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.
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.