Regional Integration in South Asia

Regional Integration in South Asia

Trends, Challenges and Prospects You do not have access to this content

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30 Oct 2014
9781848599147 (PDF)

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Regional Integration in South Asia: Trends, Challenges and Prospects presents an objective assessment of trade and economic co-operation among South Asian nations and highlights policy issues to foster regional integration. The analyses presented in this volume go beyond the usual discussions on trade-in-goods to provide insightful perspectives on potential new areas of co-operation, emerging challenges, and country-specific views on regional and bilateral trade co-operation issues.

Written by influential analysts and researchers, the volume’s 24 chapters include perspectives from Bangladesh, India, Maldives, Nepal, Pakistan and Sri Lanka, and examinations of new areas of co-operation such as investment, regional supply chains, energy and cross-border transport networks.

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  • Foreword

    This publication is the result of work undertaken by the Commonwealth Secretariat in collaboration with policy analysts and researchers from institutions with outstanding reputations in this field. It is a fine example of our Commonwealth approach and convening power.

  • Abbreviations and acronyms xxiii
  • Regional Integration in South Asia

    South Asia is increasingly becoming an important and large market in the global economy, with the region witnessing steady economic growth accompanied by a growing large, young and dynamic workforce and a middle-class population. Since the 1990s, the region has registered an annual average output growth of 6 per cent, while consideration of the past decade (2000–10) alone would result in an even more impressive performance of about 7.5 per cent, which is much higher than the corresponding global GDP growth of 2.8 per cent and more than one percentage point higher than the average growth achieved in developing countries as a group.1 This remarkable economic growth has contributed to declining poverty incidence and improvements in other socio-economic indicators. Nevertheless South Asia continues to render one of the highest poverty levels in the world: a recent World Bank estimate suggests more than 500 million people in the region are living on less than US$1.25 a day.

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  • Expand / Collapse Hide / Show all Abstracts Looking at the horizon: potential gains

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    • Has South Asia Benefitted from Growth in India?

      India has experienced accelerated growth rates since the 1990s and has become one of the fastest growing emerging economies of the world. With the rise of the South, especially the BRICS countries, many have argued that South–South integration can sustain the growth of the South in the future. In this context, this chapter examines whether India, given its geographical location, can be the driver of growth for South Asia and become its growth pole.

    • Assessing Gains from SAFTA

      In recent years, there has been increased interest in regional economic integration in South Asia. The stalemate in multilateral trade talks, leading to the much prolonged Doha Round of negotiations of the World Trade Organization (WTO), has certainly contributed to intensifying efforts in regional trading arrangements with the trends likely to continue. One of the first few major regional integration initiatives in South Asia was launched in 1995 when the South Asian Association for Regional Cooperation (SAARC) Preferential Trading Arrangement (SAPTA) was signed. It took more than 10 years for SAARC member countries to establish a South Asian Free Trade Area (SAFTA), the full implementation of which will result in the abolition of customs duties on trade goods within South Asia by 2016. The transition towards deeper regional integration schemes has taken place in parallel to the establishment of unilateral trade liberalisation programmes in individual South Asian countries. Nevertheless, SAFTA is being implemented with the aim of boosting intra-regional trade in South Asia.

    • The Cost of Economic Non-Co-operation in South Asia

      One of the major hurdles in the South Asian trade liberalisation process has been hesitancy on the part of countries from the region to subject sectors/products of high intra-regional trade potential to the Trade Liberalization Programme (TLP) under the South Asian Free Trade Area (SAFTA) agreement. This has caused a high cost to consumers in South Asia in terms of avoidable high prices on imported goods which could have been sourced from regional trading partners at considerably lower prices. Loss of consumer welfare owing to lack of depth in intra-regional trade and non-co-operative economic relations has not been hitherto subjected to thorough research. This chapter carries out a quantitative assessment of potential consumer welfare gains from deeper trade integration in South Asia and presents the results of a perception survey analysis on the views of key stakeholders on the relevance of consumer welfare in trade discourse. The results of the quantitative assessment show that minimum static annual consumer welfare gains of US$1.9 billion could be realised from enhanced regional trade. The general perception of stakeholders is that bringing in consumer welfare aspects of trade will help to rebalance the SAFTA negotiations and, towards this goal, initiatives for awareness generation and networking among various stakeholder groups is of utmost importance.

