An agenda for Safta?s Dhaka summit

The thirteenth summit of the South Asian Association for Regional Cooperation (Saarc) will be taking place over the coming weekend in Dhaka, after being postponed twice. It is expected to carry forward the agenda of economic cooperation in South Asia that has been charged after the adoption of a landmark agreement on a South Asian Free Trade Area (Safta) in 2004 in Islamabad. At long last, the Saarc region seems to be heading towards a regional trade arrangement (RTA), that is the first step in the evolution of Saarc as an economic union.

Although Saarc was formed two decades ago in 1985, its achievements in the area of regional economic integration are rather modest. Starting as a political association, Saarc adopted economic cooperation on its agenda in the early 1990s and evolved a Saarc Preferential Trading Agreement (Sapta), signed in 1993. However, progress has been very slow, because of a positive list approach on exchange of tariff preferences, small product coverage, narrow margins of preferences and inability to address non-tariff barriers, among other problems, although a recent RIS study has found that these preferences have helped in expansion of preferential exports of other Saarc countries to India.

One may argue that the signing of the Safta agreement in Islamabad last year was a case of ?too late and too little.? This is because Safta?s scope is limited to trade in goods. In comparison, the Bimstec FTA, also signed in 2004 and combining Bangladesh, Bhutan, India, Myanmar, Nepal, Sri Lanka and Thailand, is more ambitious liberalisation of trade in goods, along with trade in services and investments. Trade in goods is barely able to exploit the full potential of regional synergies or industrial restructuring, unless combined with liberalisation of investment regimes and trade in services.

Against this backdrop, a priority agenda for the Dhaka summit could be extension of Safta?s scope to cover trade in services and investment liberalisation. Since five of the seven Saarc member-states have signed the Bimstec FTA, building a consensus on the issue may not prove difficult. In particular, investment liberalisation is the key to achieving the desirable effects of an RTA, such as creation of supply capacities, especially in relatively lesser developed countries in the region.

The experiences of different regional groupings across the world suggest that industrial restructuring is an important outcome of regional economic integration. In Europe, the formation of a Single European Market, in 1992, has led to a major process of industrial restructuring, where various enterprises re-engineered their production processes in such a manner as to exploit the economies of scale and specialisation. In order to exploit the potential of industrial restructuring resulting from the Asean Free Trade Area (Afta), Asean had evolved an Asean Industrial Cooperation (AICO) scheme. This provided a virtually integrated market for enterprises even before the implementation of Afta. AICO was complemented by an Asean Investment Area, providing investment liberalisation in the region.

South Asia?s limited experience so far with trade liberalisation provides useful pointers for the gains from regionalism in terms of efficiency-seeking industrial restructuring. The Indo-Sri Lanka bilateral FTA, for instance, has catalysed intra-regional investments. Thus an Indian tyre company set up a large export-oriented plant in Sri Lanka to cater to its growing markets in Pakistan, the Middle East and other countries, taking advantage of the abundant supply of natural rubber in that country. Sri Lanka attracted Indian investments of $145 million in a very short period, making India the third-largest source of investments for the island.

Production restructuring has helped bring down Sri Lanka?s trade deficit with India from 8.6:1 to 4.9:1 in just two years, while expanding bilateral trade by 250%, making Sri Lanka the largest trade partner of India in Saarc. This success has prompted Sri Lanka and India to expand the scope of their FTA to cover investments and services in a comprehensive economic partnership agreement (CEPA).

Thus, Safta may help evolve a horizontal specialisation across the region, optimally exploiting synergies of member-countries. Sri Lanka may well emerge as the hub for rubber-based industries, Bangladesh for energy-intensive industries, Bhutan for forest-based industries and so on. India?s Tata group has already announced an investment of $3 billion in gas-based power, steel and fertiliser plants in Bangladesh.

Therefore, Safta?s scope needs to expand to cover investments, complemented by creation of a Saarc Investment Area. Another priority for the summit will be to consider a shorter period of implementation of the programme of trade liberalisation under Safta, lest it becomes irrelevant. In this context, it may be worth recalling that Asean had expedited the schedule of implementation of Afta from 2008 to 2002.

Saarc leaders may also take steps to improve physical connectivity by highways, railways, waterways, shipping and air links, power and gas grids to exploit the advantages of the geographical proximity. For development of infrastructure to improve intra-regional connectivity, a South Asian Investment Bank may be set up, which could lend exclusively to regional projects being undertaken by the region?s business entities.

Regional economic integration in South Asia has the potential to become a new engine of growth by helping to exploit the synergies for mutual benefit. We need to move fast before it is too late!

The writer is director-general, Research and Information System for Developing Countries (RIS). These are his personal views