MANTRAYA ANALYSIS#09: 05 SEPTEMBER 2016
NIVEDITA JAYARAM
Abstract
Regional integration in South Asia lags behind other regions in the world despite efforts at institutionalized cooperation through the SAARC. Economic cooperation and connectivity in South Asia can pave the way for shared problem solving and greater economic development for all states in the region. The SAARC efforts remain ineffective due to its narrow focus on the removal of tariffs on intraregional trade. Led by a motivated political leadership, SAARC could greatly benefit from identifying and resolving the unaddressed barriers to regional integration, rather than relying on progressive tariff reduction on intraregional trade in goods as the single means for facilitating regional integration.
Introduction
South Asian regional integration facilitated by economic cooperation and connectivity has emerged to the forefront of multilateral relations in the region due to the increasing awareness that only concerted effort can help South Asia jointly address the problems of developing nations with large populations. However, institutionalized cooperation, in the form of the South Asian Association for Regional Integration (SAARC), formed in 1985, has failed to achieve expected results. The region remains one of the least integrated in the world. This can be attributed to the SAARC’s failure to fully implement its main instrument for improving intraregional trade, namely, the South Asian Free Trade Agreement (SAFTA) due to a variety of reasons.
First, the SAARC-envisioned progressive trade liberalization programme has not been sufficient to ensure the full implementation of the SAFTA, due to the existence of Non-Tariff Barriers (NTBs), while the SAARCs main focus has remained tariff reduction alone. Second, low levels of regional connectivity, as well as the lack of border infrastructure to facilitate the smooth flow of goods and people, have hampered the creation of a regional supply chain. Third, the failure of the SAFTA can also be explained by its narrow scope, in that it covers only intraregional trade in goods while excluding other important aspects of regional economic cooperation such as trade in services, and investment and financial cooperation between South Asian states.
Former Indian Prime Minister Dr. Manmohan Singh stated at the 16thSAARC summit in 2010 that, “We have created institutions for regional economic cooperation but we have not empowered them adequately to enable them to be more proactive”. This statement is relevant in a scenario where South Asian nations acknowledge that regional integration is a geographic necessity, but the institutional arrangements fail to make integration possible, as they are retarded by a number of challenges which remain unaddressed. Presently, negotiations for establishing a South Asian Economic Union by 2030 are underway. However, the progressive trade liberalization programme under the auspices of the SAARC has performed poorly as South Asia remains one of the least integrated regions in the world.
Non-Tariff Barriers
The greatest impediment to intraregional trade, it has been pointed out, is in the Non-Tariff Measures (NTMs). These provide necessary protection to the importing countries and hence, are difficult to address. However, NTMs become barriers to trade in the form of NTBs, only when they are combined with unnecessary bureaucratic procedures, corruption and lack of information. As in the case of South Asia, NTBs have increased the cost of intraregional trade and also reduced quantities traded. Regional trade has remained below five percent of the total trade of South Asian countries, as it is more expensive than trade with countries outside the region.
Sanitary and Phytosanitary measures (SPS) and Technical Barriers to Trade (TBT), which are essential for protecting the health of consumers, environment, product quality and standards, comprise the largest share of NTMs in the region. SPS deals with regulations for food safety and plant and animal health. TBTs are measures taken to protect domestic markets, consumers and industries, which can indirectly discriminate against imports from other countries. Each country follows different standards and procedures with relation to SPS/TBT regulations, and also applies different standards to exporting countries based on the level of hostility or ideological differences between them. While these NTMs cannot be eliminated, it is important to ensure that they are accompanied by relevant policy measures so that they do not hamper trade and become NTBs. Further, NTMs unfairly discriminate against exports of smaller nations with lesser capacities as they lead to high costs. Another major NTB comes in the form of customs duties, rules, and regulations,. These are sometimes unreasonable and reflect the inability of South Asian countries to overcome protectionist economics.
Connectivity and Cross Border Infrastructure
Lack of connectivity in the region also adversely affects intraregional trade. The creation of a smooth flowing regional supply chain will require investment in physical infrastructure for transport across borders. There is a lack of synchronized and coordinated border infrastructure in road freight, rail, shared waterways, and connectivity by sea. For instance, goods transported between Delhi and Dhaka would take only five days with improved road connectivity. Border infrastructure such as land customs stations and warehouse facilities are weak. The low yield for investment in such projects have discouraged governments from taking a more active role in trade facilitation through cross border infrastructural development. Additionally, border authorities in South Asian countries have been noted as highly dysfunctional, further affecting trade.
South Asia can be understood as comprising three sub-regions: Bangladesh, Bhutan, India and Nepal (BBIN) in the east; India, Maldives and Sri Lanka in the south and India; Pakistan and Afghanistan in the west. The BBIN countries have recorded higher amounts of integration by undertaking measures for trade facilitation and improved connectivity. The Bangladesh-India Memorandum (2010) enables improved bilateral trade between the two countries, while also allowing Bangladesh access landlocked states of Bhutan and Nepal through Indian territory. It also envisions heightened energy cooperation, thereby building upon the region’s strengths in the form of meeting the rising demand for energy. In 2015, BBIN member countries signed a Motor Vehicles Agreement, which simplifies transport of goods and people across borders, as cargo and passengers are no longer required to transfer into the other country’s transport vehicle at the border. India has been given access to Bangladeshi port in Ashuganj, since June 2016, in order to access its remote northeastern region. Bus connectivity was established along the Kolkata-Dhaka-Agartala route in June 2015. The Dhaka-Shillong-Guwahati bus service, which was to start operating in May 2015, has been stalled due to technical issues.Improving bilateral relations within a sub-region can lead the way for the rest of South Asia by demonstrating its successes. It can encourage and help implement similar projects in the rest of the region.
