Economic Cooperation in South Asia: The Impediments

Prof. Gunanidhi Sharma, Tribhuvan University

The GEP Report, 2000, admits that the process of cooperation in SAARC region is too slow. It also highlights that cooperation without economic integration resulting from enhanced flows of trade, investment and financial fund is meaningless even in social and cultural areas. The greater flows of goods, services (including technological), financial fund and market information of all kinds inclusive that of appropriate but efficient technology demands the massive structural and institutional changes on both the demand and supply sides. As the supply inelasticity together with the absence of competitive products as well as the high tariff and non-tariff walls is the main cause for the voluminous trade deficit (annual trade deficit in trade with India amounts approximately 20 billion in 2001) of economically weaker members like Nepal, the developed members have very lately understood this reality. It is for this reason that economic issues in SAARC, as said earlier, were coming fundamentally into discussion after 1990 as the byproduct of the Uruguay round which was concluded in WTO in 1994. The SAPTA was adopted in 1995 as a gateway to SAFTA, whose complete format is to be finalized by the end of 2002, as said earlier (see the declaration o Eleventh SAARC Summit, 2002). The decision of moving towards this direction was taken in 1997. It is unanimously presumed that the South Asian free trade area would not only serve as the engine of growth generating more employment and social opportunities, but also pave the way of this region to competitive global markets. Besides, expectation is that the SAFTA would reduce fully the burden of tariff and nontariff barriers reducing the cost of production and trade as an incentive to investors, whether they are public or private and local or foreign. The SAFTA is expected to follow the rules, practices and principles of WTO, which brings even trade related non-economic issues like the favors by developed countries to least developed countries into consideration. Countries like Nepal may be freed from traditional grip of inferiority complex provided it is serious about supply side constraints or bottlenecks and institutional capacity of doing trade and making investment, negotiating with others, securing national peace, keeping prices and exchange rate stable, keeping economic house and industrial relations in order, raising economic values and productivity and overcoming economic fragmentation. Otherwise, the situation may be worsened for open door policy inviting numerous shocks abroad and making the process of becoming market for others deepened. If it happens and if India is stick to bilateralism there is little hope of gaining much from the new arrangement of SAFTA.

At present, the role of India appears conservative who always ties up economic issues with political and security issues and tries to reap the advantages of: (a) strategic location of being at the center, (b) the long historical basis of unequal bilateral relations with its neighbors and (c) its superior economic position in South Asia. In course of negotiations and agreements, India forgets to remember that it must work as the economic leader in the region, and its bitter relation with Pakistan is independent of the relations with other members. In the meanwhile, as a member of the WTO it also undermines various clauses of free and fair trade with which it itself as a less developed country is confronting. Data reveal that average non-tariff incidence in India is highest (61%) in South Asia followed by Pakistan (25%), Sri Lanka (11%) and Nepal (0.8%). In tariff barrier side, the average rates in percentages are 76, 43, 17,56 and 24 for Bangladesh, India, Nepal, Pakistan and Sri Lanka, respectively. Nepal has a lowest tariff and non tariff barriers explaining that further liberalization, unilaterally, in Nepal will not make Nepalese economy more competitive (in terms of cost advantage) which is supportive to economic restructuring with effects of high value addition and growth, more employment, poverty alleviation, favorable trade and over all balance, fair distribution of income and so on. Nepal needs consider many other factors as well affecting competitiveness of its economy (for details see Sharma, 2002). Generally, the competitiveness of an economy is explained negatively by the levels of domestic prices and positively by the rate of exchange (domestic currency/foreign currency), given foreign prices. The levels of prices are the functions of wage, interest, rent and profit rates, given the exchange rate. Other structural factors too are important in keeping the economy competitive. A few of them classified into external as well as internal ones may be listed as:

External factors: the pace of technological development abroad, cooperation between trade partners (MFN treatment), product mix in other countries, cost of import raised by the decisions of foreign government, international rates of wage and interest, pressure of donors to raise tariffs of electricity and water, etc.

Internal factors: inelastic production structure and supply bottlenecks, smaller size of the corporate economy, traditional test and preference barring the economic transformation along commercial line, etc.

The nation needs consider all the factors and work accordingly in order to bring dynamic changes in the economy that it may reap competitive advantage regularly. Other things remaining the same, hope, however, is that when Nepal becomes WTO member it may get special support for institution building, capacity enhancement and export promotion. Even in SAARC, a recent decision of creating a fund for supporting least developed countries’ requirements of raising economic and institutional capabilities relating to trade and, hence, investment must be seen as a positive step in this connection. Equally important, India’s self-centric behavior too seems changing, even if very slowly. It is evident from summit’s commitments as an outcome of public, civil society, business community and professionals’ pressures.

Summits and Ministerial meetings in the region hold (see highlights of the Decisions of the SAARC Council if Ministers, 2002 and Declarations of the Eleventh SAARC Summit, 2002) that regional block is a must for: (a) raising resource efficiency in the region, (b) devising common position for the negotiations with WTO on trade and trade related issues, (c) protecting regional standard and interest of TRIPS, labor standard, trade related investment, environment, food security and agricultural subsidy, (d) dealing with the practice of tariff and non tariff barriers in the developed countries, (e) devising common regional non-economic policies with economic implications for member states including the mechanisms to tackle the issues of poverty alleviation, women and drug trafficking, terrorism and social mobility, (f) planning for payments and investment including the use of funds created under SAARC framework, etc. Its long term vision for free trade area and economic union, however, requires an special scheme for: (a) convertibility of member states’ currencies, (b) regional level financial institutions for insurance and Ex-Imp financing, (c) the declaration of the South Asia as a visa free zone for the citizens in the region in order to realize greater mobility of people, products, factors services, and information and technology, (d) mechanism for dispute settlement and, (e) the SAARC secretariat as a strong institution for monitoring the operational aspect of decisions made by intergovernmental and expert groups.

Reality, however, is that in order to attain these aspirations SAARC must go a long way in its economic readjustment process, which is time consuming, and mean while these steps may contradict with national agendas. International pressure and India’s need of attracting FDI may, nevertheless, help this region to change the situation more favorably. Or this may be simply a hope if India is sticky on bilateral treaties. Again the pressure out side the government in India seems worth considering.

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