• Reiteration of the commitment made at the 11th SAARC Summit at Kathmandu in January 2002 for the creation of a South Asian Economic Union.
• Energy cooperation.
• Strengthening transportation, transit and communication links across the region.
• Harmonisation of standards and simplification of customs procedures.
• Public and private sector cooperation through joint ventures.
• Setting up a South Asia Development Bank.
• Cooperation among Central Banks.
• Development of tourism within South Asia.
• Discussing, coordinating and exchanging information with a view to adopting common positions, where appropriate, at multilateral fora
• The Summit gave special recognition to the challenge of poverty alleviation by approving the Plan of Action on Poverty Alleviation prepared by the Finance and Planning Ministers at their meeting in Islamabad in 2004.

Deepening Cooperation in South Asia
The key Summit decisions indicate a commitment towards deepening cooperation in South Asia. The SAFTA agreement is only the first stage in deepening cooperation. However, if South Asia's trade is to be integrated, it will require integration of the infrastructure of the region. This would point to cooperation in the areas of energy as well as the strengthening of transportation, transit and communication links across the region. This would further require harmonisation of standards and simplification of customs procedures. Trade cooperation would point to monetary cooperation thereby suggesting the need for greater coordination among Central Banks. Sustaining trading links would require investment cooperation involving public and private sector cooperation through joint ventures. Investment cooperation would need to be underwritten by financing through a prospective South Asia Development Bank. It would follow from such levels of cooperation that the governments would discuss, coordinate and exchange information with a view to adopting common positions, where appropriate, at multilateral fora.

In each of the above-mentioned areas, there would be scope for deepening cooperation. The Free Trade Area could evolve into a Customs Union with a common tariff barrier with the rest of the world. The Customs Union could lead to a common exchange rate policy and eventually a common currency underwritten by coordination of macro-economic policy across the region. Energy cooperation could evolve into a common energy grid across the region with integrated electricity and gas systems as is the case in Europe today. Transport cooperation would lead to an integrated transport infrastructure which permits uninterrupted travel from Peshawar to Chittagong and from Kathmandu to Colombo as in the European Union. Investment cooperation would culminate in regional corporations with production facilities located across the region within vertically and horizontally integrated production systems. Shares of both national and regional companies would be quoted in the stock exchanges across the region as capital flows without hindrance across national boundaries to underwrite investment in any part of the South Asia region.

Within such a framework of cooperation, the goal of poverty reduction enunciated by ISACPA would evolve from a regional goal implemented at the national level into a regional agenda to eradicate poverty across South Asia. The noble goal of a South Asian Social Charter would move beyond a set of pious declarations made in Islamabad into binding commitments for charting out the social obligations of each of the member states enforceable across the region.

Moves towards deepening cooperation would have to take the ultimate step, which today binds Europe, by integrating our labour markets. Today in Europe any European can move across national boundaries to seek work anywhere in the region. We would need to aspire to a similar situation in South Asia after making due allowances for our prevailing social and political realities.

Towards a Free Trade Area
The first stage in deepening cooperation would be to enhance trade. For a region which aspires to an economic union, we have one of the lowest levels of intra-regional trade anywhere in the world. While this originates from prevailing trade barriers in each country, the more substantive constraint lies in the structural asymmetries in the national economies which limit the scope for trade. Moving towards SAFTA is the first phase in a process of deepening economic cooperation. The problems to be faced at this stage remain less severe than may be apparent at first glance, but we should not underestimate the enormity of the challenge.

Intra-regional trade has increased significantly in the last decade, mostly through imports by all countries in the region, except Pakistan, from India. While South Asia is a fast growing destination for Indian exports, it remains marginal as a source of India's imports. The principal export destination of all South Asian countries remains North America and the European Union (EU). Trade liberalisation with South Asia has, thus, largely served to stimulate Indian exports within the region but with low levels of reciprocal export growth to India. This owes in some measure to India's relatively more restrictive import regime compared to its neighbours, but it also reflects the structural rigidities in the smaller economies who have relatively little to export to India. Thus a primary goal of trade cooperation in South Asia has been to encourage India to open up its import regime to imports from its neighbours through significant trade concessions and to help the smaller countries to enhance as well as diversify their production and export capacity to exploit emerging market opportunities in India.

