Wednesday, November 8, 2006

Opinion

-Rajendra Kumar Khetan

Rajendra Kumar Khetan

South Asia is one of the most dynamic and versatile regions in the world. Ironically, it is also one of the under-performers. A1thou the region is endowed with huge human and natural resources, the overwhelming majority of the one-fifth of humanity who call this region their home is living in grinding poverty.

The seven countries belonging to the South Asian Association for Regional Cooperation (SAARC) are rich in various kinds of resources. While India has a vast human as well as natural resources, Nepal and Bhutan are known for their water resource potentials. Bangladesh and Pakistan , Sri Lanka and the Maldives , each have their own strengths in areas ranging from tourism to industries.

But till now the resource of these countries have remained only on paper. There is an utter lack of combined efforts to tap the potentials to bring about prosperity to the peoples of this region.

Most of the countries in South Asian region are mired in internal conflict and tension, which has bogged down their potential to prosper. The South Asian countries are burdened with strains of history, which is preventing them from transforming their present potential into future prosperity.

Potential for Regional Economic Cooperation in South Asia

South Asia is a vast economic powerhouse in terms of its market potential, natural resources (e.g. the water of Nepal, natural gas of Bangladesh, coal of India etc) and qualified human resources ( e.g. IT professionals and entrepreneurs of India). Given this backdrop, South Asia can be expected to fare much better than what other economic blocs such as Europe , North America and South East Asia have achieved.

However, there is a stark absence of political will to move ahead in a united manner in this region. It may be noted here that in other regions mentioned above economic issues were pursued despite a number of outstanding non-economic issues at bilateral levels that caused frequent irritants between the members of the region. But in South Asia , politics has always managed to hold back exploration of mutually beneficial linkages in other areas. Since mid-i 980s, however, there is seemingly a palpable evolution in the attitude of the South Asian countries. In 1985, the seven countries of the region formed SAARC and since then they have exhibited intentions — albeit with occasional hiccups — to travel together to foster economic cooperation among themselves. They have exhibited this attitude through, among others, the setting up of the Committee of Economic Cooperation (CEC), which comprises of Commerce / Trade Secretaries of the SAARC member states. Still, the business communities of the region have been frequently voicing their dissatisfaction at the slow pace of the process in this direction. Of course, there are some diplomats who are not satisfied with the speed with which the SAARC process has continued so far. And they cite the example of the South Asian Preferential Trading Arrangement (SAPTA) framework, which came into existence in December, 1995 and was put into operation by 1997. It was only after the introduction of SAPTA that the economic issues formally entered into the SAARC agenda. A decade has since passed.

Take for instance the intra regional trade volume; the intra-regional trade volume among SAARC countries stand at abysmal 4.46 percent of the total trade of member states whereas the intra-EU trade is 55 percent, intra-NAFTA (North American Free Trade Area) trade stands at 61 percent and intra-ASEAN trade is 25 percent of its total trade. The total foreign direct investment in the SAARC region (2002) stood at USD 4 billion whereas the same in China only for the year 2002 was USD 53 billion.

The average adult literacy in South Asia stands at around 50 percent compared to 89 percent in East Asia (excluding China ). Per capita income is S 309 in South Asia compared to over $ 10,000 in East Asia (excluding China ). Before formation of ASEAN in 1 960s, the gap in per capita income between South Asia and East Asia (Excluding China) was $ 200, which has increased to over $ 9700 in a matter of few decades. Intra regional trade volume of SAARC countries stand at 4.46 percent of total trade of member states compared to 55 % of EU; 61% of NAFTA and 25% of ASEAN

Although the early operationalization of SAPTA can be taken as a proof of the willingness of the member states to speed up cooperation among themselves, the subsequent negotiations through which the actual tariff concessions were determined could not be termed anything except but slow as the number of items on which such concessions are offered is very small ( 4,951 by the first three rounds of the negotiations).

