Re­gional eco­nomic in­te­gra­tion a dis­tant prospect

Enterprise - - Editor’s desk -

South Asia will re­main one of the fastest-grow­ing re­gions in the world for the fore­see­able fu­ture, thanks to rapidly ris­ing con­sumer spend­ing and an im­prov­ing in­vest­ment out­look. How­ever, growth in the re­gion is be­low po­ten­tial ow­ing to a key weak­ness. Rel­a­tively low lev­els of in­tra-re­gional trade and a fail­ure to in­te­grate in many global value chains have long held back in­vest­ment, both do­mes­tic and for­eign, as well as em­ploy­ment growth. Un­less con­nec­tiv­ity im­proves and gov­ern­ments within the re­gion pur­sue closer in­te­gra­tion, in­trare­gional trade is set to re­main low, which will weigh on its eco­nomic prospects.

Pol­i­cy­mak­ers in South Asia have long en­vied the economies of East and South-east Asia, where close in­tra-re­gional trade has helped to im­prove ac­cess to global value chains and pro­vided the back­drop for in­vest­ment and em­ploy­ment growth. By con­trast, de­spite com­mon his­tor­i­cal and cul­tural bonds, ef­forts at forg­ing closer trade and eco­nomic ties at re­gional level have reaped only small div­i­dends—such as in trade fa­cil­i­ta­tion and pol­icy har­mon­i­sa­tion—in re­cent years in South Asia. This is mainly ow­ing to rel­a­tively poor in­fras­truc­ture, a weak se­cu­rity en­vi­ron­ment in some parts of the re­gion and mu­tual dis­trust be­tween the ma­jor re­gional ac­tors. These fac­tors have his­tor­i­cally con­strained and will con­tinue to tem­per the speed at which in­te­gra­tion will oc­cur.

The South Asian economies (en­com­pass­ing In­dia, Pak­istan, Afghanistan, Bangladesh, Sri Lanka, Bhutan and Nepal in this con­text) rep­re­sent a mar­ket of more than 1.7bn peo­ple. It has been foe­cast that the re­gion will achieve rapid growth over the com­ing years but that its po­ten­tial will still be held back by poli­cies, which of­ten con­tinue to favour in­ward-look­ing growth strate­gies and pro­tec­tion­ist reg­u­la­tion. This has of­ten left South Asian economies not only iso­lated from global value chains (with no­table ex­cep­tions such as tex­tiles), but is also be­hind low lev­els of in­tra-re­gional trade. Ac­cord­ing to the Asian De­vel­op­ment Bank, in­trare­gional trade ac­counts for a mere 5 of to­tal trade in South Asia.

Pre­vi­ous at­tempts to a build a re­gional eco­nomic bloc and en­hance com­mer­cial op­por­tu­ni­ties have been frus­trated by bit­ter ten­sions be­tween the largest states (such as In­dia and Pak­istan) and se­cu­rity con­cerns (par­tic­u­larly with re­gard to Pak­istan and Afghanistan). The South Asian As­so­ci­a­tion for Re­gional Co-op­er­a­tion (SAARC), an ef­fort to forge closer re­la­tions, held its first sum­mit in 1985, but it has so far made rel­a­tively lit­tle progress. Al­though for­mal tar­iff rates came down as a re­sult of ne­go­ti­a­tions un­der the South Asian Free-Trade Area (SAFTA), tar­iff bar­ri­ers re­main high ow­ing to SAFTA’s in­clu­sion of “sen­si­tive” lists, which en­com­pass hun­dreds of prod­ucts on which the tar­iff con­ces­sions are not ap­plied. There has been lit­tle ef­fort to re­move these im­ped­i­ments to trade among the SAFTA/SAARC mem­bers over the years and prospects for lib­er­al­iza­tion look dim at present.

Even where zero-tar­iff rates ap­ply, in­tra-re­gional trade is crip­pled by all-per­va­sive non-tar­iff bar­ri­ers. These in­clude time and re­source-in­ten­sive border pro­to­cols and doc­u­men­ta­tion, un­der­de­vel­oped port and road in­fras­truc­ture and highly re­stric­tive visa and in­vest­ment regimes. Ver­ti­cal in­te­gra­tion of in­dus­tries (such as in South-east Asia) could pro­vide a boon for re­gional trade. In South-east Asia, in­ter­na­tional com­pa­nies were able to lever­age coun­try-spe­cific strengths (such as lower en­ergy or labour costs) and con­se­quently ex­panded pro­duc­tion net­works that in­te­grated the economies closer over time. How­ever, in South Asia this will con­tinue to be held back by pol­icy frag­men­ta­tion, in­ad­e­quate re­gional trans­port net­works (un­der­min­ing the pre­dictabil­ity of de­liv­ery and adding to in­ven­tory costs) as well as high tar­iff lev­els.

Frus­trated by the lack of move­ment on in­ter­nal trade and in­vest­ment, South Asian coun­tries such as In­dia are in­creas­ingly look­ing be­yond the re­gion for op­por­tu­ni­ties (par­tic­u­larly to­wards South-east Asia, North Asia and the Gulf). This makes par­tic­u­lar sense in the case of In­dia, which, ow­ing to the large size of its econ­omy (and its am­bi­tions to move up in global value chains), will be in­creas­ingly de­pen­dent on mar­kets in de­vel­oped coun­tries rather than the smaller South Asian economies. Land­locked Nepal has his­tor­i­cally been re­liant on close trade ties with In­dia but, amid a re­cent de­te­ri­o­ra­tion in bi­lat­eral ties, may seek to re­bal­ance to­wards China. Sim­i­larly, China’s grow­ing en­gage­ment in Pak­istan may reduce the in­cen­tive to co-op­er­ate more closely with In­dia (whose econ­omy is cur­rently around seven times larger than Pak­istan’s in US-dol­lar terms). For its part, Bangladesh is look­ing to China to ad­dress its eco­nomic de­vel­op­ment goals, such as up­grad­ing in­fras­truc­ture. Over­all, al­though gov­ern­ments across South Asia ac­cept that greater re­gional eco­nomic in­te­gra­tion will be im­por­tant to bol­ster­ing growth, po­lit­i­cal and lo­gis­ti­cal obstacles loom large. As a re­sult, ef­forts to lib­er­al­ize trade and in­vest­ment are likely to make only slow progress.

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