Narrow Focus of the SAFTA
Loopholes in regional integration can also be attributed to the SAFTA’s narrow focus on trade in products. Services constitute one third of South Asia’s exports and 50 percent of the region’s GDP, mainly in information technology, energy, business process outsourcing, and tourism and travel. The service sector is especially important due to South Asia’s underperforming industrial sector and declining productivity in agriculture. Comparative advantage on trade in goods is difficult to exploit in the region, as all countries are characterized by labour surpluses and lack of capital. However, in the case of services, national comparative advantages can be exploited. For instance, neighbouring countries could benefit from India’s well-developed health sector, tourism potential in Sri Lanka and Maldives, and gas transmission services in Bangladesh. An agreement on services is necessary to complement the SAFTA. The South Asian Trade in Services Agreement (SATIS) has not yet materialized owing to inability of the South Asian nations to take the steps necessary to make SATIS a reality.
It has been demonstrated that enhanced investment has positive effects on intra-regional trade. Indian investment in Bhutan’s hydroelectric resources, majority of which is sold to India, comprises a major share of Bhutan’s income. India also holds more than 60 percent of Bhutan’s debt stock and is one of its largest aid providers. Other smaller nations with untapped resources due to capital unavailability in the region could benefit from intraregional FDI flows to achieve rapid economic development. If developed, these resources could be used to meet the food and industrial input requirements of India. India should be encouraged to invest in these resources, and integrate LDCs into India’s rising economy on mutually beneficial terms. However, this has been hindered by the fears of Indian interference in the domestic politics of these countries, and lack of initiative on the part of India. Intraregional investment therefore remains less than one percent as no agreement has been negotiated for the same.Financial cooperation in the form of multilateral financing agencies, such as the vision for a South Asian Development Bank, has also seen slow progress.
Conclusion and Recommendations
The SAARC’s trade liberalization programme has been partially successful, in that intraregional trade has shown a steady, if slow, improvement. It increased fourfold between 1990 and 2000, and is expected to increase by 1.6 times when all tariffs are removed. The SAARC must, therefore, prioritize the removal of all bottlenecks, which impede the full implementation of these measures. South Asia is characterized by the historical baggage of conflict and mistrust, as well as being socially, economically and politically heterogeneous. Added to this is India’s presence as the largest country in the region, and its economic and military might, which make smaller nations wary of India’s dominant role in setting the agenda for the region. The SAARC’s focus must then be on ensuring that policies enabling integration are informed by the unique characteristics of South Asia’s political economy. Policy undertaken to facilitate integration should clearly spell out what each country is to gain from integration, as well as how security concerns of hostile nations are to be addressed, in order to create a win-win situation.All regional integration arrangements must clearly spell out the preferential treatment to Least Developed Countries, so that they are not unfairly discriminated in the process of economic integration. Allowing the SAARC’s agenda to be hijacked by political tensions will lead to lack of political will in addressing the challenges to economic cooperation.
One way to address this is to allow the increasingly important private sector in South Asian countries to lead the discussions on improving bi/multilateral cooperation. Strong linkages between enterprises in these countries, acting as a pressure group, will push the political leadership into negotiating policies that are favourable for businesses. Trade facilitation measures for achieving the full implementation of the SAFTA and paving the way for progressive integration must be the primary focus.
The negative effects of NTBs can be avoided by creating a transparent system with uniform standards in the region.Standard certificates issued by the exporting country should be accepted by the importing country.Special testing laboratories must be made available at border regions to avoid delays. Border warehouses will improve trade in perishable items, which constitute 1/3rd of intraregional trade.All countries should follow a single set of mutually agreed customs procedures, rather than an arbitrary model. Efforts must be undertaken to build the capacity of small and medium enterprises in smaller nations to meet export standards in order to allow them to benefit from trade.
Regional transport and communication links must be improved through investment in cross border infrastructure and trade-transit agreements between countries. The disincentive to invest in infrastructure can be addressed by creating a transport network across countries that have a free trade agreement in place. This will increase the traffic along these routes. Private sector investment can be sought on such projects as they will yield high profits, and can be engaged in a Build-Operate-Transfer model. Trade is affected when one country’s infrastructure is less developed than its trading partner. It is necessary to harness funding by setting up regional multilateral financing institutions in order to synchronize infrastructure standards across countries. Trade facilitation through the creation of trade-transit agreements should be undertaken on an urgent basis. Efficiency at the level of border authorities will simplify cross border transit and will complement improved connectivity.
Trade, financial cooperation, and investment reinforce one another and must be undertaken simultaneously. The SAFTA must be complemented with agreements in investment and financial cooperation in order to make it more feasible.It has been repeatedly proven in international relations that the benefits derived from economic cooperation outweigh the domestic nationalist in hostile states. Integration is possible when participant states view it is an opportunity, rather than a threat.
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(Nivedita Jayaram is a project intern with MISS and is associated with Mantraya’s “Regional Economic and Cooperation and Connectivity in South Asia” project. All Mantraya publications are peer-reviewed.)