It seems the region has not learnt lessons and exploited the advantage of being a late- corner in the field of building regional economic blocs. Despite vast opportunities, it is sad to note that the potentials of enhancing trade among SAARC countries have never been fully explored. In fact, intra-regional trade opportunities do not receive the attention they deserve. It has resulted in the neglect of regional competitive and comparative advantages and low levels of synergy in efforts towards growth and economic development.

As such, this paper attempts to put forth some ideas regarding what cain be done to further speed up the process of economic cooperation in the region.

Achievements So Far:

Before getting on with suggesting what can be done for the improvement of economic cooperation in the South Asian region, it would be worthwhile to take stock of what has been achieved so far in this field. And the achievements made are, indeed, not insignificant though they may not be outstanding.

For instance, one can draw satisfaction from the fact that the basic institutional framework required for full-fledged economic cooperation in the region is in place. At the official level, there is the Committee of Economic Cooperation and there are several committees to oversee the development in the fields of agriculture, tourism, monetary policy, environment and meteorology, communications, education, culture and sports, health, population activities, rural development, science and technology, prevention of drug trafficking and drug abuse, transport etc. The SAARC Chamber of Commerce and Industry (SCCI), SAARC LAW and South Asian Federation of Accountants are recognized as the SAARC-level apex bodies in the respective fields of business, law and accounting and these bodies report directly to the SAARC Council of Ministers. The SCCI has set up Tourism Council and Construction Industry Council and there is a plan to set up Women Entrepreneurs Council and Information Technology Council as well.

These institutions broadly present basic framework, which can be used as a launch pad to take off the regional cooperation in respective fields.

SAPTA & SAFTA

When we analyze the efforts so far in regional economic cooperation in South Asia , we may find that they are focused more on sharing the benefits of such economic cooperation than on increasing the size of the benefits.

The example is provided by the way negotiations were conducted under SAPTA. It can be seen that the countries are offering tariff concessions on items, which are imported in very significant quantities. It appears they are worried about possible sudden surge in the imports. Proper analysis of the micro and macro level effects of such increased trade is lacking in all the countries. The fear of closing down of some industries and loss of employment in those industries should be weighed against the possible gains from the creation of new employment opportunities in other industries that may flourish under free trade. In fact, the process may also lead to the creation of additional employment opportunities by utilizing the comparative cost advantages of each other. Since some of the members of the chamber of commerce and industry of each of the countries are going to face closure of their business units if they are involved in industries that have no comparative cost advantages, such analyses have to be conducted by some independent parties.

Without developments in these directions, the South Asian Free Trade Agreement (SAFTA) seems to be a distant dream. The wish to increase intra-regional trade in South Asia is affected by a number of economic as well as non-economic factors such as the following:

Similarity of products and processes : Most of the economies in the region are based on agriculture and their technological advances with regard to production processes are not much different. They produce similar items. Thus, the preferential trade agreement may not necessarily lead to higher volume of intra - regional trade within SAARC.

Consumer demand: Some of the goods produced on a large scale in certain SAARC countries do not appear to meet the required consumer demand of the importing SAARC country. For example, as Pakistan is not a tea producer, it offers a large market for tea exports of Sri Lanka , India , Nepal and Bangladesh . However, a large part of Pakistan ’s tea requirement is fulfilled by imports from outside the region such as Kenya , because the kind of tea preferred by Pakistanis is not produced in adequate quantity within the SAARC region.

Product quality: Often the lower quality of products produced within the region leads some countries to import goods from outside the region, even though the prices may be higher.

Market limitations: At times this becomes a major obstacle. Intra-regional trade can suffer because of political and/or geographical considerations. For example, geography limits the market for Nepal and Bhutan . Being land-locked countries, they have to trade mostly with India . On the other hand, political differences between India and Pakistan have kept the trade between these two countries at a very low level. Lack of adequate air, surface, rail and water transportation facilities within the region adds to the market limitations substantially by bottle-necking the easy movement of goods particularly those of bulky nature.

