of production in one field would ncccssitate a reappraisal of production plans in other sectors. Thus the establishment of a joint purpose enterprise, not originally included in the national plan, would have implications for the establishment of subsidiary or ancillary industries providing inputs to these joint purpose enterprises. The intcgration of joint purpose industries with the overall national plans would have implications for the use of scarce resources, i.e. capital, skill, and foreign exchange, for resources used in joint purpose ventures would have to be diverted from some of the alternative projccts provided for in the plan. Regional integration of specific projects may not only alter the composition of pre-

UNIECAFE, Ariari Ginfirerice on Indirsfrializnri~,rr-~ Country Stirdy o[Irno, December 1965. State Planning Organizdtion, First Five-Year Developmerit Plarr (1963-1 967), Ankara, 1964. W. Tim, Industrial Growth During the Third Plan, July 1965. Unpublished manuscript.

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exisiting national plans by the incorporation of new projects or by a modification of existing ones, but may also make it possible for the member countries to draw on each other’s resources and may alter the total amount of resources available. The original targets for increases in incomes, employment, foreign earnings and savings, being based on a different set of projects and different estimates of resources, would then have to be changed. This suggests that in order for the regional integration programmes to be successfully harmonized with the national development plans, both exercises must be undertaken simultaneously; otherwise the effects of regional projects are likely to be inconsistent with the national targets.

CONCLUSION

It is possible to envisage different levels of regional economic co- operation, ranging from consultation on matters of common interest, via free trade to the creation of an economic union involving co- ordinated development plans and common monetary and fiscal policies. The RCD has made considerable progress in getting its members to consult on matters of common interest and in getting them to participate in specific projects. It has taken important steps in setting up the machinery and institutional framework for economic collaboration. At the present the main emphasis is on the establishment of closer economic links between the member countries, especially in their knowledge of each other’s markets and special resource endowments. There is an agreement, for example, on joint exporting and marketing arrangements for the major competitive exports of member countries, and on collaboration in fairs and exhibitions. The creation of the RCD Chamber of Commerce makes an important institutional advance in the field of economic co-operation and trade.

The member countries have been cautious in adopting measures of trade liberalization. Work undertaken so far has led to the identification of a number of commodities which are considered suitable for increased intra-regional trade. The differences in the import systems and trade regulations of the three countries have made the selection of suitable instruments for trade liberalization difficult. The emphasis to date has been on the liberalization of trade along bilateral channels. But the benefits of the larger market can only be derived from a multilateral trade expansion in the RCD area, eliminating the need for a bilateral balancing of trade betwwen each pair of countries. It is unlikely that the static gains from trade will be appreciable, since the existing proportion of intra-regional trade to total trade is very low. Nor is it likely that trade expansion along the existing lines, based on the peculiar resource endowments of the individual countries (such as


jute in Pakistan and oil in Iran) would be considerable. The future lies in the expansion of trade in manufactured goods, which may receive considerable support from the establishment of joint purpose enterprises. The gains from increased competition between the industries of the member countries are expected to be considerable in the long run in view of the similarity of their industrial structures.

The regional planning council has as one of its longer-run obligations a regional harmonization of national plans. Though attempts at sectoral integration, as for example in petrochemicals, have been made, the beginning of the harmonization of national plans will have to await the results of co-operation already initiated in the various sectors. In the course of planning its foreign trade, especially its exports of manufactures, owing to the repercussions on their overall production programmes, each country will have to take into account import and export projections of the other two countries. Such action would help to avoid a duplication or inconsistency in national production targets and forestall the emergence of global surpluses or shortages of particular commodities.

The obligations of Turkey as prospective member of the EEC, to be felt only when she becomes a full member of that scheme, may limit her efforts to forge common commercial or economic policies with her regional partners. On the other hand, if and when Turkey becomes a full member of the EEC, it is conceivable that an arrangement may be worked out between the RCD countries and the EEC. Pakistan’s attempts to forge a closer economic link with Indonesia may similarly be shared by the rest of the RCD countries. Economic co-operation between Pakistan and Indonesia follows the lines envisaged in the RCD, i.e. an expansion of trade through special trade and other arrangements and the promotion of joint ventures in the field of industry and communications.

regional co-operation for development: pakistan, iran and turkey

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