    • Building Regional Supply Chains in South Asia

      A long time has passed since the South Asian countries initiated a process of preferential trade liberalisation with the establishment of the South Asian Association for Regional Cooperation (SAARC) in 1985. The next concrete step for promoting regional trade was the operationalisation of the SAARC Preferential Trading Arrangement (SAPTA) in 1996 with an expectation of moving towards a South Asian Free Trade Area (SAFTA) agreement, the implementation of which eventually began in 2006 and is scheduled to be completed by 2016. Nevertheless, South Asia remains one of the least integrated regions with intra-regional trade accounting for about 5 per cent of the region’s global trade, in contrast to the most recent estimates of a global average intra-regional trade of 35 per cent (WTO 2011) and region-specific comparable figures of 70 per cent for the EU; 49 per cent for NAFTA; 25 per cent for ASEAN; 16 per cent for CARICOM; and 10 per cent for COMESA. Since the 1990s, individual South Asian economies have opened up at a rapid pace. Their overall exports and trade have risen enormously. However, the relative significance of intraregional trade remains appallingly low.

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    • Non-tariff Barriers in South Asia

      With tariffs coming down worldwide, attention has been increasingly diverted to issues related to barriers to trade other than the tariffs, non-tariff barriers (NTBs). It is true that, often, NTBs are put in place for protectionist purposes; on the other hand, NTBimposing countries tend to argue in favour of these barriers for a variety of reasons. The border line between defensive and offensive interests with regard to the NTBs thus tends to be blurred. The fact also remains that in many regional trading agreements (RTAs), which were set up in the first place to enhance intra-regional trade flow, NTBs have emerged as the spoiler that defeats the very purpose and objective of the RTAs. In this context South Asia has emerged as an epitome of this dichotomy.

    • Dealing with Non-tariff Barriers in South Asia

      There is considerable heterogeneity across South Asian countries in terms of the extent to which they trade and the relative importance of trade in goods and services. Information on trade in services is simply not available for countries such as Afghanistan and Bhutan. Among others, Pakistan has the lowest level of trade as a share of GDP in the region: exports of goods and services comprise just 13 per cent of GDP. Bangladesh, Sri Lanka and India each have a share of trade in goods and services of around 20 per cent of GDP, with trade in services accounting for 13 per cent of GDP in India compared with just 6 per cent in Bangladesh and 11 per cent in Sri Lanka. The smallest economies of the South Asian region – Afghanistan, Bhutan and Nepal – which are also landlocked, in general have higher shares of trade as a percentage of GDP. This is also the case for the island states of Maldives and Sri Lanka.

    • Regional Investment Co-operation in South Asia

      Although theoretically foreign direct investment (FDI) and trade are considered to be substitutes for each other, evidence suggests that FDI could exploit those markets better by using its intangible assets that cannot be substituted by trade (Bloström and Kokko 1997; Caves 1996). These intangible assets of foreign companies include technological and marketing expertise, which could be used for exploiting knowledge of local markets, consumer preferences and business practices, etc. Under an integrated regional market, FDI from member countries could target each other’s market with a view to operating with low-tariff barriers. Such kinds of operation would be effective when production networks within the region function in a vertically integrated manner. In those markets, extra-regional FDI would take advantage of tariff barriers and large regional markets, etc. Despite the advantages of an integrated market, all locations within the region may not attract intra- and extra-regional investments at the same level; countries which have strong locational advantage could attract most of the FDI (Bloström and Kokko 1997). In other words, investment between member countries in an integrated region may be differentiated by differences in size of economy, variation in economic policies, poor physical and non-physical infrastructure facilities, lack of cross-border facilities and political factors (Sobhan 2004). Overall, an integrated regional market could facilitate ‘investment creation’ at a large scale both by intra-regional and extra-regional FDI. Promotion of FDI in South Asia should take that perspective into account in its initiative for regional co-operation for investment.

