No very deep knowledge of economics is usually needed for grasping the immediate effects of a measure; but the task of economics is to foretell the remoter effects, and so to allow us to avoid such acts as attempts to remedy a present ill by sowing the seeds of a much greater ill for the future. —- Ludwig von Mises

Indian policy makers’ optimism is matched only by their short-sightedness when it comes to dealing with matters of national security. To recount all the instances when they have been caught with their pants down would require a book-length treatment, not a short few paragraphs on a blog. But I cannot pass up the latest blunder in the making. I hope that I don’t have to say I told you so in a few years’ time. I hope I am wrong in my analysis but I am afraid that I will be proved right.

It appears that the 1,625 mile long pipeline project carrying liquefied natural gas from Iran to India is on track, as UPI reported on Aug 4th. Over a period of 25 years, India will import about 1.2 million metric tons of LNG each year, for a total of $40 billion.

India’s urgent energy needs are undeniable and much of it has to be met through importing hydrocarbon-based energy. India should really be investing heavily in developing renewable energy sources for it to achieve energy independence. Relying on foreign oil and gas is not a good idea in the first place. However, that is a matter which needs to be dealt with separately. For now, let’s focus on the pipeline. The really scary part of this US$4 billion pipeline is that about 475 miles of it will traverse through the terrorist state of Pakistan.

I do not share the optimism displayed by Reuben when he wrote:

As I see it, the pipeline could potentially be one of the biggest guarantors of peace on the sub-continent. Pakistan will earn substantial amounts of money from rights-of-way revenue from the pipeline. Therefore, they have strong incentive to keep the peace.

The operative word above is “potentially.” Potentially, one can imagine all sorts of great win-win outcomes in any strategic game. But more often than not, they are not what game theorists call “Nash equilibria”. As is well-recognized in literature and seen in actuality, the equilibrium obtained is sub-optimal. The incentives ex-ante differ from those ex-post with predictable results.

OK, let’s cut to the chase. Pakistan, the story goes, gains transit fees from allowing the gas pipeline to go through Pakistan and every year makes, say, a few hundred million dollars. So, it is argued, Pakistan will not sabotage the pipeline when push comes to shove because it will stand to lose the transit money. That is flawed thinking because it does not take into account the fact that Pakistan could “gain” in another way: by imposing heavy losses on India.

I take it for granted that someone will have to pay for the $4 billion pipeline and I am assuming that India pays for it to be built. The pipeline is planned to be operational in 2009. By 2011, India has started relying on the delivery of a couple billion dollars of LNG and about $10 billion dollars worth of industry is dependent on it. Assume that there is some conflict between Pakistan and India – say the Kashmir problem, or some river water dispute. Now Pakistan says very softly to their Indian counterparts at the negotiating table – off the records – “Guys, shape up or we will blow the f**king pipeline up tomorrow at 5 AM.” The stupid Indians will exclaim, “Naah, you wouldn’t do that. If you did that you will lose $100 million in transit fees.”

“Oh yeah?” the Pakistanis would taunt. “And how much would you lose, you morons? You will lose a $4 billion pipeline, and you will lose $10 billion of industrial output that you have built around the imported LNG. So stick that in your infidel pipes and smoke it, you losers.”

The Indians would respond, “No, you will not do that, will you? After all, haven’t we been friends with all those Samjhauta buses and all those nice things we do like play cricket with you guys and invite your lovely dictator to come and stay for free at our tax payers’ expense? Surely you cannot be saying that you will not play nice with us after all our attempts at being nice to you. Please say it ain’t so. Pretty please.”

“Listen up, kuffars,” the Pakistanis would reply, “and listen up real good. If you don’t toe the line as we say, some terrorists will blow the f**king pipe up. We will disclaim all responsibility, of course. The US – you know, our big-daddy who calls us the “frontline state against terrorism” – will realize how important a job we are doing against terrorism and will immediately announce the gift of a few dozen F-18s and military aid amounting to $2 billion. I hope you are getting the picture, you silly sons of bitches.”

Well, admittedly a crude rendition of what perhaps happens in diplomatic meetings but I think it is essentially what will happen if India is stupid enough to build a pipeline to deliver it essential energy through a state that has repeatedly demonstrated that it is willing to be a suicide bomber. A few years ago, they were on the verge of lobbing a few nukes at India. Were they concerned that they would be vaporised as well? Not really. After all, if they get nuked in retaliation, they will go straight to heaven but they would have destroyed the kuffar state in the end.