Dr Kamal Monnoo When Paul Krugman won the Nobel Prize in economics, the news was greeted with nostalgia amongst peace lovers. Mr. Krugman had been writing a bi-weekly column for The New York Times since 1999 regularly attacking the works of the Bush Administration and talked about Scale Economies. He primarily won the prize for his models of international trade and economic geography, whereby, he gave more clarity and practical meaning to the model of monopolistic competition, published originally by Avinash Dixit and Joseph Stiglitz, when they introduced economies of scale into trade theory and beyond. Economies of scale had long posed awkward problems for theorists. If bigger firms face lower costs, then in principle one firm should supply the entire market, thereby enjoying the lower costs of all. But in the Dixit-Stiglitz model, the monopolizing logic is offset by a countervailing force: consumers taste for variety. People prefer to spread their custom over different versions of the same good. The market is, therefore, carved up among competing firms, each offering a product bearing its own distinctive stamp. However, the mere presence of the Dixit-Stiglitz model gave Krugman an opportunity to add another dimension to it. This new dimension, which he referred to as Economic Geography and as he put it, Dixit and Stiglitz provided me with a tool to open cleanly what had previously been regarded as a can of worms meaning, he literally saved economics or economic theories from an abiding empirical embarrassment. So, what is really that he changed? Earlier we had reasoned that countries gain from specialization and exchange, i.e. concentrating on what they do best and importing the rest. The earlier theory explained why the Portuguese might sell wine in exchange for English cloth, but it didnt explain why similar countries, blessed with similar ratios of capital, labour and land, should so vigorously trade similar goods back and forth. This phenomenon in itself, by any standard, did not represent a merely small blind spot According to the WTO, 52 percent of Germanys exports to France are things France also produces and exports to Germany. But the Dixit-Stiglitz model, with its subtly differentiated firms competing for variety-loving consumers, lent itself to basically explaining only why Germans might import Renaults, even as the French imported Volkswagens. What Krugman instead gave us is a model telling us that in reality when trade barriers fall, firms gain access to bigger markets, allowing them to expand production and reap economies of scale, but at the same time, openness also exposes them to competition from rival foreign firms, paring their margins. Some firms may go out of business; however, between the domestic survivors and the foreign entrants, consumers (meaning people) still have more to choose from. Thus the gains from trade arise not from specialization, but from 'scale economies, fiercer competition and cornucopia of choice that globalization provides. The concept of scale economies for the first time gives economics a sense of space. For example, he himself argues that, night-time satellite photos of Europe reveal the distinctive contours of economic activity: bright lights cluster around metropolitan centres, shinning particularly more brightly around the triangle of Brussels, Amsterdam and Dortmund. Earlier, economists struggled to explain these images as they didnt fall in line with the crux of the theory itself; They were accustomed to assuming that firms face constant returns to scale and yet if this was to be true then every person could essentially create his own little backhouse production chain, and there would be no need for an economy to divide into a farm belt and an industrial belt? As we all know that big factories benefit from lower costs of production. Manufacturing firms might therefore cluster near to a large market, leaving behind a sparsely populated hinterland, in order to make the most of scale economies and minimize the cost of transporting goods to their customers. Earlier theorists reasoned that firms herd together to benefit from some kind of spill-over, i.e. perhaps firms pick up tricks of the trade and other know-how from their neighbours. But this argument appeared somewhat unsatisfying, because largely spill-over could neither be measured nor could ita scope be delimited. What we have learned today from Mr. Krugman is that regional focus, proximity and neighbourhood cooperation instead yield new, yet tangible, kinds of benefits and strengths. The opportunity for firms to locate in respective regions strong areas is a gift to other firms in the area, because in attracting new workers it also brings new customers. Unlike a technological spill-over, the real physical proximity of firms and real production work taking place in common areas of interest leave a paper trail, showing up in firms growth in general, thus benefiting the entire region by making it more competitive in a global environment. So to put all this simply, with this new model, by contrast, the gross importance of regional cooperation for the first time has come to the global forefront. Finally, a leading economist is advocating with concrete empirical evidence the following three focus points: 1) Regions, which fail to offer space for joint production and common productivity development, tend to lose out in the long run. 2) Negative spill-over cannot be avoided. Meaning, a neighbours loss cannot be your gain and a regional partners problem cannot be bottled up within the geographical boundaries of that country. 3) And the most important: Poverty alleviation is a geographical challenge and, therefore, needs to be tackled at a regional level. Regrettably, the short history of Pakistan and India stands mired in an unhealthy rivalry, mistrust, needless animosity and frivolous point scoring. Instead of honest soul searching and an honest will to find solutions and evolve strategies to move together towards growth, development, peace and security what we see instead is a culture of blame game one step forward and two backwards. Rather than learning from historys evidence that settling disputes makes for progress, India and Pakistan remain the unfortunate victims of their own internal bias and narrow perspectives. If meaningful peace, security and progress have to be attained in South Asia then we all know that these two countries hold the key to such a dream. What they need to realize is that the 'Boomerang law of nature ultimately always prevails: An un-equitable distribution of water will not be a victory for one side or a loss for the other. A looming wreck on the Indus will in effect have disastrous consequences for both sides and not just one. Why cant we learn from the Brazil-Paraguay gesture on water or the Brazil-Bolivia gesture on natural gas? Resolving the Kashmir issue with justice is in the interest of both sides and not just Pakistan. Settle it and embark with a clean slate into an era of joint progress and prosperity. Regardless, of what respective sides claim, both India and Pakistan are still faced with a stubborn poverty level that continues to hover around the one third mark. Why cant we pursue a common strategy on poverty alleviation that will help people on both sides of the border? Extremism in the name of religion will transform into terrorism whether it is the case of the Taj in Mumbai, Samjotha Express, the plight of Indian Muslims, Taliban or bomb blasts in Pakistani metropolises claiming lives of thousands of innocent civilians. Corruption in Pakistan will sooner or later also rub on the Indian side and vice versa. If one spy agency is bad the other cannot be good either Isolation of Pakistani cricket is not just bad for Pakistan but counter productive for the culture and sports of the entire region. Benchmarks and justifications for separatist tendencies cannot have different yardsticks and be only confined to a particular country The veneer of a shining democratic India will always wear thin till such time that it can also lead and inspire the region into emulating its model of democracy and growth. In short, a serious soul searching has to be done on both sides to realize that cooperation and amalgamation of long-term economic interests is the only way forward. Impediments like terrorist incidents should be used to strengthen mutual resolve in this regard instead of becoming hostages to them. Ask the Pakistani side and they will tell you the sacrifices paid to combat terrorism. To list just a few, 3 30,457 security personnel injured or killed since 9/11. 4 Around 10,000 casualties in 2009 alone. 5 10 soldiers casualties every day in 2009. 6 Terrorists arrested/killed: 17,742. 7 Resources put at full stretch and surge to fight terrorists, threatening domestic and more importantly international peace and security. The writer is an entrepreneur and an economic analyst. Email: kamalmannoo@hotmail.com