To­wards South-south Co­op­er­a­tion

De­spite nu­mer­ous trade agree­ments signed within SAARC coun­tries, re­gional trade re­mains in­signif­i­cant. If it en­vi­sions world trade, non-tar­iff bar­ri­ers need to be re­moved.

Southasia - - Cover story - By Raza Rumi

China and In­dia have sus­tained their lead­ing role in driv­ing the eco­nomic re­cov­ery in Asia and the world, says the UN an­nual eco­nomic re­port, World Eco­nomic Sit­u­a­tion and Prospects 2011 (WESP). Gross do­mes­tic prod­uct (GDP) in East and South Asia ex­panded by 8.4 per cent in 2010, up from 5.1 per cent in 2009, the re­port states. A mod­er­ate slow­down is ex­pected in the neart­erm out­look with GDP fore­cast to grow, on av­er­age, by 7.1 per cent in 2011 and 7.3 per cent in 2012.

In­dia (over 8%), Sri Lanka (over 6%) and Bangladesh (6%) are now the fast grow­ing economies of the re­gion. In con­trast to Sri Lanka and In­dia, eco­nomic growth in Nepal, Pak­istan, and – to a lesser ex­tent – Bangladesh, is more sub­dued due to coun­try-spe­cific fac­tors such as po­lit­i­cal in­sta­bil­ity, weak in­fra­struc­ture and a poor in- vest­ment cli­mate. In Pak­istan, dur­ing 2010, the worst flood­ing in the his­tory of the coun­try in­flicted im­mense eco­nomic dam­age, de­stroy­ing large parts of the in­fra­struc­ture in the af­fected ar­eas, in­clud­ing roads, bridges, ir­ri­ga­tion sys­tems and power plants, as well as crops.

South Asian economies had an av­er­age trade-to-gdp ra­tio of 42.7 per cent in 2008 show­ing that they were still rel­a­tively less open than East Asia, which had an av­er­age tradeTO-GDP ra­tio of 63.2 per cent in 2008. In­clud­ing ser­vices trade, the es­ti­mates rose to 51%. Sev­eral rea­sons in­hibit re­gional ex­pan­sion and some of the chal­lenges are listed be­low.

Pro­tec­tion lev­els are rel­a­tively high in In­dia, Pak­istan and Bangladesh and South Asia re­mains a highly pro­tected re­gion in the world. It lags be­hind in open­ing up to for­eign com­pe­ti­tion and in at­tract­ing for­eign di­rect in­vest­ment. It is also the least in­te­grated re­gion, where ac­cord­ing to the World Bank, in­tra-re­gional trade ac­counts for only 5% of the coun­tries’ to­tal mer­chan­dise trade.

Con­tin­u­ing with trade re­forms has be­come more com­plex be­cause of con­cerns of how re­forms will af­fect em­ploy­ment, in­come dis­tribu- tion, poverty and vul­ner­a­bil­ity. In­dia is fo­cused on WTO ne­go­ti­a­tions on agri­cul­tural trade poli­cies and there is a strong in­ter­est in ser­vices trade. In Sri Lanka, gov­ern­ments have fo­cused on lib­er­al­iz­ing the man­u­fac­tur­ing in­dus­try but have ex­cluded agri­cul­tural prod­ucts from such ini­tia­tives. Var­i­ous in­ter­est groups in Bangladesh op­pose fur­ther re­forms, ar­gu­ing that trade lib­er­al­iza­tion has been too fast. The coun­try also has to ad­just to the abol­ish­ment of the tex­tile and cloth­ing

ex­port quo­tas, in­sti­tuted on Jan­uary 1, 2005. How­ever, In­dia and Pak­istan are bet­ter po­si­tioned to deal with this in­ten­si­fy­ing global com­pe­ti­tion.

