Economic Cooperation in South Asia: The Problems and the Impediments

Prof. Gunanidhi Sharma
Tribhuvan University
April 1, 2003

The perceptions:

The pace of socio-economic transformations all over the world was made more rapid with the establishment of the UNO in 1945, the Bretton woods System in 1944 and such other world as well as the regional bodies coming into existence in different dates dealing with health, education, finance, environment, labor and trade. The approach of almost all of these bodies before 1970s was the convergent one. Gradually the situation in 1970s changed with the revival of neoclassical economic order (with faith in free market capitalism), which rejected the Keynesian fiscalism, in the name of stabilization and structural adjustment in 1980s (see Sharma, 2001 and 2000b). Mainly the IMF and the World Bank devised these programs, respectively. AS these institutions together with the GATT (the WTO after 1994) made the Bretton Woods System, all of them had the united voice for liberalization, privatization and globalization in order to give both national and international treatments to MNCs. The process overtook the UN plan of actions articulated in favor of humanism. At the extreme WTO in 1994 approved the research findings as the private property and ignored the ILO programme for labor related social security, which later on in 1996 was approved by Ministerial Conference in 1996(SAWTEE, 2001 and Dasgupta, 2000). Besides, the initial principles, rules and institutions of WTO focused on areas of developed country interest like: General agreements on tariff and trade along with associated agreements and jurisprudence, the general agreements on trade in services and agreements of trade related IPRs and Investment. Unfortunately, even the weaker economies like that of the least developed countries like Nepal which was not the member of the WTO were unable to resist the package of programs put forth by Bretton Woods System with its three pillars, namely, IMF, IBRD and WTO. Programs in all by each of these were in the shape of: denationalization, deregulation, decontrol, devaluation of currency, and deficit in budget. These programs came all of a sudden and the low-income countries in need of western and multilateral support were asked either to keep oneself apart from the world community, or to accept the new arrangements instantly. Result was that the countries with traditional feudal structure, without competitive market equipment and unable to cope with the growing world competition were pushed into a long socioeconomic transition held up in economic instability (Sharma, 1998). Accordingly, even the regional bodies evolved after 1950s till1980s including EEC (1958), ASIAN (1967), etc, were also brought into the fold of these fundamental changes.

The SAARC as an institutional framework for cooperation in south Asia was promoted in 1985. Although its history goes back to 1980 when the president of Bangladesh proposed for the first time about it in 1980, several other ministerial official meetings among nations in the region were conducted between 1981 and 1983. It finally resulted in Ministerial Declaration in 1983, which eventually led to the establishment of SAARC in 1985 (see FES, 1994). The SAARC Secretariat was established in Kathmandu in 1987.

The primary focus of SAARC in the beginning was on social and cultural issues of cooperation (see Shakya and Manandhar, 2000). Though its process of movement was slowly changing, its professional shape was complete in early 1990s when its economic role was extensively articulated in accordance with the neoclassical framework of economic development. Particularly, it was in 1991 that the initiation in this direction was taken for the establishment of SAPTA with programs of reducing trade related tariff and nontariff barriers. It, however, was adapted by the summit in 1993, of which the first round was launched in 1995, followed by the second round in 1997(see Mehta and Bhattacharya, 2000). It has completed the fourth round so far. But since its approach of tariff reduction and tariff concession was the commodity approach, it was too much time consuming to deal with 28000 of the traded commodities in the region (see Mehta and Bhattacharya, 2000). Meanwhile SAPTA was also an ambitious plan in the presence of the deeply rooted traditional bureaucracy, which was not market friendly in the spirit of WTO and was in need of shock treatment at the political level. As a result, more fast track of SAFTA process was recommended after 1997 with a consensus of all the member states, The Eleventh SAARC summit in Kathmandu in 2002 reiterated this and fixed 2002 as the dateline for finalizing its complete structure (see Declaration of the Eleventh SAARC Summit, 2002). The aim of moving towards SAFTA, however, is to attract more FDI, required for socio economic transformations, through MNCs which are demanding both national and international treatments (see Sharma, 2000), and in the meantime, to go for higher order trade, finance, investment and market interactions among member states which were divergent till date with nominal flows between members of trade, finance, technology, market information and remittances (see FNCCI, 2001); even though there was strong cultural, religious and social ties among the members as stated earlier.

