The 17th South Asian Association for Regional Co-operation (Saarc) summit, to be held on 9-10 November 2011 in Addu, a picturesque southern hemisphere atoll in the Maldives, will be an opportunity to address many contemporary economic challenges that the region faces. South Asia has emerged as one of the fastest-growing sub-regions in the world, having sustained high growth rates of around eight per cent preceding the global financial crisis. Its resilience was highlighted by its ability to weather the effects of the financial crisis. However, tremendous development gaps remain in terms of poverty reduction, infrastructure development and achievement of the Millennium Development Goals. South Asian countries also face shared vulnerabilities, whether it is the outbreak of tropical diseases such as dengue fever or high rates of inflation, especially food commodities. Regional interdependence warrants a regional approach to address their common problems.
Given that the spectre of double-dip is haunting the advanced economies, supporting the recovery process would be critical. In the context of rising food prices, the Saarc Food Bank should be made operational immediately. Regional co-operation and co-ordination for enhancement of agricultural productivity would also be fruitful given the similar geoclimatic conditions. Beyond these short-term challenges, South Asia should also worry about the weakening demand for its products in the advanced economies in the West given the compulsions of unwinding debt-fuelled consumption. The solution lies in rebalancing their growth in favour of greater domestic and regional demand for sustaining their dynamism in the future. While closing development gaps has great potential for generating additional aggregate demand, the emergence of the Asia-Pacific region as a growth pole of the world economy led by China and India makes regional economic integration at sub-regional as well as broader regional levels a viable development strategy.
Recent work by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) recognises tremendous complementarities within and between various sub-regions of the Asia-Pacific region that can be exploited for mutually-beneficial co-operation. Recent work has also shown that nearly three-fourths of intra-regional trade potential in South Asia remains unutilised because of tariff and non-tariff barriers, poor transport infrastructure and connectivity, lack of trade facilitation, poor banking links and so on.
The experiences from different regional groupings suggest that regional economic integration can foster the balanced and equitable regional development through a process called efficiency-seeking industrial restructuring. It involves building production capabilities in relatively lesser developed regions through intra-regional investments. The South Asian experiences also fit into that pattern. For instance, in the first six or seven years of the implementation of the India-Sri Lanka free-trade agreement (FTA), bilateral trade has expanded rapidly, with India’s exports to Sri Lanka growing at an average annual rate of 34.5 per cent and those of Sri Lanka growing at 132 per cent. Sri Lanka’s imports-to-exports ratio fell from 10.3:1 to 3.3:1. Sri Lankan export items to India increased from 505 to 1,062 with a visible shift in favour of high-value added manufactures, making India the third-largest export destination since 2003 from 16th in 2000. There are anomalies too. CEAT India, for instance, set up a large export-oriented tyre plant in Sri Lanka to cater to its growing markets not only in Pakistan and West Asia but also back to India. India has now emerged as the fourth-largest source of investment in Sri Lanka in recent years. Sri Lankan companies such as MAS and Brandix have also set up special economic zones in India to produce fabrics for their garment production units back home.
Therefore, the South Asian Free Trade Agreement (SAFTA) has the potential of fostering a similar restructuring of industry to produce more balanced and productive outcomes. To exploit the full potential of regional economic integration in South Asia, Saarc countries need to expedite its implementation schedule and expand its scope by reducing the sensitive lists and removing non-tariff barriers. They should also realise the potential of the Saarc Agreement on Trade in Services, signed at the 16th Summit in Bhutan, by initiating liberalisation and concluding the investment protection and promotion agreement negotiated earlier.
Another critical challenge is in the direction of creating seamless connectivity throughout the region. This will require a regional transport and transit treaty that can help leverage South Asia’s position on the world map at the cross roads amid East Asia, Central and West Asia, as epitomised by the ancient “silk route”. Integration of financial and capital markets can also play an important role. To improve their access to capital, for instance, companies from other South Asian countries should be allowed to list at Indian stock markets and raise capital besides strengthening the commercial banking links.
Apart from deepening regional co-operation, Saarc would also be able to play its role in shaping broader Asia-Pacific regionalism, critical if the present century is to become a truly “Asian Century”. Hopefully, the Saarc leaders will seize the moment to move forward on the economic agenda for consolidating and sustaining the dynamism of the region against the background of a global slowdown and flagging multilateral trade negotiations and prepare the sub-region to shape the broader economic integration in Asia-Pacific, which will be theme of the next ESCAP Commission in May 2012.
The author is chief economist of UN-ESCAP, Bangkok.
The views expressed are those of the author and do not necessarily reflect the views of the UN.