Focus on economic agenda

Nagesh KUMAR

The 15th SAARC summit this weekend in Colombo will confront many challenges. While the recent bombings will highlight the menace of cross-border terrorism, it will be important to advance the agenda of economic cooperation, especially in the context of global slowdown and the collapse of Doha Round of talks at the WTO.

Tremendous opportunities of win-win cooperation exist in South Asia, which are yet to be exploited.

Nearly three-fourths of intra-regional trade potential remains to be exploited, thanks to tariff and non-tariff barriers, poor transport infrastructure and connectivity, lack of trade facilitation and poor banking links, among other barriers.

The lack of supply capabilities in smaller and lesser developed economies for products having demand in the larger country, viz., India was another factor also leading to persistent trade imbalances in the region.

Global experience suggest that regional economic integration can foster balanced and equitable regional development by a process called efficiency-seeking industrial restructuring that involves building production and supply capabilities in relatively lesser developed regions through intra-regional investments.

Thus the laggard countries of Europe, viz., Ireland, Greece, Portugal and Spain have benefited from rapid convergence of income levels with the more developed countries after joining the European Union with the industrial production shifting in their favour. Limited experiences of trade liberalisation in South Asia have also produced similar patterns.

For instance, in its six years of operations, the India-Sri Lanka FTA, bilateral trade has expanded rapidly with India’s exports to Sri Lanka growing at an average annual rate of 34.5% while those of Sri Lanka growing at 132%. Sri Lanka’s imports to exports ratio fell from 10.3:1 to 3.3:1.

The number of Sri Lankan export items increased from 505 to 1,062 with a visible shift from low-value added agricultural products to high-value added manufacturing goods making India the third-largest export destination since 2003 compared to 16th in 2000.

This has happened largely due to the fact that the FTA has facilitated Indian investments to Sri Lanka that strengthened the country’s supply capabilities. Ceat India, for instance, set up a large export-oriented tyre plant in Sri Lanka to cater to its growing markets in Pakistan, West Asia and other countries taking advantage of abundant supply of natural rubber in the country.

As a result of such investments by Indian companies, India has emerged as the fourth-largest source of investments in Sri Lanka during 2004-2005, next only to the US, UK and Singapore. Now Sri Lankan companies such as MAS and Brandix are setting up special economic zones for production of fabrics for their garment production units back home.

Therefore, the South Asian Free Trade Agreement (SAFTA) has the potential of fostering a similar restructuring of industry to produce more balanced and productive outcomes.

To exploit the full potential of regional economic integration in South Asia, SAARC countries need to expedite the implementation schedule of SAFTA and expand its scope by reducing the sensitive lists and remove non-tariff barriers.

Another critical challenge is in the direction of creating a seamless connectivity throughout the region that will require a regional transport and transit treaty.

Many have been advocating the revival of Afghanistan-Pakistan-India-Bangladesh-Myanmar (APIBM) surface transport corridor with interconnections with Bhutan and Nepal on the way.

This corridor can emerge as Asia’s new silk route making South Asia a hub for East Asia-Central Asia trade besides facilitating intra-regional trade. There are real possibilities of creating new sources of interdependencies.

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

Integration of financial and capital markets can play an important role in facilitating exploitation of potential of intra-regional cooperation. We need to strengthen the reciprocal commercial banking links across the region.

Companies from other South Asian countries should be allowed to list on Indian stock markets and raise capital. The scope of SAFTA should be expeditiously expanded to cover trade in services and investments.

Adoption of the regional investment promotion and protection treaty, a draft of which has been negotiated, would be an important step in this direction.

Regional economic integration in South Asia has the potential to become a new engine of growth by helping to exploit synergies for mutual benefit.

Hopefully, the SAARC leaders will seize the moment to move forward on the economic agenda for consolidating and sustaining the dynamism of the region against the background of global slowdown and flagging multilateral trade negotiations. The writer is Director-General, Research and Information System for Developing Countries