While SAFTA was seen as the route to opening up trade, it always needed to address the problem of trade asymmetry in the region. To the extent that the SAARC process moved too slowly to address these issues, bilateralism became a preferred option to stimulate intra-regional trade. As of today, India has entered into bilateral free trade agreements with Nepal, Bhutan and Sri Lanka. In the case of Bangladesh a bilateral free trade agreement is under negotiation with India. It is expected from the negotiations that India would offer accelerated market access to Bangladeshi exports as has been permitted under the Indo-Lanka Free Trade Agreement (ILFTA). In return the smaller economies would be given more time to eliminate their trade barriers to Indian exports. There is some apprehension amongst economists in the region that the bilateral FTAs may compromise the move towards SAFTA. It could, however, be argued that these FTAs may facilitate the move to SAFTA since they have already opened up the doors for enhanced trade in the region. Negotiations have already begun through the SAARC Secretariat on working out the details of SAFTA. These negotiations will have to factor in the implications of the bilateral FTAs in place within the region or under negotiation.

The countries of the region should agree on the guiding principles for the official negotiations.

1. India must make the deepest concessions.
2. Generous concessions must be offered to the SAARC LDCs.
3. The negative list principle should be used to accelerate agreement; this list must be reduced to a minimum in each country and, particularly, the bigger economies.
4. Provision must be made to provide financial support to the weaker members to enhance their development and trade capacity.
5. Provisions must be made for financial compensation to those LDCs such as Maldives who are likely to face significant import revenue losses due to trade concessions under SAFTA.
6. A final agreement reached as early as possible, preferably by the time of the next Summit.

Investment Cooperation
The move towards SAFTA will be meaningless unless the issue of stimulating investment in the region, particularly in the less developed areas, including Sri Lanka, is accelerated. The substantive point of a free trade area is for small economies with narrow markets, such as Bangladesh, Nepal and Sri Lanka, to be able to use the incentive of the larger South Asian and particularly Indian market to stimulate enhanced investment from within and without. In Bangladesh as in Sri Lanka, it is widely believed that the expectation of servicing a market of one billion people in India will open up new investment horizons. Domestic entrepreneurs seeking to access global financing and foreign enterprises, particularly from East and South East Asia looking for entry into the large and growing Indian market, will be encouraged by SAFTA to rethink their investment plans.

Given the opportunities for unrestricted access to an integrated South Asian market, deep structural changes in their production capacities which can expand and diversify the basket of goods available for export are essential to transforming the fortunes of the smaller economies of South Asia. Structural changes have the potential of transforming the dynamic comparative advantage of an economy and can, therefore, never be adequately captured in the static gravity models used to forecast gains from regional cooperation. Business houses in India and outside investors could also be expected to adjust their production base by locating plants to serve South India in Sri Lanka or Northeast India and Eastern Bangladesh rather than servicing them from Mumbai or Haryana. New patterns of vertical and horizontal integration, with plants located across the region, could serve to restructure the manufacturing landscape of South Asia.

To realise such a transformation in the investment climate in each of these countries, preconditions will have to be created where perceptions of political hostility and the attendant security threats to investors, particularly from India, will have to be put to rest. While some of these apprehensions may be addressed within a possible SAARC investment guarantee scheme and/or the use of the globally facility known as MIGA, the real apprehensions remain invisible and originate in the mindsets both in India and the host country. It is the primary responsibility of the host governments, major political parties, the business community and the media of these countries, to create the preconditions whereby investors will feel secure.

Allowing for improvements in the social environment for investment the major task will be to put in place the necessary financing facilities to service the emerging investment needs. Within India there is no shortage of private or public institutions which can underwrite investments across regional boundaries. But such facilities will need to be encouraged by changes in the laws governing capital market convertibility. While each South Asian country will take time to open up its capital account, India can take the initiative of moving to restricted convertibility by lifting all policy restrictions to capital flows within the region.

