Integrating economies into growth

Dhaka will be hosting the 13th summit of Saarc towards the end of the week. The Islamabad summit last year adopted a landmark framework agreement on South Asian Free Trade Area (Safta). The Saarc region may finally be heading towards a regional trade arrangement (RTA), the first step in its evolution as an economic union. Most of the discussion on Safta focuses on its favourable effect on intra-regional trade.

Regional economic integration, however, is more about finding an engine of growth rather than just promoting trade. Though Saarc was formed in 1985, its achievements in the area of economic integration are modest. Initially a political body, Saarc adopted economic cooperation on its agenda in the early 1990s and signed the Saarc Preferential Trading Agreement (Sapta) in 1993. However, the progress has been slow. Sapta was based on a positive list, or a product-by-product approach of exchange of tariff preferences. The tariff preferences exchanged in four rounds of negotiations have been of marginal significance, mainly due to small product coverage, narrow margins of preferences and inability to address non-tariff barriers. This is although a recent RIS study found the preferences helped expand preferential exports of other Saarc countries to India. It took 11 years for Saarc to transition from Sapta to Safta.

One may argue that signing of Safta in Islamabad last year was a case of ?too late and too little.? This becomes apparent on comparing Saarc?s achievements with another grouping with an overlapping membership, viz. Bimstec, combining Bangladesh, Bhutan, India, Myanmar, Nepal, Sri Lanka and Thailand. Bimstec evolved an FTA within seven years of establishment at its first summit in 2004, a feat that took Saarc two decades and twelve summits.

Bimstec?s FTA is more ambitious, as it contemplates liberalisation of trade in goods and services, as well as investments. While Safta is limited to trade in goods, which is unable to exploit the full potential of regional synergies, or industrial restructuring, unless combined with liberalisation of investment and trade in services. Therefore, Bimstec?s FTA may be far more successful and may also be easier to implement. Safta does not provide for compensation for loss of revenue by least developed countries, which must be resolved before its implementation. The scarcity of experience in revenue compensation poses a challenge. A priority agenda for the Dhaka summit could be extension of Safta?s scope to cover trade in services and investment liberalisation. As five of the Saarc members have signed the Bimstec FTA, building a consensus on this may not be difficult.

Investment liberalisation is the key to achieving the desirable effects of an RTA, such as creating supply capacities, especially in lesser developed countries in the region. The experiences of various regional groupings suggest industrial restructuring is an important outcome. In Europe, the formation of the Single European Market in 1992 enabled industrial restructuring, where enterprises re-engineered production processes to exploit the economies of scale and specialisation. And to exploit the restructuring potential of Asean Free Trade Area (Afta), Asean evolved an Asean Industrial Cooper-ation (Aico) scheme, which provided a virtually integrated market even before Afta?s implementation. Aico was complemented by an Asean investment area, providing investment liberalisation.

South Asia?s limited experience in the framework of Sapta or bilateral FTAs gives useful pointers for the gains from regionalism in terms of efficiency-seeking industrial restructuring. The Indo-Sri Lanka bilateral FTA has catalysed intra-regional investments. Thus an Indian tyre company set up a large export-oriented tyre plant in Sri Lanka for its growing markets in Pakistan, the Middle East and other countries, using the abundant local supply of natural rubber. Sri Lanka attracted Indian investments of $145 million in a very short period, making India its third largest source of investment. Production restructuring has helped bring down Sri Lanka?s trade deficit with India from 8.6:1 to 4.9:1 in two years, while expanding bilateral trade by 250%. The success has prompted Sri Lanka to seek to expand the scope of its FTA to investments and services in a comprehensive economic partnership agreement (Cepa). Thus, Safta may facilitate horizontal specialisation to enable optimal exploitation of its members? synergies. Sri Lanka may well emerge as South Asia?s hub for rubber-based industries, Bangladesh for energy-intensive industries and Bhutan for forest-based industries.

The Tata group of India has recently announced an investment of $2 billion in gas-based power, steel and fertiliser plants in Bangladesh. Therefore, Safta?s scope must be expanded to cover investments and complemented by creating a Saarc investment area. Another priority is to consider a shorter period of implementation of the programme of trade liberalisation under Safta, lest it becomes irrelevant. It may be recalled 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 to exploit the advantages of geographical proximity.

Regional economic integration in South Asia has the potential to generate billions of dollars of income, employment, trade and could help the region in its fight against poverty, among other benefits!

The writer is director general, Research and Information System for the Non-aligned and Other Developing Countries. These are his personal views