Challenges to South Asian economic cooperation

Business
By Editor_1
-Wikipedia
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By P. K. Balachandran

COLOMBO – Following the birth of the European Economic Community (EEC) in 1957 and the Association of South East Asian Nations (ASEAN) in 1967, Bangladesh President Ziaur Rahman envisaged the formation of a South Asian Association for Regional Cooperation (SAARC) in the late 1970s. The idea was viewed with suspicion by India, the dominant power in the region. However, SAARC saw the light of day in 1985.

As expected, SAARC’s growth was slow in contrast to the EEC, which progressed to becoming the European Union (EU) incorporating both political and economic unity, and ASEAN, which became an economic success story. However, thanks to SAARC, South Asia’s intra-regional trade rose from 4.5% of its total trade in 2008 to 7.6% in 2015, and 6.9% in 2018.

But this incremental growth was over 33 years during which the South Asian Preferential Trade Agreement (SAPTA) had come into existence (in 1993) and the South Asian Free Trade Agreement (SAFTA) was operationalized in 2006. SAARC’s achievements have been significantly low as compared to other regional blocs.

Its dismal performance gives rise to doubts whether a “geographical region” can be automatically assumed to become an “economic region”. No doubt South Asian nations have much in common, culturally and historically, but they are also deeply divided with all kinds of disputes  – over sovereignty, territory, sharing of river waters, ethnic groups, geo-political interests and the asymmetric distribution of political power in the region with the smaller nations grumbling about “Indian hegemony”.  Economic cooperation, which is the essence of regional groupings, is stymied by these divisive factors.

Lack of trust among the member countries has been the most significant factor in the under-performance of SAARC. The basic conflict has been between India and Pakistan. The India-backed SAARC–Motor Vehicles Agreement was stalled by Pakistan. Similarly, the SAARC satellite project which India proposed was abandoned following objections from Pakistan in 2016.

SAARC has also faced obstacles in the area of security cooperation. A major hindrance in this regard has been the lack of consensus on the threat perception, with differences over who is a terrorist and who is a freedom fighter. While cross-border terrorism emanating from Pakistan is a major concern for India, Pakistan has refused to address these concerns saying that the terrorists are but rebels against Indian rule in Kashmir.  Bangladesh, with its many Islamic terror groups, had been a major security concern for India despite the friendly Sheikh Hasina being in power there. This, combined with the dispute over alleged illegal Bangladeshi migration to India, and the sharing of the waters of the Teesta river, have bedevilled Indo-Bangla relations.

Factors Inhibiting Cooperation

Despite grandstanding on liberalization and reforms, in actual fact, South Asian nations swear by trade barriers and indigenization and are not part of international production chains. As of 2016, South Asia’s average tariffs were at 13.6%, significantly higher than the world average of 6.3%. SAARC countries also have long “sensitive” lists. 44 to 45% of the imports from other SAARC members fall under the sensitive lists of Bangladesh and Sri Lanka. 39% of India’s exports to South Asian countries fall under sensitive lists.

Non-tariff barriers are a well-known obstacle to intra-South Asian trade. Sri Lankan exporters have often cried foul about these barriers. Sanitary  and  phyto-sanitary  (SPS)  measures,  which  are  meant  to  protect humans, animals and plants, together with technical barriers are reportedly beyond accepted norms in  the  multilateral  level.  Dealing with these technical barriers is a tedious process which puts off exporters and importers. India  has  imposed  restrictive  measures  on  its  imports  to  protect  domestic  production. Rules of Origin, meant to curb re-export, also put restrictions on trade in countries which are industrially weak.

Connectivity is a major issue though India, Pakistan and Bangladesh have good road and rail systems. India and Pakistan are extremely wary about the free movement of goods and people. It was only in 2016 that road and rail were opened between India and Bangladesh following the signing of the Bangladesh-Bhutan-India-Nepal Motor Vehicles Agreement (BBIN MVA). The agreement did away with trans-shipment of goods from one country’s truck to another at the border, a time consuming and costly process.

India and Sri Lanka were earlier linked by ferry between Rameswaram and Talaimannar but this was not resumed on nationalistic grounds. Projects to make Palaly airport and Kankesanthurai port short links with India remain in the doldrums. Bhutan has opted out of the Bangladesh, Bhutan, India, Nepal Motor Vehicles Agreement (BBIN MVA) for environmental reasons. Trucks from Nepal and Bhutan are allowed in India, but Nepali trucks need to possess a licence before entry. But these licences are only valid for three months. Renewal of licences is extremely time-consuming. In 2015 Nepal was fuming over an alleged trade blockade by India over the former’s controversial constitutional arrangements.

Absence of Complementarity

Due to lack of economic complementarity and also due to tradition, South Asian countries prefer to trade with the West rather than with each other. The items that South Asian countries export are more or less the same, with the exception of India, which is the most industrialized of the lot. The common products are textiles, readymade garments, leather, and agricultural products. There is competition between Bangladesh, Pakistan and Sri Lanka in textiles and apparel exports. India opposes liberalizing textiles and apparels because it is itself a manufacturer of these items. No wonder, India’s trade with the South Asian countries has remained roughly between 1.7% and 3.8% of its global trade.

Asymmetrical Power

I a 2010 paper for the ADB entitled: The Political Economy of Regional Cooperation in South Asia, writer V. V. Desai says the asymmetrical economic and political power in South Asia is a deterrent to cooperation. Between 60% and 90% of the intra-regional trade of all SAARC member states, except Pakistan and Afghanistan, is with India, he points out.

“India‘s more diversified and relatively-better developed economy makes it a competitive supplier of several imports to SAARC‘s smaller economies. With trade liberalization, the imports of smaller economies from India are growing very rapidly. On the other hand, owing to their relatively narrow resource base and less diversified economies, they are unable to increase exports to India in a corresponding manner. This imbalance between imports and exports vis-à-vis India is in the ratio of 10:1 and even widening in some instances,” Desai points out. Rising trade deficits becomes an issue.

To correct trade imbalances with India and others in a sustainable manner, Desai says that the smaller SAARC economies need to offer similar products of interest at competitive prices. “These smaller economies need to diversify and upgrade production structures by investing large amounts of capital and harnessing newer technologies. This underscores the urgent need for smaller countries to put in place policies and facilities to attract large amounts of FDI, including from India. Similarly, it also argues strongly for operating a well-funded development assistance facility by India and other SAARC members, with support from bilateral and multilateral donors to help LDC (Least Developed Countries) members to diversify and upgrade their economies. Thus, there is an urgent need to activate and sufficiently strengthen the SAARC Development Fund. Meanwhile, progress towards market openings on the part of the smaller SAARC economies will be governed by their ability to maintain an acceptable trade balance with India and other trade partners.”

Recent Trends

Due to political and economic differences within regional groups, countries join new and less problematic groups. India sees BIMSTEC and BBIN as substitutes for SAARC as they do not have Pakistan as a member. Many countries are now joining the Regional Comprehensive Economic Partnership (RCEP), a free trade agreement between the Asia-Pacific nations of Australia, Brunei, Cambodia, China, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, South Korea, Thailand, and Vietnam. But India has refused to join the RCEP saying it does not give protection to its agricultural sector which is not strong enough to be liberalized.

-ENCL

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