The proposal for a dedicated South Asian development fund may also be encouraged. The Fund was endorsed by SAARC at least a decade ago but has been virtually stillborn. The Fund's mission needs to be clarified and new life needs to be breathed into the organisation. There is some confusion as to the scope of this fund and whether it will cover both financing of infrastructure projects as well as private investment. Here it is suggested that two funds may be developed. One fund should be dedicated to financing infrastructure development projects mostly located in the less developed countries. As in the case of the European Union, a special fund is needed to enhance the development capacity of weaker countries to enable them to enhance their competitiveness in an integrated market. Billions of Euros were invested through the EU in such funds, to finance investment in Spain, Portugal, Greece and Ireland when they entered the EU, to enable them to upgrade their infrastructure and enhance their competitive capacity. A similar fund, underwritten from within SAARC but supplemented by aid resources from outside the region should be established to enable Bangladesh, Bhutan, Maldives, Nepal and Sri Lanka to invest in infrastructure projects. Investment which modernises and enhances capacity in transport and communications as well as energy, perhaps with a special focus on regional connectivity but not exclusive to it, will enhance the attractiveness of these economies to prospective investors.

A second fund should be established as an Investment Fund, serviced by both public and private capital, to finance private sector investment projects within the weaker economies, which involve cross border investment as well as projects for serving regional markets. This should attract prospective investors from India and Pakistan and could be used to leverage further private investment from outside the region which may even cover private investment in infrastructure projects.

Integrating the Infrastructure
The Islamabad Summit quite appropriately identified energy, transport and communications as important areas for cooperation. Of these, the need for transport integration is perhaps the most urgent since it is integral to the operationalisation of a free trade area. South Asia inherited an integrated transport infrastructure from the British who were themselves bequeathed a road network by the Mughal Empire. This infrastructure was fractured not by the partition of India but by its political aftermath and now needs to be rebuilt within the context of greater political harmony in South Asia.

Across the mainland of South Asia the original transport infrastructure is already in place, but in many areas has fallen into disuse or needs upgrading. The main obstacle to improving connectivity is political. The barriers to cross-border movements make neither commercial or logistical sense and originate in the pathologies of inter-state as well as domestic politics. The political leaders of South Asia will therefore need to first dismantle the political barriers to transport integration. Once this is done, procedures for facilitating cross border movement of people and goods will need to be harmonised (visas, customs facilities) and system connectivity will have to be established (linking metre guage rail systems with broad guage systems). Infrastructure where fractured will have to be rebuilt or upgraded to sustain a heavier traffic load and capacity will need to be expanded to accommodate the enhanced traffic emanating from intra-regional movements. In some cases new investment would be needed to build transport links where none exit today.

So far SAARC has done very little to address the issue of transport integration. Some meetings have been convened by the SAARC Secretariat to look at the issue of standardising the transport infrastructure but there is no strategic vision to guide the integration process largely because of the underlying political tensions which constrain issues of transport connectivity. Whatever dialogue on improving linkages has taken place owes either to the enterprise of multilateral bodies such as the World Bank, Asian Development Bank or UNESCAP or civil society initiatives. The mandate from the Islamabad Summit has inspired the SAARC Secretariat to place the issue of improving transport linkages on its work programme. However much work is needed to both design an underlying vision and then translate it into programmes and projects which free up movement of traffic across South Asia.

Energy Cooperation
South Asia is, in aggregate, an energy deficit area largely because India is emerging as one of the world's largest energy markets. In contrast, Nepal and Bhutan retain the potential to emerge as major sources of energy exports though harnessing the vast hydro power potential in their rivers. Indeed power is already Bhutan's largest source of export earnings directed to India which has helped to make it the only country in the region with a trade surplus with India. However, Nepal's export-oriented hydropower projects have been tied up in protracted negotiations with India, its principal prospective market for power. These negotiations have acquired political overtones which have strained bilateral relations and have also become a major issue in domestic politics in Nepal. Bangladesh has a potential for exporting natural gas to India but is reluctant to do so because of domestic political opposition to such exports on the grounds that its gas reserves are insufficient to justify such exports. Pakistan remains a potential transit point for connecting the vast energy reserves of West and Central Asia to South Asia but has not been able to benefit from its strategic location because of its political tensions with India.

This politicisation of what would in most other regions have been viewed as economic or commercial decision derives from the political perspective guiding the development of the energy sector in every country. The idea that the supply and demand for energy must be balanced within a country is not very meaningful in a region where some countries are major importers of energy and others see it as their principal export. In such circumstances, it would make sense for South Asia to move away from conceiving of its energy security as a national project and will have to redefine its market in regional terms. If South Asia's energy scenario were to be redefined within a regional context its energy needs would expect to be served through a common distribution system integrated within a single energy grid of power and gas lines extending across the region. Such an integrated system would need to resolve quite complex problems of cross-border pricing, harmonisation of standards and equipments and the role of external players as sources of supply (Iran, Central Asia) or as corporate investors.