    • Regional Trade in Services in South Asia

      Even though the services sector is the major contributor to gross domestic product (GDP) in most South Asian countries, trade in services in South Asia is low. However, even at the global level, compared to the trade in goods, trade in services has a much lower share in total world trade. The ‘intangibility’ and ‘unstorability’ factors were considered the main impediments to trade in services. The services sector was not included in the multilateral trading system until the inception of the Uruguay Round of General Agreement on Tariffs and Trade. Following the conclusion of the Uruguay Round, the General Agreement on Trade in Services (GATS) was the first initiative that aimed at the progressive liberalisation of trade in services. Since January 1995, the World Trade Organization (WTO) has been administering this agreement and finally, services trade is getting the necessary importance in the multilateral trading system.

    • Connectivity and Regional Co-operation in South Asia

      One of the major challenges facing South Asia in deepening regional integration and increasing competitiveness is poor quality and inefficient national and international infrastructure services, both hardware and software, which raise costs of transportation and production and constrain the capacity of the South Asian economies to gain from a liberal trading environment, regional or otherwise. The South Asian region, with its geographical contiguity, has great potential for co-operation in the area of connectivity.

    • Productive Integration of Least Developed Countries into Regional Supply Chains: The Case of South Asia

      The use of regional supply chains in production implies the geographic dispersion of the stages of production (of goods and services) across national borders within a given region.1 As such, these supply chains often involve a complex web of inter- and intra-firm transactions across and within national boundaries engaged in various aspects of production and marketing of a single or related range of products. (Some investigators have, perhaps more correctly, referred to them as supply networks. This web of firms is able to extract the potential benefits from variations in comparative advantage across countries and across country- or region-specific trade advantages (or sidestep trade or regulatory restrictions) to lower production costs and increase market access (Kimura and Obashi 2011). In addition, stiff competition between firms at certain stages along the production chain can serve to maintain strong downward pressure on costs (Wills and Hale 2005). However, the geographic dispersion of the production process also means that the viability of regional supply chains is predicated on the ability to transfer goods across space and national borders both quickly and inexpensively. Those requirements pose a substantial challenge to the introduction and expansion of regional supply chains in developing regions, in general, and the participation of least developed countries (LDCs), in those chains, in particular.

    • International Trade, Regional Integration and Food Security in South Asia

      South Asia is home to more than 23 per cent of the global population but it accounts for less than 3 per cent of global output (GDP). All countries in South Asia are classified in the low-income or low-middle-income categories. Poverty and hunger are the most serious problems faced by the region. About 43 per cent of the poor and 36 per cent of the undernourished population of the world is concentrated in South Asia. Despite rapid growth of some of the economies in the region, the incidence of poverty, hunger and malnutrition has not seen perceptible decline. All these countries, except India, have been net importers of food, as their own production has not been sufficient to meet domestic requirements.

    • Promoting Regional Energy Co-operation in South Asia

      It is well established that supply of adequate, reliable and reasonably priced energy is one of the key inputs for sustainable socio-economic development of any region. South Asia is not only the second fastest growing region in the world; it is also one of the poorest, which puts energy at the very heart of the development process in the region. According to the United Nations (UN) World’s Economic and Social Situation and Prospects 2013, the region registered a growth rate of 8.3 per cent and 5.8 per cent in the years 2010 and 2011 respectively, with projections of 4.4 per cent in 2012. Despite this, significant progress remains to be made. With a population of over 1.6 billion, the region is home to half of the world’s poor. This huge population growth coupled with expanding economies has spurred ever-increasing pressures of energy demand for countries in the region. The International Energy Agency (IEA) has projected that South Asia could have the highest growth rate of energy consumption in the world by 2020.

