THE future of Saarc as a regional organization depends on implementation of the road-map contained in the Declaration for greater economic integration, adopted at Kathmandu in January, 2002: a South Asian Free Trade Area, a South Asian Customs Union in 2015 and South Asian Economic Union by 2020.

Superseding South Asian Preferential Agreement which remained operative since 1996, Agreement on South Asian Free Trade Area to be operative from January, 2006, is the first step towards the avowed goal.

Prior to SAPTA coming into effect, intra-Saarc trade in 1995 stood at $4.2 billion in the total regional world trade of $401.2 billion, denoting a share of mere 4.1 per cent.

SAPTA helped move the share marginally to five per cent in 2003 with overall regional world trade standing at $183.2 billion and intra-regional trade at $9.3 billion. Unfortunately, Safta Agreement does not draw lessons from dismal performance of SAPTA and, as such, is devoid of effective measures for removal of the causes inhibiting growth in intra-regional trade.

Independent organizations and economists have carried out an analysis of the unsatisfactory performance both in terms of economic and non-economic factors. Amongst the economic factors, the first is lack of complementarity of economies as all seven member-states have a similar production base mainly in primary goods and textiles.

On one hand, it restricts intra-regional trade and on the other hand forces them to compete for similar goods in the world market. This leaves very little room for intra-regional trade. What is more interesting to note is that the available narrow range for trading, India enjoys a comparative advantage in a larger number of commodities than other member-states.

Dr A.R.Kamal in his paper titled “Safta and Economic Cooperation” observes that “the South Asian countries enjoy comparative advantage in a relatively narrow range. Bangladesh, Nepal and Pakistan out of 71 commodity groups have revealed comparative advantage in seven, five and 12 respectively while India and Sri Lanka have comparative advantage in 26 and 21 product categories; and none of the countries has comparative advantage in capital intensive and high value added products”. The imbalance in the comparative advantage with India enjoying in a comparatively larger number of commodities within the available narrow range of intra-regional tradable area, has three implications for smaller states.

Firstly, with India having a comparative advantage in goods such as engineering, iron and steel items, transport equipment, IT products etc is likely to force closure of such industries in smaller countries producing these goods at a comparative disadvantage. This is likely to have an adverse effect on employment level.

Secondly, with India enjoying a preponderance in trade relations with other member-states, trade balances of small countries with India are to turn unfavourable, thereby straining balance of payment position.

Thirdly, a reduction in tariffs means a sizeable revenue loss for small countries. Other factors inhibiting intra-regional economic cooperation arise from a lurking fear of India amongst member-states on account of two factors. There is a sharp inequality among member-states in area, population and share in overall regional income.

This point is well-articulated by Naphil Matangi Markay in his IMF Working Paper titled “Patterns of Shocks and Regional Monetary Cooperation”. He points out that “another key feature of Saarc is the significant role of India in the region which changes the dynamics of interaction among members. India has 72.58 per cent of land area, 78.98 pr cent of the GDP and 75.49 per cent of the population of Saarc as a whole. By comparison, no one country has the same weight in the European Union as does India in Saarc. The region is handicapped by disputes between India and other small states. Safta is mainly driven with the obsession of creating a free trade area without removing bottlenecks in the way. Trade cannot be increased without establishing its linkages with economic issues inhibiting economic integration in South Asia.

The Agreement does not deal with the issue of lack of complementarity among economies and does not offer any measure for creating diversity in the economies of the region. Under Article 8 with the caption ‘Additional Measures’ it does mention removal of barriers to intra-Saarc investments along with a number of other measures. However, in order to create diversity, a separate article touching upon the subject and proposing a mechanism for creating diversity in the economics of member-states is warranted.

Similarly, the concerns of the small states regarding closure of the industries in small countries producing the goods at a comparative disadvantage have not been addressed in the Agreement. A positive supporting mechanism with financing arrangements is required to enable small countries to go for substituting industries in which they have or could acquire a fair degree of competitiveness. The other concerns of small countries such as balance of payment problem and revenue loss are recognized by the Agreement. As for the balance of payment problem, Article 15 permits a unilateral provisional suspension of the concessions by a member-state subject to its approval by the Committee of Experts.

Apart from creating controversies among states, this clause smacks of lack of trust in the institutional mechanism created under Safta. In fact, the provisional suspension of concession should have been made subject to approval of the Committee of Experts within a time frame of 30 days failing which such provisional suspension of concession could take effect.

As for loss of revenue concern, the agreement provides for compensation to least developed states under clause (e) of Article 11. However, the question of devising an appropriate mechanism for such compensation has been left for subsequent negotiation. There are other infirmities in the agreement such as leaving the issue of framing of rules of origin under Article 18 and finalization of sensitive lists under clause 3(a) of Article 7 for negotiation without mentioning any cut off dates. There are also loose provisions in the agreement relating to tariffs and non-tariff measures which need be made more specific within a specified time frame for completion of actions.

Instead of sinking their interests into Safta, the member-countries are pursuing bilateral trade relations in the region as well as in other regions. This undermines Safta as an Agreement to create a free trade area in the region for embarking upon the goal of forming South Asian Economic Union. The bilateral trade relations of member-countries need be subsumed under Safta.

The onus for making Safta an effective instrument principally lies on India, being a large partner in Saarc by offering concessions both on economic and political fronts.

On economic front, it has to offer concessions unilaterally to small countries so as to allay their fears and suspicious. On political front it has to speed up resolution of festering issues. These initiatives by India will reinforce Saarc and raise her status. However, these initiatives of India need be fully reciprocated by other member sates by pursuing pro-Saarc policies. One does hope that at the forthcoming Saarc Summit, not only loose ends in Safta will be tightened but a more positive and aggressive political commitment will be visible.