The SAARC governments have already recognised the need for cooperation in the energy sector. The Summit in Islamabad reaffirmed this interest. A meeting of SAARC ministers was held in Dhaka in 2003 to explore the scope for cooperation. But so far very little has been done to work out the economics or explore the political implications of such cooperation. At the level of civil society, SACEPS set up a Task Force to explore the scope for cooperation. Its report identified the attendant benefits as well as the complex issues of politics, ownership, pricing and management associated with building energy linkages in the region. This report was presented to the SAARC Summit in Islamabad. Another study by the Coalition for South Asian Cooperation (CASAC) and the CPD, Dhaka, has taken the work of the SACEPS Task Force forward and completed a more comprehensive study on energy cooperation. There is a need for both SAARC and civil society institutions in the region to come together to draw a substantive and implementable programme for energy cooperation which can be discussed more comprehensively by the SAARC governments before concrete proposals for cooperation are placed before the Summit.

Harmonising Macro-economic Policies
Any move towards an Economic Union cannot limit itself to a free trade area. SAARC will sooner or later have to explore the scope for a Customs Union. This issue will not be as complex as it might have appeared some years ago. Under the pressure of the WTO convergence in tariff levels across the world is the order of the day. Since all SAARC countries have been lowering their tariff rates, mostly under pressure from the World Bank/IMF structural adjustment reforms, the deep disparities in tariff levels which once characterised the region are less apparent toady. It, therefore, makes sense to open up discussion on adopting a common tariff policy vis-à-vis the rest of the world. However, this task is also problematic. It is the smaller economies who have reduced their tariffs rather faster than India or Pakistan. However, this is not a problem which can persist over a long period of time due to the WTO rules of the game. It would therefore make sense to initiate work on the implications of a Customs Union within South Asia in order to see when, under what circumstance and at what pace such a Union can be put in place.

Deepening integration will involve moving beyond trade to address the broader issue of harmonising macro-economic policies. This would cover such areas as fiscal, monetary and exchange rate policies. Such a level of cooperation would demand coordination amongst SAARC finance ministers to ensure that their budget deficits, inflation, exchange and interest rates maintain some element of alignment. Such issues have never been discussed at any level within SAARC. Coincidentally, such macro-economic indicators, with episodic variations, have in recent years not significantly diverged across the SAARC countries. However, this cannot always be the case so that some consultation, if not coordination, amongst finance ministers would be in order.

The more advanced move towards a common currency lies even further ahead. The available professional work on monetary cooperation carried out by IPS, Colombo, and at RIS, New Delhi, on behalf of SACEPS, has examined the implications of moving towards exchange rate harmonisation and eventually a common currency. Both studies have recognised that any move in the direction may be premature. However, what has emerged out of these civil society consultations is the suggestion that a parallel currency rather than a common currency may be put in place largely to underwrite trade and investment transactions in the region. So far little or no discussion at the official level has taken place among SAARC finance ministers on macro-economic policy. Even though the finance ministers are expected to meet every year such meetings have been episodic and have limited themselves to safe subjects such as poverty.

Integrating Labour Markets
It makes little economic sense to talk of globalisation though integration of factor markets, in the form of commodities and capital, while omitting all discussion of labour which is a recognised factor of production. Freeing of the movement of labour across national boundaries is not discussed either at the WTO or the SAARC fora. In the WTO the SAARC countries come together to support the inclusion of the movement of natural persons in any discussion on trade in services. It is preposterous for the U.S. and the Europeans to include such issues as the liberalisation of banking, insurance and consultancy services as part of the negotiations on the services sector at the WTO without any reference to labour services which are a major export from Bangladesh, India, Nepal, Pakistan and Sri Lanka. In contrast to South Asia's strong position on the subject in international fora it is verboten to discuss the issue of movement of natural or any other variety of persons in any SAARC fora. The truth is that the issue of labour flows across borders, whether at the WTO or in South Asia, is discussed as an issue of immigration, usually illegal, by ministries in charge of internal security rather than those responsible for trade and economic affairs.

To the extent that SAARC governments may remain inhibited about discussing the problem of labour flows it is suggested that at the level of civil society serious discussion of the issue should take place. These dialogues would need to be backed by major research on the underlying economics, the social implications in the receiving and sending countries and the political fallout from this process. Such an