The ab­sence of in­fra­struc­ture in the re­gion by way of elec­tri­cal in­ter­con­nec­tions and gas pipe­lines across the bor­ders (ex­cept in the case of the few in­ter­con­nec­tions be­tween In­dia and Nepal, In­dia and Bhutan, and be­tween Afghanistan and Cen­tral Asia and Iran) is a phys­i­cal con­straint to trade. There is no spe­cial geo­graph­i­cal rea­son for lack of in­ter­con­nec­tions be­tween In­dia and Pak­istan and be­tween In­dia and Bangladesh. Load-shed­ding and power out­ages are com­mon dur­ing peak hours. In­ten­si­fy­ing the prob­lem fur­ther, there is a mis­match be­tween elec­tric­ity tar­iffs and sup­ply costs. House­holds and agri­cul­tural con­sumers are heav­ily sub­si­dized while in­dus­trial and com­mer­cial con­sumers pay some of the world’s high­est prices. As a re­sult, theft of power and non­pay­ment is wide­spread.

What lies in the fu­ture?

Bi­lat­eral trade pat­terns show that the ex­tent of South-south trade as a share of global trade is pro­jected to dou­ble by 2030, from 12.8% to 26.5%. Among Asia’s de­vel­op­ing coun­tries it slightly more than dou­bles. Es­ti­mates show that the share of high-in­come coun­tries’ exports to de­vel­op­ing Asia in global trade will be higher by 2030 and the share of de­vel­op­ing Asia’s exports to high-in­come coun­tries in global trade will be much higher, at 22% in 2030 com­pared with 12% in 2004.

Among the re­cent de­vel­op­ments with re­spect to lib­er­al­iza­tion, the nor­mal­iza­tion of trade re­la­tions be­tween In­dia and Pak­istan au­gurs well. This year Pak­istan has granted In­dia the Most Fa­vored Na­tion (MFN) sta­tus. China was granted MFN sta­tus by Pak­istan in the 1990s. How­ever, the opinion is that China has seized the Pak­istani mar­ket for consumer goods and has greatly im­pacted its small-scale do­mes­tic man­u­fac­tur­ing in­dus­try. In­dia may be a bet­ter op­tion for bi­lat­eral trade due to low trans­porta­tion costs and a new mar­ket for exports. The po­ten­tial for in­creased in­tra-re­gion trade is es­ti­mated to grow to $20 bil­lion if trade re­stric­tions are re­moved. How­ever, progress and ac­tiv­ity has been slow so it will take years for gains to reg­is­ter.

In­dia is emerg­ing as the re­gional leader in in­ter­na­tional trade and has been a par­tic­i­pant in many re­gional agree­ments. New Delhi struck a high pro­file strate­gic part­ner­ship with Afghanistan in Oc­to­ber 2011. In­dia promised Myan­mar a $500 mil­lion credit line to im­prove in­fra­struc­ture this year and signed ten agree­ments, in­clud­ing those on trade, environment, power and road and rail con­nec­tiv­ity with Bangladesh. Sri Lanka also re­vived eco­nomic part­ner­ships with In­dia in Oc­to­ber 2011.

Find­ings in­di­cate that with the ex­ist­ing low level of bi­lat­eral and in­trare­gional trade shares and low trade vol­ume within SAARC, the gains from free trade ar­range­ments are likely to be min­i­mal. The re­gion ac­counts for a very in­signif­i­cant share of world trade due to per­sis­tent high lev­els of non-tar­iff bar­ri­ers. Thus, pref­er­en­tial trade lib­er­al­iza­tion is more likely to bring about trade di­ver­sion than trade cre­ation lead­ing to more gains for large coun­tries and more losses for small coun­tries. South Asia will have to be­come a player in the global mar­ket as re­gional mar­kets can­not alone sus­tain growth. A slow­down in eco­nomic growth in the North need not dam­age de­vel­op­ing economies so long as the lat­ter can keep grow­ing. One im­por­tant way to guard against in­ter­na­tional re­ces­sion is opt­ing for greater South–south trade. The writer is a La­hore-based pub­lic pol­icy ex­pert and an editor at weekly Fri­day Times.

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