Sanjay Kathuria, Sohaib Shahid & Michael J Ferrantino: South Asia must aim higher

The average cost of trade between any two countries in South Asia is 85 per cent higher than it is between any two countries in East Asia - a price markup that hurts the economies and people of South Asia

Successful regions of the world usually have strong economic linkages within the region: the European Union, Association of South East Asian Nations (Asean) and North America are prime examples. South Asia has tried to follow their lead. For example, the South Asian Free Trade Agreement (Safta) became effective in 2006. However, its ambitions were low and its achievements even lower. The more successful global neighbourhoods have gone beyond traditional tariff liberalisation, into deeper aspects of regional integration, and can offer useful lessons for South Asia.

A critical issue for South Asia relates to trade facilitation, or the cost of moving goods around - for example, from factory to port, through customs, and to the export destination. Trade costs are extremely high in what is the least integrated region in the world. The average cost of trade between any two countries in South Asia is 85 per cent higher than it is between any two countries in East Asia - a price markup that hurts the economies and people of the region. The potential gains from better trade facilitation are as high as eight per cent of gross domestic product in both South as well as Central Asia, almost twice as large as the global average.

Asean countries have done well in this regard, with trade information portals or single windows facilitating electronic document submission that enables smooth clearance of exports and imports. These national initiatives have been linked through the Asean Single Window, which allows compatibility of national windows using international open communication standards.

South Asia is home to some of the most complex and protective trade regimes in the world. Streamlining non-tariff measures (NTM), that often become unduly restrictive (for example, through very long border clearances for goods on health grounds), can help. In the African Economic Communities group, an online mechanism for reporting, monitoring and eliminating non-tariff barriers to trade has helped resolve disputes in a transparent setting (tradebarriers.org).

Investment goes hand in hand with trade; the share of intra-regional investment in South Asia is even less than in intra-regional trade. Asean's experience could be instructive, in particular its member nations' friendly investment regimes that have encouraged both intra-regional (which stand at over 17 per cent of overall foreign direct investment) as well as other international investments. Also, the region has set up the Asean Comprehensive Investment Agreement to provide fair and equitable treatment to non-Asean investments.

Geographical proximity provides a natural incentive for energy trading, and South Asia is particularly fortunate to have large renewable resources, especially hydropower, but it has been slow to tap these. According to a recent World Bank study, unrestricted electricity trade provision would save $9 billion per year of electricity supply costs in South Asia. It would also reduce regional power sector carbon dioxide emissions by eight per cent. However, South Asia has been slow to exploit its vast energy wealth.

By contrast, the Greater Mekong Sub-region is now moving from bilateral power agreements to grid-to-grid trading. Its long experience in building capacity in countries (especially the smaller countries), building trust among partners (like South Asia, it also has had to deal with asymmetric economic power, such as between Thailand and Lao PDR), and setting up institutions would provide a useful knowledge base.

The coming South Asia Economic Conclave (www.saec.in), a summit-level meeting between the private sector and government, will discuss some of these issues. For example, how can tariffs on intra-regional trade be reduced while taking into account the concerns of smaller countries? How can intra-regional investment be kick-started as a way to promote regional value chains? Can tourism provide the missing dynamism in trade in services? And so on.

Rome was not built in a day. But momentum can be built, and success can become infectious. Successful cross-border projects can help create and nurture a constituency for regional integration - a key recent example being power exports from India to Bangladesh, which started off with 250 Mw exports in October 2013, and soon doubled to 500 Mw. There is now a consensus between the two countries that about 7,000 Mw of power being developed in northeast India would be transmitted via Bangladesh to the rest of India, with Bangladesh also drawing a considerable amount. Such projects can feed into a conscious attempt to build a more positive regional narrative, where each success story helps sustain an upward movement in the overall narrative for regional integration.

The authors are in the World Bank Group's Trade and Competitiveness Global Practice. Sanjay Kathuria is a lead economist; Sohaib Shahid is a consultant; Michael J. Ferrantino is a lead economist