Economic integration in South Asia

The sooner dialogue between Pakistan and India resumes, the better it would be for the economy of the region

By Hussain H. Zaidi

Addressing the Lahore Chambers of Commerce and Industry the other day, the Indian High Commissioner to Pakistan underlined the need for shoring up intra-region cooperation in this part of the world as the engine of growth. He observed that while South Asian countries were integrating with the international economy, they remained less integrated with one another.

One can hardly disagree with the Indian envoy. The countries of South Asian Association for Regional Cooperation (SAARC) are mired in poverty and underdevelopment. South Asia accounts for nearly 23 percent of the total world population. However, its share in the global GDP is less than 3 percent. The region is home to the world’s 400 million poor, which means nearly 30 percent of the region’s population lives below the poverty line.

All South Asian countries have a rather low-ranking on the Human Development Index (HDI), which according to the Human Development Report 2010 is: Sri Lanka (91), the Maldives (107), India (119), Pakistan (125), Bangladesh (129), Nepal (138) and Afghanistan (155). The ranking for Bhutan is not available but it was 133rd previous year. The HDI ranking is based on achievements in terms of life expectancy, education, and real income. The low HDI ranking reflects poorly on these vital indicators in the region.

Trade is an instrument of development. However, SAARC’s trade performance is also disappointing. The combined trade of all eight member countries accounts for less than 2 percent of global trade. The region accounts for 1.7 percent of world exports and 3 percent of global FDI inflows. The share of South Asia in total Asian exports and imports is merely 4.7 and 7.5 percent respectively. Not only is global trade volume of SAARC member countries small, intra-region trade is also low. Intra-SAARC trade accounts for less than 5 percent of the total trade of the region.

With a view to achieving regional integration, the member countries created South Asian Free Trade Agreement (Safta) in 2004 at the twelfth SAARC Summit. The agreement, which came into force on January 1, 2006, provides that members will reduce their tariffs to 0-5 percent by December 31, 2015. The success of Safta, however, largely depends on normalisation of Pakistan-India relations. In case the relations between the two countries do not normalise, Safta’s fate will not be different from that of its predecessor, South Asian Preferential Trade Agreement (Sapta).

The major reason for meager intra-SAARC trade is low volume of trade between Pakistan and India, the largest economies and trading nations in the region. Though formal Pak-India trade (the two countries have informal trade of more than $3 billion a year) has increased from $236 million in 2001-2002 to $1.32 billion in 2009-10, (including $259.4 million exports from Pakistan and $1.06 billion exports from India), it still constitutes less than 1 percent of the global trade of the two countries. Pakistan has not even granted MFN status, a basic requirement under the WTO, to India and continues to conduct its imports from India on the basis of a positive list. On its part, India maintains high tariffs and non-tariff barriers on products of export interest to Pakistan.

South Asia is clearly dominated by India. It accounts for 74 percent of the region’s population, 75 percent of its GDP, 79 percent of its trade and 81 percent of the region’s FDI inflows. India has trade surplus with all other South Asian countries except Bhutan. In addition, India is the largest military power in the region and, together with Pakistan, a nuclear state. Because of its formidable position in South Asia, India thus bears the responsibility more than any other country to make SAARC a success.

However, it is with India that most other countries in South Asia have had bilateral disputes. These countries look to New Delhi’s growing military expenditure with grave suspicion. This has on the one hand prevented India from assuming the leadership of SAARC, much to the former’s disappointment, and on the other, made its neighbours look outside for help and mediation.

For instance, Norway mediated between the Sri Lankan government and Tamil Tigers and Pakistan has been calling for third-party mediation, particularly by the US, to help resolve the Kashmir issue.

The problem in case of South Asia is that not only are the resources scarce, they are also misallocated. Too much is spent by the countries on military goods and services leaving a very small amount, after debt servicing and meeting administrative expenditure, for capital formation and human resource and social sector development. In case of India, military expenditure accounts for 2.5 percent of GDP, while the ratio in case of Pakistan, Sri Lanka, Bangladesh, and Nepal is 4, 2.6, and 1.5 percent respectively. The vicious cycle of poverty and debt in SAARC countries can end only if the meager resources are optimally utilised for capital formation and human resource and social sector development. This will also increase their attractiveness as markets for foreign direct investment.

The poor trade performance of SAARC stands in marked contrast with that of the neighbouring regional alliance -- Association of South East Asian Nations (ASEAN). The ASEAN countries account for merely 8.4 percent of the total world population. However, their share in total world trade is nearly 7 percent. ASEAN’s contribution to Asia’s total trade is 23 percent. Intra-ASEAN trade accounts for nearly 30 percent of the global trade of the 10-member countries. ASEAN countries have remained embroiled in territorial disputes but that has not hampered their trade relations.

The efforts to normalise relations between Pakistan and India, therefore, must continue. The search for resolving the contentious issues should go on. In principle, these issues should not deter economic cooperation in the region. China and Taiwan have a serious political dispute but that has not prevented them from enhancing economic cooperation.

As a matter of fact, this separation of economic and political issues does not apply to South Asia, particularly to Indo-Pak relations. Therefore, pragmatically, the best approach will be to address economic and political issues together. This is what the stalled Pak-India composite dialogue was meant for. Therefore, the sooner the dialogue is resumed, the better it will be not only for the two countries but also for the region.