    • Commodities Super-cycle: Implications for South Asia

      At the beginning of this millennium, there was a significant turnaround in primary commodity prices. After two decades of low, and at times dwindling, prices, many primary commodity prices have registered a steep increase since 2002. The marked price increases began to gather pace first in 2002–03 and then in 2006–07, culminating in an all-time high peak in nominal terms in 2008 across commodities, just before the onset of the global financial crisis. The sharp increase in nominal prices was so marked that it has also resulted in a sharp upturn in real commodity prices in the first decade of the new millennium, though the scale of the increase differs among commodities and the real prices of agricultural commodities are still lower than the peaks previously attained during the Korean war and oil shocks of the early 1970s. This price movement has led many observers to conclude that commodities had entered into a new price super-cycle in the early 2000s (e.g. Kaplinsky 2010).

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    • Tariff and Non-tariff Barriers in South Asia Trade: A Bangladesh Perspective

      Regional co-operation leading to economic integration in South Asia in the form of intra-regional trade and investment was uppermost in the minds of South Asian leaders who gathered to form the South Asian Association for Regional Cooperation (SAARC) in December 1985. Since then, top political leaders of member countries have met in summits more than 16 times. Yet, after 27 years of SAARC, 17 years of SAARC Preferential Trading Arrangement (SAPTA), and another 7 years of SAFTA, with its concomitant Trade Liberalization Programme (TLP), progress on the ground has faltered in the area of trade and investment under the regional accord umbrella.1 This has happened despite several institutional processes having been put in place, such as periodic summits of policy-makers and officials with the objective of removing barriers to trade and investment.

    • Tariff and Non-tariff Barriers to Trade in South Asia: An Indian Perspective

      India is the largest economy in the South Asian region accounting for more than 80 per cent of South Asia’s GDP. More than 90 per cent of the regional trade of Bangladesh, Nepal and Sri Lanka as well as a major part of their global trade is with India. Trade among the remaining South Asian countries is much smaller than India’s trade with any of its South Asian partners. Owing to its central geographical location in the region, India is also at the helm of all regional trade facilitation and transit issues. The pace and direction of economic integration in South Asia, therefore, is largely a function of India’s relations with the other economies of the region.

    • Pakistan: South Asia Trade and Non-tariff Barriers

      The purpose of this chapter is to analyse, from the perspective of Pakistan, the future of South Asian integration in light of the changing patterns of trade. The scaling down of tariffs has shifted the focus of researchers working on the South Asian Free Trade Area (SAFTA) towards the plethora of non-tariff barriers (NTBs). The member countries of SAARC have been forthcoming in reducing their tariff barriers as agreed under SAFTA. In fact, India has implemented all of the tariff reductions that were agreed under the SAFTA, well before the deadline. Pakistan, Bangladesh and Sri Lanka have also been responsive in reducing tariff rates in compliance with this agreement. However, this liberalisation of tariffs has had little impact on trade and integration within the region. Whereas, India has allowed duty-free imports for all products except for the ones specified on the sensitive/negative list, it has conversely put in place harsh requirements, which have in turn created procedural complexities, making trade flows unviable.

    • Nepal and SAFTA: Issues, Prospects and Challenges

      The Preamble to the Agreement on South Asian Free Trade Area (SAFTA) expects it to act ‘as a stimulus to the strengthening of national and SAARC economic resilience, and the development of the national economies of the Contracting States by expanding investment and production opportunities, trade, and foreign exchange earnings as well as the development of economic and technological co-operation’ (SAARC Secretariat 2004). Nepali policy-makers believed that joining SAFTA would help Nepal to expand its exports to countries other than India, collectively called the ‘Rest of South Asia’ (RSA), and thereby contribute to geographic export diversification. If Nepal’s intra-regional trade during the first five years of implementation of SAFTA is any guide, this objective is far from being achieved. This is also the plight of most of the LDCs in the region, which are heavily dependent on the two largest economies of the region for their regional trade.

