Column Beggar thy neighbour

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: least one-fourth of the world’s population, which is large and encompassing enough. Most of the potential member countries do not have very high tariff or non-tariff barriers to the rest of the world (because of WTO commitments). Absurdly enough, it may just be the case that they have higher barriers towards their neighbouring countries than to the rest of the world—Pakistan’s refusal to grant India most-favoured nation (MFN) status is a case in point. Given this scenario, a move towards a free trade area can correct some of the imbalances and enhance trade and well being in one of the poorest regions in the world.

Cross-border investment could be as important as trade in boosting the economies of the region. According to the Unctad World Investment Report 2007, India is the only significant exporter of capital (investment) in the Saarc region (Pakistan at second place had an FDI outflow of just $107 million). Outflows of FDI from India in 2006 were close to $10 billion. Government estimates peg the number at $17 billion for 2007-08. Significantly, most of these outflows—around 80%—are directed towards developed countries. This is somewhat counter-intuitive because theoretically capital should flow to resource scarce countries—it is also very different from the experience of Brazil and China whose outward FDI flows are more to developing countries. There are fewer regions and countries as resource-scarce as members of Saarc other than India. Pakistan’s receipt of FDI inflows, second highest in the region to India’ $16 billion, was just $4 billion in 2006. Bangladesh received only $625 million and Sri Lanka received $480 million, all Unctad figures for 2006. Surely, some of the capital going out of India should go into these countries which are registering good rates of economic growth and present economic opportunity—but FDI flows from India to other Saarc countries are near zero. Pakistan, of course, deliberately kept Indian FDI out of the country. Now for the first time in the trade policy of 2008, the government of Pakistan has opened talks with Indian investors—for the manufacture of CNG buses and for building power generation capacity. Bangladesh, due to petty politicking and bureaucratic inertia, also lost out on Tata’s proposed investment of $3 billion in power, steel and fertilisers.