The SAARC as a process of regional economic cooperation has now become a reality than a simple hope (see Sharma, 2000a), although its movement is quite slow for inherent administrative, political and psychological reasons as stated above. Even if it has not been fully able to convince its developed member states about the changes at the global level and for the same reason to realize much of its programs for social, economic, environmental, research, financial and trade related transactions between members in the region by means of the flows of goods, services, fund, information, technology and manpower, its initiation over takes customs union and is highly compatible with WTO spirit. There is a convergent attempt of the members to make the region more competitive, economically efficient and diversified through division of labor and specialization, based on comparative cost advantage, essential for reducing regional disparities and gaps demonstrated by a division of members between developed and least developed countries. It is expected that this attempt would eventually lead the members to attain and think collectively in order to approach the world height of sophisticated economic attraction relating to investment, finance, trade and human resource development. However, more commitments for organized move in different areas are a prerequisite for its success.

The intent of this paper is to discuss the prospects and impediments in economic cooperation in South Asian region begun some more than fifteen years ago in 1985.

The Prospects:

It appears that the economic benefit of the division of labor and specialization enhancing competitive economic efficiency of resources was recognized even in the hay days of Manu in ancient time in South Asia; although the concept was misled for centuries resulting in social exploitation by upper but intelligent cast. The concept, however, was modernized, corrected and broadened now to include the geographical economic division of labor. History also witnesses the integrated feature of societies in South Asia, as these societies were governed by same philosophy of life whether it is of south, north, east, or west. Religions, of course, matter. But culturally most of the practices are difficult to separate. We also share history and geography in the sense of climate and vegetation. All of them have helped to conclude our plan for regional grouping. As of time, our emphasis, however, is different. While in earlier days cultural, religious and spiritual ties were dominant and the economic transactions were in the background, the factor in the front line for integration now is mostly economic one founded on the division of labor and specialization. The economic perspective of the process of launching SAARC in 1980s was set mainly by two interests of: (a) creating the strong neighborhood economy with larger inter national flows of funds, goods, market information, technology, services and manpower, and (b) making common efforts for approaching the economies out side the region. Both of them in view of the resource potential of the region were essential for making each economy here more competitive, prosperous, and dynamic.

Indeed, SAARC has a high potential for economic transformation through: (a) application of efficient but appropriate technology in almost all the fields of national importance, (b) linking the rural resources with urban, national and international economies, (c) providing skills of management, accounting, engineering, research, social service, processing, doing agriculture, cottage industry and trade, and so on, to mass of unskilled and semi skilled labor force, (d) exploitation of natural endowments, (e) preservation of ecology, environment, cultural heritage and trdditions, and above all, (e) the modernization of traditional bureaucracy, public institutions and service delivery net works. In order to prevent the wastage of scarce resources, raise allocative efficiency of them, and harness the said development potential across regions, there needs time bound programs of the involvement of national governments and corporate sectors, NGOs, regional level INGOs, civil societies and national and regional level industry-business communities.

Of course, the SAARC summits since early1990s appear to have more serious about: maximum possible development of resources in the region, equal sharing of the fruits of development by peoples, alleviation of poverty and income and wealth disparity across communities and peoples, preservation of ecology and environment, increase in the quality of life, and promotion of economic growth through social stability (see SAARC Secretariat, 1997 and SAARC Secretariat, 2001). There are mechanisms of inter governmental meetings which devise programs of actions consistent with decisions taken at the political levels. Also, there has been an attempt to establish SAARC level Agricultural Information Center in Dhaka, 1998, Tuberculosis Center, Kathmandu1992, Documentation Center, New Delhi, 1994, Meteorological Center, Dhaka, 1995 and Human Resource Development Center, Islamabad, 1999. A high level commission for poverty alleviation has also been set up by sixth summit in Colombo, 1991, followed by Association of SAARC Speakers and parliamentarians, 1992, SAARC Fund for Regional Projects including SAARC-JAPAN Special fund, 1991. In the non-governmental side SCCI was set up in 1992. There are also regional bodies, or affiliates of journalists, INGOs, Research Institutes and Civil Societies. All these happen for bringing societies in the region closer together (see Bhargava, 1994, RIS, 1987 and SAARC Secretariat, 2001 and SAARC Secretariat, 1997) and reap optimum advantage from history, geography and culture.