    • The Way Forward on Tariffs, Non-tariff Barriers, SAFTA, Bilateral Free Trade Agreements: The Case Study of Sri Lanka

      The forces of globalisation have led to the freer movement of goods, services and capital (if not labour) across borders. Even though South Asia continues to be the least integrated region in the global economy, considerable liberalisation in trade in goods, services and investment flows has nevertheless taken place. Among the South Asian countries, Sri Lanka stands out as an early liberaliser, since it initiated economic reforms in 1977. Much of this liberalisation today is not only taking place multilaterally under the World Trade Organization (WTO), but regionally and bilaterally. It is also apparent that, in parallel with lowering of tariff barriers, more opaque non-tariff barriers (NTBs)/measures have emerged as the main ‘behind the border’ instrument restricting the free flow of goods and services.

    • South Asian Trade: What it Means to Maldives

      South Asia, counted among the fastest-growing regions in the world, has the most geographically diverse composition in terms of the size, populations and resources of its countries. It is anticipated that the fast growth in South Asia will benefit from young demographics, new waves of globalisation, increased labour mobility and the rise of the middle class in the coming years (Ghani 2011).

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    • Indo-Bangla Trade: Composition, Trends and the Way Forward

      Since the 1990s, South Asia has grown twice as fast as the rest of the world.2 Most of the countries in the region have embarked upon more systematic and persistent trade liberalisation measures and, on the whole, such a policy stance has been maintained. This change in policy orientation has contributed to the improved trade performance of the region, coinciding with accelerated economic and per capita income growth. Enhanced outward orientation and improved growth performance also provide potential for increased regional trade and economic co-operation. In reality, however, South Asia is still one of the least-integrated regions of the world.

    • India–Pakistan Economic Co-operation: Implications for Regional Integration in South Asia

      One of the most significant recent developments in India–Pakistan bilateral economic co-operation is the revival of trade talks in 2011. Since then, the two countries have built closer economic relations with a shared vision of enhancing peace and stability in the South Asia region. There have been several initiatives taken by both countries to strengthen bilateral relations, of which Pakistan’s decision to offer most favoured nation (MFN) status to India is remarkable.

    • India–Sri Lanka Free Trade Agreement and the Proposed Comprehensive Economic Partnership Agreement: A Closer Look

      In pre-colonial times there were strong economic relations between India and Sri Lanka, but these relations diluted during nearly four and a half centuries of colonial rule. Soon after independence in both countries, economic relations strengthened, but not significantly, as a result of inward-looking economic policies dominating in both economies until about the mid-1980s. The economic links began to pick up in the 1990s with the liberal economic regimes consolidating in both economies, and received a boost in 1998 when the two countries signed a bilateral India–Sri Lanka Free Trade Agreement (ISLFTA), which came into operation in March 2000. This was a pioneering attempt in the direction of trade liberalisation in the South Asian region and involved the liberalisation of trade in goods. Sri Lanka’s economic objectives were to increase trade ties with South Asia’s dominant economic power, to induce the transformation of Sri Lanka’s exports from low-value-added goods to high-valueadded goods aimed at niche markets and to provide low-income groups with cheap consumer imports from India (Kelegama 1999).

    • The Promise and Potential of Trade Between Pakistan and India

      There have been significant developments in Pakistan–India trade relations since the beginning of 2011, as both countries have moved determinedly to remove some of the key barriers impeding bilateral trade. In April 2011, the two countries announced a roadmap to boost trade relations; April 2012 saw the formal opening of the trade gate at the Wagah–Attari border and New Delhi making the surprise announcement that it would allow direct Pakistani investment in India. While India promised to resolve the issue of non-tariff barriers (NTBs) that constrain Pakistani exports to its neighbour, Islamabad pledged to grant most favoured nation (MFN) status to India. More important in the near-term is Pakistan’s decision to relax the constraints on Indian imports by switching to a ‘negative list’ approach to import controls.

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