South Asia least integrated region for trade

Updated March 15, 2020

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South Asia has an abysmal performance in intra-regional trade as bilateral movement of goods is throttled between India and Pakistan, says the Asian Development Bank (ADB). — AFP/File
South Asia has an abysmal performance in intra-regional trade as bilateral movement of goods is throttled between India and Pakistan, says the Asian Development Bank (ADB). — AFP/File

ISLAMABAD: South Asia has an abysmal performance in intra-regional trade as bilateral movement of goods is throttled between India and Pakistan, says the Asian Development Bank (ADB).

There is a need to harness the potential of regional cooperation through promoting multilateral institutions by learning from the experiences of European Union (EU) and Association of Southeast Asian Nations (Asean) to address challenges faced by South Asia, according to a working paper of the ADB Institute.

The region should firmly promote South Asian Association for Regional Cooperation (Saarc) to focus on deeper economic integration and trade.

Its secretariat should be built into a powerful and knowledgeable body in trade, economics and non-traditional security threats with a common vision.

South Asia should implement Saarc-wide free trade agreement (FTA) for all members by 2022 and collaborate to speed up the construction of new physical infrastructure and settle all border disputes among nations.

The core issues related to economic liberalisation, regional integration, and non-traditional security threats should be given high priority, the codument says.

Despite some achievements, the performance of South Asian countries in economic integration is not strong under the institutional arrangements of Saarc. Over the period, the region has emerged as one of the fastest growing in the world with average rate of GDP increase estimated at above seven per cent, which is expected to reduce poverty and unemployment.

However, Saarc has not been able to leverage the drivers for economic growth in member countries through regional cooperation, which is evident from the fact that countries here are better integrated with those outside compared to own neighbours, it adds.

Like Southeast Asia, comprehensive approaches are needed to enhance competitiveness and create attractive markets in this region by enabling economic environment to increase industrial cooperation and strengthen production networks, sustain the synergies between liberalised trade and investment across countries, strengthen the financial system to enterprise development, remove infrastructure bottlenecks to gain from conducive policies, improve energy efficiency and cooperation, and collaborate for research and development through improved quality of human capital.

The economic integration of South Asia could deliver large benefits to its poor population and potential areas of sub-regional links should include high-market integration, better transport, improved energy, wider information and communication technology and people-to-people connectivity, more investment in infrastructure development, and reducing common vulnerabilities and risks.

Europe and the United States have been the main markets for South Asian exports and they remained the major sources of foreign direct investment. There should be stronger FDI integration within Asean and Saarc by increasing flows and cross-border investments in telecommunications, construction, roadways and financial services. In Southeast Asia, market-led integration has been facilitated by strong regional production networks and the international supply chains.

However, South Asian economies, with the exception of India, have failed to participate in the production networks. South Asia and Southeast Asia production network and value chain production activities need to be integrated. In addition, an Asian common market should be established to facilitate the free mobility of goods, services, labour, knowledge and capital within by removing border barriers.

South Asian countries are more introvert and less open compared to higher degree of trade openness and sustained investment in Southeast Asian countries. Protectionism is highly prevalent in South Asian countries, while Southeast Asian economies have preferred accelerated trade and investment reforms even after the Asian crisis.

While Southeast Asia’s intra-regional trade has been remarkable, South Asia is the least integrated in the world which needs to be improved through bilateral FTAs for fuller benefits of cooperation with Asean and political commitments from the governments.

Trade creation and trade diversion will cause overall welfare gains in the economies of South Asia as the larger countries India and Pakistan would particularly gain from preferential arrangements with a bigger block such as North American Free Trade Association and the European Union, while smaller ones like Bangladesh and Nepal would benefit more from regional integration.

Published in Dawn, March 15th, 2020