Non-Tariff Barriers (NTB): Also important is the need for dismantling the non-tariff barriers (NTBs) among the SAARC member states. SAPTA. so far, is restricted to dealing with tariff barriers only. But there are several examples of NTBs that Nepali exporters complain have been raised by India for imports from Nepal . Two such examples are quota on Nepali vegetable ghee, acrylic yarn, copper production and zinc oxide and the quarantine restrictions of Nepali agricultural products entering into India . Now that Nepal also has gained the WTO membership and India is already its member. The two countries can be expected to use the WTO framework to deal with such complaints. One more point to be noted in this regard is that the SAPTA agreement is concerned only with the trading of goods. There is a need to expand the agreement to cover also the trading in services.

Issue of Standards: One of the NTBs imposed in the regional trade among the SAARC countries is related with the quality standards. Till now there is no, single SAARC level standard certification system in place. Nepal and India have been working for an agreement, which will recognize the national standard certification from each other. Similar arrangement can be developed for other countries as well. However, it would be a better idea to have a unified standard system for the entire region. Single quality standard will also help to explore markets jointly as the commodity to be marketed will carry a regional quality tag. The SAARC committee needs to speed up the work on this issue.

Increasing Capital Flows: After the trade of goods and service are made fully free among the countries of SAARC under SAPTA, the region could move towards customs union, which will need opening up of region’s economy. Therefore, SAARC countries would be pressed to ease free movement of trade of goods and services, improving access, communications, infrastructure and easy movement of people within SAARC. The experience of the East Asian Financial Crisis of late 1990’s should, however, be kept in mind and there has to be an effective mechanism to check the sudden and speculative movement in the capital. For this reason, it is advisable to set up a regional fund in line with the International Monetary Fund ( IMF) , which would immediately come to the rescue of the country that may be facing sudden financial crisis. Regional fund is also necessary to balance risks related to Foreign Exchanges, Stock markets and capital movement. This initiative should be buttressed by a SAARC- level Credit Rating Agency. Double taxation avoidance arrangements not only encourage remittance of profits but also act as an effective tool and incentive to attract capital and FDI. The proposed regional agreements on avoidance of double taxation and for promotion and protection of investment within the region should be expedited.

To ease the free movement of labor among the countries, the SAARC members should start easing their respective visa regimes and work permit requirements. Nepal has already moved ahead of its neighbors by waiving visa fee for the citizens of the SAARC countries. Contacts at people to people level of the respective countries and resulting common aspirations and understanding will strengthen the cross border bonds and harmonious coexistence of peoples belonging to different races, languages, religion and cultural backgrounds.

Attracting FDI: Foreign Direct Investment (FDI) is widely recognized as an effective means for poverty alleviation as it induces faster economic growth. South Asia can he a very attractive destination for market seeking as well as resource seeking FDI as it is inhabited by one fifth of the humanity, on the one hand, and is rich in natural resources, on the other. But the performance of this region in attracting FDI has been very dismal as compared to its potential.

The United Nations Conference on Trade and Development (IJNCTAD) has in its World Investment Report 2002 categorized all the five SAARC countries (the report does not cover Bhutan and the Maldives ) as under-performers in terms of FDI performance index. The highest score on FDI performance index is assigned to India among the SAARC countries at 0.2. If the index is equal to one, it means the country mobilized the FDI equal to the potential determined by various considerations.

One of the reasons for the low FDI flow in South Asia is the policy restrictions that constraint the intra regional trade in South Asia as discussed above. This warrants for a regional policy change by all the member countries not only to facilitate the rules governing the FDI but also to facilitate movement of goods between the member states so that the market seeking FDIs are encouraged to set up production facilities in this region.

Text courtesy: From the author's paper presented last year at a regional seminar held in Kathmandu-ed.