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Saarc region an emerging powerhouse

September 08, 2008

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Saarc nations’ hold substantial amounts of resources, which will steadily become more essential to Saarc and other developing nations who continually require additional resources to maintain rapid rates of economic growth.

This growth is fueled by the steady increase of the middle class (especially within India) and has resulted in an appetite for consumer goods, paid for by higher disposable incomes.

Much promise awaits Saarc, as sometime in the second quarter of the twenty-first century, Asia is expected to become the hub of the world economy. At this point Asia will represent a significant presence by producing more than half of the world’s income. Accordingly, businesses with an ability to cater to regional tastes while maintaining effective supply chain management have the opportunity to benefit from Saarc, with Pakistan in a prime position to capitalise on areas such as banking and textile value addition.

Any national government is obliged to place its nations own strategic interests first, however more often than not this can be part and parcel of a wider cooperative environment. Saarc nations share many economic and structural similarities; therefore it makes sense to develop a joint regional strategy that attracts FDI and tourism while focusing on an internal framework for supply chain attractiveness.

For non-Saarc based organisations, there are still many aspects that discourage FDI, sourcing and the establishment of operations within the region. Obstacles such as political volatility (Pakistan and Bangladesh), a 25- year old conflict within Sri Lanka, across the region are deterrents, but generally these aspects have not detracted from impressive year- on- year economic growth. SAFTA’s gradual phasing in is a promising example of the benefits obtained by a collaborative approach, and come 2015, this free trade agreement should pay sound dividends to Saarc nations.

Saarc’s export-orientation, inflows of foreign direct investment, labour skill levels, infrastructure levels and ease of doing business are substantially less advanced than in East Asia, and are a major handicap to economic growth. In saying this however, coordination between Saarc nations could allow some of these gaps and competencies shortfall to be bridged, but first require the normalisation of relationships between Pakistan and India if any significant advancement of Saarc is to be seen.

Asia offers a viable solution to common supply chain management issues such as the rising cost of labour and increasing input costs of raw materials. The region is capable of offering better efficiencies in manufacturing or knowledge based solutions at lower price and many multinationals have found an integrated supply chain solution covering procurement, value-addition and logistics throughout Saarc.

For Saarc in general, and Pakistan in particular, in order to take a bigger piece of this supply chain pie, considerable investment in macro and micro infrastructure is needed. This includes ports, roads and production equipment as well as other enabling infrastructure that can ensure timely, reliable and cost effective product to market scenarios. A case in point is the extremely high spoil rates of Pakistani mangos meant for export; due to insufficient refrigeration supply chain coordination and infrastructure.

Additionally, access to pre- and post shipment finance needs greater focus, as well as the development of export services such as risk mitigation, including factoring and agi-insurance. Currently these services are limited across SARRC, and at a policy level, need more support. In doing so, this will foster an environment that moves away from commodities and focuses more on value addition of agri and manufactured goods.

India is by far the largest economy in South Asia, accounting for approximately 80 per cent of South Asia’s GDP, trade, and regional growth (2007). India’s High Net-Worth Individuals (HNWIs) control $350 billion worth of assets, according to Merrill Lynch. As a nation:

• India plans to invest $475 billion between 2007-2012 for infrastructure development.

• Indian’s telecom industry is the fastest growing telecom sector in the world.

• India is one of the world’s largest recipients of FDI, and has become a favoured location of outsourcing labour- intensive work such as call centres, thanks to a well educated middle class.

Proactive policies to increase economic integration with other South Asian countries could see a great spillover effect to other Saarc nations, the result being a bottom line impact on the economic development of India’s neighbours. Pakistan would however be unable to capitalise on this if current relations remain as they are. The political implications of a more economically integrated and rapidly developing South Asia would be a major additional benefit if policy decisions focus more on coordination and cooperation.

High non-tariff barriers such as complicated customs procedures at borders make intraregional trade difficult and costly. Therefore, attention to ‘behind the border’ issues is crucial to Saarc’s development. In any business situation, strategy into action is what is important. Aspects created in theory need to look at the environment, and instigate change from the bottom up as well as the top down. A free trade agreement is of no consequence if slow processing times at border crossings occur. It is also important to remember that SAFTA will not come into full effect until 2015, and in the mean time it is SAPTA that is trying to encourage a preference of tariff rates for Saarc members rather than a rapid reduction. Like all things, good things often take time, but let us hope that the opportunity cost of that time is not missing the boat all together.

Dhanushka Jayakody is the lead consultant at MTI Pakistan’s office.