South Asian Economic Blues

The agreement reached on the creation of South Asian Free Trade Area (SAFTA) at the 12th Summit of South Asian Association for Regional Cooperation (SAARC) and an understanding evolved between India and Pakistan on reviving a composite dialogue have rekindled some hope in regional trade, if not a whole range of regional cooperation. Most remarkable was the compromise reached between Least Developed Countries (LDCs), on the one hand, and India and Pakistan, on the other, on some of the crucial terms of SAFTA. Yet the agreement on SAFTA fell short of most crucial imperatives since it deviated from a more consistent report on the subject, 'SAARC vision beyond the year 2000', prepared by the Group of Eminent Persons (GEP).

Given the failure of four rounds of South Asian Preferential Trading Arrangement (SAPTA) in promoting trade, doubts are being expressed that no less a flawed SAFTA may not as well deliver as expeditiously as required without separating trade from politics of bilateral conflicts and overcome a tendency to dominate and fears about hegemony of one over the others. However, SAFTA could not be postponed, especially by Pakistan and India who wanted to engage each other. Faced with the challenges of an irreversible globalisation, growing engagement with numerous bilateral and multilateral Free Trade Areas (FTAs), within and beyond the region, and quite radical reduction in tariffs under structural adjustment program of IMF, undertaken by most South Asian nations, it is essential that member countries of SAARC take a big stride.

But the agreement on SAFTA has left more than it has addressed. Whereas rules of origin, areas of technical assistance and the crucial issue of negative list, without setting a time frame, have been left to future negotiations, it has avoided to cover liberalisation of services and far broader areas of economic cooperation. Evading trade-investment nexus that takes care of trade deficits between the trading partners through investment flows or capital account, SAFTA neglects vertical and horizontal integration of industries that benefits from the respective relative advantages and is crucial to global competitiveness. Although not all-embracing in terms of trade, if the negative list that is yet to be negotiated became larger the agreement will come into conflict with Article 24 of GATT. Even trade, however limited it may be, will not take place without lifting non-tariff and para-tariff barriers, liberalising visa regime, allowing free flow of information, relaxing custom procedures and removing double-taxation.

SAFTA is clueless about how to make adjustment or reconcile the already existing bilateral and multilateral treaties, such as Indo-Lanka Bilateral Free Trade Area (BFTA), Indo-Bangladesh BFTA, Indo-Nepal BFTA, Pak-SL BFTA, BIMSTEC-FTA, (including India, Bangladesh, Sri Lanka and others), growth quadrangle (India, Nepal, Bangladesh, Bhutan) and triangle (South India, Sri Lanka, Maldives). SAFTA is even far behind the Indo-Lanka BFTA that covers both services and investment and BIMSTEC which promotes cooperation among sectors or Indian Ocean Rim Association for Regional Cooperation (IOR-ARC) premised on unilateral trade liberalisation in an open region. BFTAs, in some ways, render greater regional cooperation of little use. Even if certain bilateral trade agreements, such as between India and Sri Lanka, provide good precedent to follow, they cannot substitute a more balancing regional economic arrangement that can simultaneously address the interests of more and less developed or big and small countries in maximising the benefits from the economies of scale and relative advantages while facing the brunt of and benefiting from globalisation.

No doubt there is limited complementariness among the economies of South Asia and they find greater comparative advantage in trading with the developed countries. Similar was the case with ASEAN in early 70s when the trade within South East Asia was less than six per cent, but as they got into preferential trading and attracted intra-regional foreign investment (FDI) it rose up to 23 per cent of their total trade. Given the increasing pressures of globalisation and amid growing regional economic groupings, 60 per cent of the world trade is preferential and South Asia can gain more than lose from such an arrangement. Despite the trade barriers and bilateral disputes, informal trade has flourished across the South Asian frontiers to the tune of US$ 3 billion- benefiting neither consumer nor adding up to revenues- even though formal trade remained abysmally low (US$ 1641 million). More than trade, South Asian economies, irrespective of their size, stand to gain from deeper and broader regional cooperation.

There is, however, a deep-rooted fear among the least developed and smaller or medium-size countries that trade with India and liberalisation of tariff will always be a business of loss for them. Holding more than 70 per cent of region's resources and as an emerging economic power with greater stakes in the region and beyond, India has 'to ensure that smaller members of the region have a growing stake in regionalism... This responsibility, India has not taken seriously' (Economic & Political Weekly, New Delhi)). However, by adopting the model of ASEAN Free Trade Area, SAFTA can become meaningful and the member countries of SAARC can reap more equitable benefits. Since India has already entered into bilateral and multilateral trade arrangements with all of its five neighbours with whom it has contiguous borders, SAFTA is seen by the five member countries of SAARC as an economic window, essentially, with Pakistan or trade between the two bigger economies of South Asia. This being the case, Pakistan cannot have any meaningful trade either with India or other countries of South Asia, with whom it doesn't share borders, without granting a Most Favoured Nation (MFN) status to India.

To overcome widespread poverty and backwardness, resolve conflicts, benefit from extended regional cooperation and economies of scale, become more competitive and achieve higher growth, South Asia needs to overcome the time lag to jump-start an untapped regional cooperation beyond a narrow scope of SAFTA. While establishing a South Asian Development Bank, South Asian Development Fund, South Asian Energy Grid, SAARC must fully exploit the trade-investment nexus, liberalise trade and promote investment, withdraw restrictions on travel and free flow of information across frontiers, create South Asian Investment Areas and undertake vertical and horizontal industrial integration. There are greater opportunities for cooperation in communication, information, energy, education, health, water and power, modern technologies, research and development (R&D). Along with a Free Trade Area, steps need to be taken for Customs Union, Tariff Union and Monetary Union, already under SAARC-FINANCE consideration. Meanwhile, South Asia can look to tap the energy resources of Central Asia and interact with South East Asia and China to emerge as a vibrant economic entity in what is being seen as an Asian Century.