Key to unlocking value of SAFTA

Arif ZAMAN

When SAARC Heads of Government meet in a few days in Sri Lanka they will do so at a time of slowing growth in the US and Europe and South Asia’s economies remain amongst the fastest growing in the world despite downward pressure.

It also remains the case that South Asia-representing 24% of the world and 42% of its poorest people with one fifth of the population aged between 15 and 24 years (the largest number of young people ever to transition into adulthood in the world)-is also home to the largest concentration of a growing middle class in any three bordering countries (estimated at around 350 million) and by 2015 to five of the world’s ten largest cities.

Agreement

The key to capitalising on the region’s potential is invigorating and implementing the South Asia Free Trade Agreement without hindrance and in particular finalising an agreement to extend this to include the services sector and on making good the recognition at the last SAARC Summit in Delhi in April 2007, when governments ‘stressed that to realise its full potential, Safta should integrate trade in services.’

This is also a key call from a combined report from the SAARC Chamber of Commerce & Industry and the Commonwealth Business Council released this week.

South Asia is the fastest growing region in the export of services. Exports of services from South Asia grew at 14% per annum between 1995 and 2003 compared to less than 8% for East Asia. It is not only India that did well, but Pakistan and Sri Lanka, too, which have grown faster than East Asia in service exports.

Bangladesh services exports have also grown fairly rapidly, averaging about the rate in East Asian economies. India and Bangladesh have performed well in the exports of computers and information communications and other commercial services, while Pakistan has done well in the export of transport services and Sri Lanka in travel services.

However if services are the fastest growing sector in all South Asian countries, trade in services has not significantly developed in the region. In South Asia the contribution of services’ value added to GDP is 40% on an average and rising. This varies among SAARC countries from the lowest ratio of 38% in Nepal to the highest ratio of 57% for Sri Lanka.

The service sector is the second most important sector (after agriculture) in providing employment for South Asian countries. The cultural and linguistic ties and geographic proximity among countries in South Asia make it easier for trade in services to take place.

Furthermore, countries with similar levels of development, like those in South Asia, are likely to find it easier to make the compromises required for negotiating agreements on trade in services.

South Asia now needs to take advantage of its geographical proximity and strengthening relationships to build new partnerships in various sectors including the capital markets, banking, IT and telecommunications.

The inclusion of services within Safta’s framework is a necessity, if members are to realise the benefits of a free trading area. There are many reasons that demand for an immediate inclusion of services within Safta.

Potential

First, the capacity of SAARC members, except India, in producing and trading manufactured goods is weaker while services are emerging as the most potential sector in all member countries and potential for intra regional services trade are huge. Therefore members are more optimistic on the issue of trading services rather than manufactured goods.

Second, the availability of services (especially tourism, health, education, and labour) within the region will help to attract consumers from other parts of the world. So, an advanced services infrastructure within the region will boost the regions’ share in global services trade. Safta may play an instrumental role in developing such an advanced services infrastructure within the region.

Third, in any economy, the competitiveness of producers largely depends on access to efficient services such as banking, telecommunications, and transport facilities (services). Moreover services are an integral part of other economic activities so their liberalisation will produce strong and positive spill over effects on other economic activities.

In terms of composition of overall trade in services in South Asia, imports of services were higher than exports of services for the SAARC region until 2004, but since then total exports have become higher than the total imports of services in the region. This is an important change in the composition of trade in services for the region; however this has been mainly led by India.

In 2006, India had higher imports of services as compared to its exports across countries; exports are highest in computer and information services from India, followed by Sri Lanka and Pakistan.

In terms of imports, India is the only country that has substantial imports of computer and information services. Travel services are an important service in terms of exports, as almost all South Asian countries have positive net exports apart from Bangladesh and Pakistan.

For countries like Nepal and Maldives travel services have the major share in their total exports of services.

With respect to transport services, all the South Asian countries are net importers of transport services, with India being the biggest importer followed by Pakistan. India and Pakistan are also net importers of insurance, financial and other business services.

Almost all South Asian countries are net exporters of communication services. South Asian countries have a competitive edge in different categories of services. In transport services, Pakistan and Sri Lanka have a competitive advantage while India has a competitive advantage in construction services, computer and information services and other commercial services.

Maldives and Nepal are more competitive in travel services while Bangladesh has a higher competitive edge in financial services.

Technology

South Asia’s export interests lie in the area of labour-intensive and manpower-based services and import interests in the area of capital and technology intensive services. Construction, education, tourism and health services are of special significance both from export as well as import interests.

However several issues need to be addressed to make liberalisation of services a success. Since data and analyses of trade in services are very limited in South Asia, it is essential that this be improved in order to enable negotiators and stakeholders to make the best commitments in the interest of their respective countries.

Regulatory capacity is also weak in the region, especially in terms of ensuring standards of service supply and adherence to rules.

It is important to address this issue through greater cooperation between the regulatory bodies within the region and also learning from regulatory bodies in other countries that have entered into agreements on trade in services.

There are also significant asymmetries in existing standards, and hence the qualifications of many services suppliers will not be recognised by fellow Members. Mutual recognition agreements (MRAs) will be required to harmonise standards in the region.

(The writer is advisor, Commonwealth Business Council and SAARC Chamber)

Financial Express