South Asia Development and Cooperation Report 2008

Dr. Saman Kelegama

Report produced by Research and Information System for Developing Countries (RIS), New Delhi, India, and published by Oxford University Press, India

The RIS has played a pioneering role in disseminating research on South Asian Economic Cooperation and integration. Starting in 1990 with the publication: “Economic Cooperation in the SAARC Region: Potential, Constraints, and Policies”, RIS embarked on producing the South Asia Development and Cooperation Report in the late 1990s. The report under review is the fourth South Asia Development Cooperation Report after 1998/1999, 2001/2002, and 2004 issues published earlier.

There are nine Chapters starting with a snapshot of the global economic environment, followed by the next three chapters which examine the macroeconomic performance, trade performance and competitiveness, and FDI flows and investment climate in South Asia.

The next four chapters are on deepening regional economic integration beyond SAFTA with especial focus on trade facilitation, transport networking, and energy integration. The last Chapter is on human development and social infrastructure in South Asia.

The report argues that there are opportunities for ‘win-win’ cooperation in the region which still remains unexploited. The existing pattern of intra-regional trade in South Asia fails to capture the extent of complementarities in the region due to high incidence of non-tariff barriers (NTBs) and informal trade.

The report argues that three-fourth of intra-regional trade potential remains to be exploited, which SAFTA can hope to realize. By assisting to create supply capacities in the lesser developed countries, regional economic integration can provide new opportunities for trade creation and fostering equitable development.

It is argued that this will take place by a process of efficiency seeking industrial restructuring that involves building production and supply capacities in relatively less developed countries through intra-regional investment.

In order to highlight the importance of the investment-trade nexus, the report highlights cases of Indian investment induced trade from Sri Lanka to India under the India-Sri Lanka bilateral FTA.

Of course, to reap similar benefits under SAFTA, South Asian countries should remove NTBs and reduce the ‘negative list’. Furthermore, Pakistan’s imports from India are still governed by the positive list as Pakistan has not provided Most Favoured Nation treatment to India. Thus, there is an urgent need for extending the coverage of SAFTA to “substantially all trade” in the region as per the WTO requirements.

The South Asian region has still not exploited the potential for intra-regional FDI inflows, especially with Indian companies undertaking relatively large investments in different parts of the world. Intra-regional investment is tapped with the help of ASEAN FTA and the ASEAN Investment Area in the ASEAN region, and South Asia should seriously look at this model to exploit the investment-trade nexus in the region.

The report also shows that unlike East Asian countries, South Asian countries have been slow in upgrading their export profile in favour of knowledge-intensive and high value added goods that are fast moving. The production structure in South Asia is still dominated by labour-intensive, highly price-sensitive, and low value adding goods such as textiles, garments, leather goods, and primary products.

The report argues the case for regional cooperation through intra-industry specialisation and vertical integration that has the potential in strengthening the competitiveness in the region.

Even though India has emerged as a global hub for outsourcing of Information and Communication Technology (ICT) services, other South Asian countries are yet to exploit the full potential of trade in services. In this context, some of the findings of the RIS study for the SAARC Secretariat on ‘Potential for Trade in Services in the Context of SAFTA ‘ that are summarised in the report are useful.

A noteworthy finding is that the trade in services within the region was more balanced with smaller and less developed economies generally enjoying surpluses with larger economies, thus helping to bridge the asymmetries that exist in trade in goods in the region.

The report also shows how autonomous liberalisation in services in the SAARC member countries has contributed to stimulating some trade in services in the region. In the case of India and Sri Lanka, deepening trade under the FTA has automatically triggered liberalisation in services which has further contributed to stimulating trade in goods.

Countries in South Asia experience high trade costs due to inadequacy in trade and transport facilitation. South Asian trade is constrained by poor infrastructure, congestion, high costs, and lengthy delays.

These problems are particularly severe at border crossings, many of which post significant barriers to trade. Thus, improving connectivity to facilitate trade and investment flows in the region is important. In regard to transport connectivity, the reports present the case for a SAARC Regional Transport and Transit Agreement that would facilitate surface transport links throughout the region.

It has been estimated that the potential transit revenue earned by Bangladesh from Indian trucks transiting through its territory to the North could be of the order of US$ 1 billion a year.

The report also makes the case for reviving an Afghanistan-Pakistan-India-Bangladesh-Myanmar international corridor, which could emerge as Asia’s new ‘silk route’ connecting Central Asia with East Asia, besides facilitating intra-SAARC trade, and making South Asia as the hub for Pan-Asia trade.

The report recommends a South Asian Common Transport Policy for providing a comprehensive framework for facilitating regional connectivity through different modes of transport.

The report also recommends a South Asia Regional Infrastructure Development facility as a centre for cross-border infrastructure projects, within the ambit of the South Asia Development Fund.

(To be continued)