Obviously, prospects of regional grouping in South Asia are underlined by the desire for cooperation at various levels of the government and outside it. It is also expressed even at peoples level, although it is limited to the psychological extent. The economic efforts of the cooperation are accelerated by the richness of the region measured in terms of: the larger size of the market represented by the size of the population which exceeds 1.25 billion (about 20% of the global population), and the volume of total trade of all members; factor endowments represented by biodiversity, cultural heritage, topography and geographical indications; the will to kill economic isolation; willingness to share research output, benefits of the geographical divisional of labor, development experiences, economies of scale, externalities of social and economic infrastructure, institutional capabilities, etc; common strategies for confronting with economies outside the region and for attracting the inflow of capital and technology; desire to reduce over dependence on developed countries, preserve and promote appropriate technology and realize collective self reliance; and so on.

In all, there is high potential as well as desire for reducing the cost of non-cooperation in the neighborhood economy of SAARC in terms of the loss of the proximate economic benefits of the integrated markets for goods, financial fund and services and social services like health, education, training, etc. The non-cooperation also results in the loss of benefits of integrated system of transportations and communications contributing to high economic and social mobility and its impact on resource efficiency raising economic growth and employment and reducing poverty and tension between members.

Although the process of the economic integration as per the potentiality, background and the interest of the peoples in the region for developing a strong neighborhood economy have already begun, it is yet to get momentum, however. Factors inhibiting are many, which are listed in the next section.

The reality at present is that the region as a whole of South Asia is India centric in the sense that it occupies 72% of the area, accounts 77% of the population and shares 77% of the GDP (see FES, 1994). Even with the convergent attitudes towards cooperation at all the peoples', government, NGO and INGO, civil society, industry and business and political levels after the formation of SAARC, the movement of the organization is of peristaltic but frustrating nature. It is evident from statistical reporting whether it is in terms of trade transactions or the attraction of foreign direct investment. May be it is for locational advantage that India is at the center for which it can influence economic relations between other member states, or that it has a larger but technically more diversified economic and social structure. Given the conservative outlook of the south block with influential position of shaping foreign relations in India, only way out that remains for other members of the SAARC is to convince Indian people, NGOs, civil societies and professionals, often known as the part of second and third track diplomacy.

Whatever may be the cause, the economies of SAARC are very weakly integrated in terms of various multilateral primary and secondary flows, the primary being the trade, investment and finance and human resource. The bilateral flows as the basis of multilateral flows in many respects are determined by India's strategic position and its conservative use by it as stated earlier. Result is obvious. Data reveal that India is less interested in sharing the cost of non-cooperation. Out of the total merchandise export within the region India had 66.6% share in1995 which further increased to 69.5% in 1998. In imports too it had 66.7% share in 1998, implying that it is more or less in favor of trade account balance. In FDI flows, India's share in 1998 was 72%. Nepal could attract only less than 1% (See FNCCI, 1999, 2001and Lama, 2001) of it.

The figures of trade between Nepal and India demonstrate a frustrating trend in terms of trade diversification and balance:



It appears that the terms of trade in volume (if not in Percentage) as well as the trade gap of Nepal with India are working against Nepal. It is explained by Nepal's growing dependence on total trade with India (49% of national total which was 28% in 1995 and below 20% in 1990 and 98% before 1960), which was coming down to almost 20% in late 1980s and is on the rise over time after 1990. The rise of import is of far greater in size; even though export too is growing but lagging behind the volume of import. This may be a trend in least developed countries if the trade takes place freely. But since Nepal's trade with India is regulated by preferential treatment as per treaties in 1950, trade treaty of 1996 and 2002 and the SAARC agenda under SAPTA, it appears that the negative terms of trade and dependency with respect to India may be reversed through only cooperation. As it is not happening so till now, it occurs that SAFTA may be the best mechanism towards this direction. As it is on the making, the higher order cooperation in trade with equitably shared benefits among members is likely to come in future. In inflow of FDI too, experiences reveal (see Sharma, 1995) that Nepal's dependence on India due to the 1950 treaty of national treatment to Indians is not weakened (of the total joint venture investors in Nepal approximately 33% is Indians [ see Lama, 2001]). The SAFTA, which is to be finalized at the end of 2002, is expected, as mentioned earlier, to neutralize this effect of bilateral relations between Nepal and India and further raise the new prospects of higher-level cooperation in the region (See Highlights of the Decisions of the SAARC Council of ministers, 2002 and Declarations of the SAARC Summit, 2002).

The Impediments:

The GEP Report, 2000, admits that the process of cooperation in SAARC region is too slow. It also highlights that cooperation without economic integration resulting from enhanced flows of trade, investment and financial fund is meaningless even in social and cultural areas. The greater flows of goods, services (including technological), financial fund and market information of all kinds inclusive that of appropriate but efficient technology demands the massive structural and institutional changes on both the demand and supply sides. As the supply inelasticity together with the absence of competitive products as well as the high tariff and non-tariff walls is the main cause for the voluminous trade deficit (annual trade deficit in trade with India amounts approximately 20 billion in 2001) of economically weaker members like Nepal, the developed members have very lately understood this reality. It is for this reason that economic issues in SAARC, as said earlier, were coming fundamentally into discussion after 1990 as the byproduct of the Uruguay round which was concluded in WTO in 1994. The SAPTA was adopted in 1995 as a gateway to SAFTA, whose complete format is to be finalized by the end of 2002, as said earlier (see the declaration o Eleventh SAARC Summit, 2002). The decision of moving towards this direction was taken in 1997. It is unanimously presumed that the South Asian free trade area would not only serve as the engine of growth generating more employment and social opportunities, but also pave the way of this region to competitive global markets. Besides, expectation is that the SAFTA would reduce fully the burden of tariff and nontariff barriers reducing the cost of production and trade as an incentive to investors, whether they are public or private and local or foreign. The SAFTA is expected to follow the rules, practices and principles of WTO, which brings even trade related non-economic issues like the favors by developed countries to least developed countries into consideration. Countries like Nepal may be freed from traditional grip of inferiority complex provided it is serious about supply side constraints or bottlenecks and institutional capacity of doing trade and making investment, negotiating with others, securing national peace, keeping prices and exchange rate stable, keeping economic house and industrial relations in order, raising economic values and productivity and overcoming economic fragmentation. Otherwise, the situation may be worsened for open door policy inviting numerous shocks abroad and making the process of becoming market for others deepened. If it happens and if India is stick to bilateralism there is little hope of gaining much from the new arrangement of SAFTA.

At present, the role of India appears conservative who always ties up economic issues with political and security issues and tries to reap the advantages of: (a) strategic location of being at the center, (b) the long historical basis of unequal bilateral relations with its neighbors and (c) its superior economic position in South Asia. In course of negotiations and agreements, India forgets to remember that it must work as the economic leader in the region, and its bitter relation with Pakistan is independent of the relations with other members. In the meanwhile, as a member of the WTO it also undermines various clauses of free and fair trade with which it itself as a less developed country is confronting. Data reveal that average non-tariff incidence in India is highest (61%) in South Asia followed by Pakistan (25%), Sri Lanka (11%) and Nepal (0.8%). In tariff barrier side, the average rates in percentages are 76, 43, 17,56 and 24 for Bangladesh, India, Nepal, Pakistan and Sri Lanka, respectively (see Karmacharya, 1999). Nepal has a lowest tariff and non tariff barriers explaining that further liberalization, unilaterally, in Nepal will not make Nepalese economy more competitive (in terms of cost advantage) which is supportive to economic restructuring with effects of high value addition and growth, more employment, poverty alleviation, favorable trade and over all balance, fair distribution of income and so on. Nepal needs consider many other factors as well affecting competitiveness of its economy (for details see Sharma, 2002). Generally, the competitiveness of an economy is explained negatively by the levels of domestic prices and positively by the rate of exchange (domestic currency/foreign currency), given foreign prices. The levels of prices are the functions of wage, interest, rent and profit rates, given the exchange rate. Other structural factors too are important in keeping the economy competitive. A few of them classified into external as well as internal ones may be listed as:

1. External factors: the pace of technological development abroad, cooperation between trade partners (MFN treatment), product mix in other countries, cost of import raised by the decisions of foreign government, international rates of wage and interest, pressure of donors to raise tariffs of electricity and water, etc.
2. Internal factors: inelastic production structure and supply bottlenecks, smaller size of the corporate economy, traditional test and preference barring the economic transformation along commercial line, etc.

The nation needs consider all the factors and work accordingly in order to bring dynamic changes in the economy that it may reap competitive advantage regularly. Other things remaining the same, hope, however, is that when Nepal becomes WTO member it may get special support for institution building, capacity enhancement and export promotion. Even in SAARC, a recent decision of creating a fund for supporting least developed countries' requirements of raising economic and institutional capabilities relating to trade and, hence, investment must be seen as a positive step in this connection. Equally important, India's self-centric behavior too seems changing, even if very slowly. It is evident from summit's commitments as an outcome of public, civil society, business community and professionals' pressures.

Summits and Ministerial meetings in the region hold (see highlights of the Decisions of the SAARC Council if Ministers, 2002 and Declarations of the Eleventh SAARC Summit, 2002) that regional block is a must for: (a) raising resource efficiency in the region, (b) devising common position for the negotiations with WTO on trade and trade related issues, (c) protecting regional standard and interest of TRIPS, labor standard, trade related investment, environment, food security and agricultural subsidy, (d) dealing with the practice of tariff and non tariff barriers in the developed countries, (e) devising common regional non-economic policies with economic implications for member states including the mechanisms to tackle the issues of poverty alleviation, women and drug trafficking, terrorism and social mobility, (f) planning for payments and investment including the use of funds created under SAARC framework, etc.

Its long term vision for free trade area and economic union, however, requires an special scheme for: (a) convertibility of member states' currencies, (b) regional level financial institutions for insurance and Ex-Imp financing, (c) the declaration of the South Asia as a visa free zone for the citizens in the region in order to realize greater mobility of people, products, factors services, and information and technology, (d) mechanism for dispute settlement and, (e) the SAARC secretariat as a strong institution for monitoring the operational aspect of decisions made by intergovernmental and expert groups.

Reality, however, is that in order to attain these aspirations SAARC must go a long way in its economic readjustment process, which is time consuming, and mean while these steps may contradict with national agendas. International pressure and India's need of attracting FDI may, nevertheless, help this region to change the situation more favorably. Or this may be simply a hope if India is sticky on bilateral treaties. Again the pressure out side the government in India seems worth considering.

The Conclusions:

Countries in the South Asian region are aspirant of attaining high growth rate and quality of life through cooperation since 1980s. The agenda of economic cooperation got approved, however, in mid 1990s when WTO started functioning. The speed of cooperation, nonetheless, is very slow for the absence of good faith, and also for the dominant profit motive among the economically superior members, mainly India. As there is nominal possibility of political cooperation among members (for the question of sovereignty), the cooperation means only social and economic closeness. The economic neighborhood too is eclipsed by: (a) the bilateral treaties between members, and (b) the conservative but discriminatory outlook of the Indian bureaucracy, which is at the center and always ties up noneconomic security issues with economic SAARC agendas for the development of trade, finance and investment related areas.

Of course, professionals, civil societies, INGOs, business and industrial communities and ordinary people are behind the success, whatever the SAARC has, so far. Summits and Ministerial meetings are kept up only not to become unpopular among peoples in the region. Meanwhile, there is confusion in members about: How much to expect from SAARC? Every sphere of social, economic, cultural and environmental developments and relations has been spelled out and underlined in the Summit and other official meetings. Visions too are written in GEP report. But economic objects are yet to realize. Neither there is institutional support for effective implementation, nor the scheme, specially in favor of least developed countries, for: (a) how to fit national agendas into SAARC framework, (b) how to make economies efficient and internationally competitive, (c) how to strengthen the corporate sector that it can compete with MNCs, (d) how to tackle the problem of weak export base, and above all, (e) how to make SAARC Secretariat competent in playing a role of a planner, a monitor and an advisor.

Frankly speaking, if nations in this region are really aspirant of free trade area inspiring all the investors at local, regional and international levels to work effectively in all economies in the region, there needs: (a) declaration of SAARC as a visa free zone for citizens in the region, (b) convertibility of currencies of member states, (c) establishment of regional level institutions of insurance, export financing and Stock Exchange and (d) strengthening institutional capabilities, relating to database, research, program monitoring, program coordination, etc, of SAARC Secretariat.

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