We in South Asia tend to be modest (which is a good thing) and to underestimate ourselves (which is not such a good thing) when we speak of South Asian integration and the present situation in the sub-region. We often speak of the South Asian paradox that a region that has so many cultural and other affinities should be so lacking in integration and connectivity. My own view is the minority view. Many of you have heard me say before that there is more to what is happening in South Asia than is described by the (now traditional) narrative of pessimism, of which we South Asians ourselves are the major retailers.
That narrative goes something like this: South Asia is one of the least integrated regions of the world, with itself and with the rest of the world. It is also one of the regions most beset with irreconcilable political and security issues and disputes. With 22 per cent of the world’s population, it has only six-seven per cent of the world’s gross domestic product. Intra-regional trade accounts for only about six per cent of its own total foreign trade. It is resource poor with only 8.3 per cent of global water resources, and so on and so forth.
All of these might be true, but it misses the point that reality is far more complex, that empirical performance by South Asia, particularly in the last five years, has shown us how to deal with these limitations. And, that we have a moment in history, which we should seize if we wish to transform South Asia.
Let us first look at the South Asian economies. South Asia has emerged as one of the fastest growing sub-regions in the world with an average rate of growth of eight per cent sustained over the past five years. Intra-regional trade within South Asia has begun to grow and has doubled over the past five years. We are, therefore, at a point where it is increasingly evident to all the countries in South Asia that there are substantial costs to not moving forward by lowering tariffs, minimising sensitive lists, and tackling non-tariff barriers. Each government has taken significant actions in the recent past. India has reduced the sensitive list under South Asian Free Trade Area, or SAFTA, in a dramatic fashion last year for least developed countries. As a result, I am told that Bangladesh’s exports to India will cross the $ 1-billion mark in a 12-month period in July for the first time in history. The India-Sri Lanka Free Trade Agreement has already quadrupled trade between the two countries, and we are now working to improve it. Pakistan has decided to grant India the Most Favoured Nation treatment, gradually moving to a negative list system. I could cite bilateral and multilateral examples of positive steps taken recently by each of the countries in the region.
When we speak of South Asia as the least integrated region in terms of trade, we ignore the wide variation in our experiences. The fact is that intra-regional trade as a proportion of total trade varies widely for the countries in South Asia. For Nepal, it is as high as 60.5 per cent, for Sri Lanka 18.9 per cent, for Pakistan 6.6 per cent and for India only 2.7 per cent. But this variation also tells us how great the potential is, and why intra-regional trade is growing faster than South Asia’s trade with the rest of the world.
The other caveat that we should bear in mind is the fact that official figures certainly underestimate the real magnitude of trade that is taking place between South Asian countries, whether clandestinely or through third countries. Anecdotal evidence suggests that the real figure for India-Pakistan trade could be almost three times greater than the official trade figures of almost $3 billion. It is an open secret that most India-Bangladesh trade is not reflected in the official figures. South Asia has the dubious distinction of a relatively high level of informal trade flows unrecorded and unreflected in official trade statistics. This suggests that natural complementarities do exist between South Asian economies and have already been identified and acted upon.
Several years ago, in 1999, RIS carried out a study of the costs of non-cooperation in South Asian Association for Regional Cooperation (SAARC). They found that in 1994, Sri Lanka and Pakistan imported many items at higher unit values than would have prevailed if they had imported them from within SAARC, paying on an average twice what they would have paid in South Asia, and losing $266 million in the case of Sri Lanka and $511 million in the case of Pakistan (incidentally, these were relatively high values at that time.) If anything, the costs of not doing business with each other have risen since then. Products are being exported by countries in the region to the rest of the world, but not to other countries in the region. But it is heartening that there is a much wider realisation of these costs within the region. It is probably time that we updated the study today.
The other opportunity comes for the fact that as our economies have diversified and become sophisticated in the last decade, similarities in production structures across countries could also offer opportunities for intra-industry trade. Several sectors such as processed foods, rubber products, plastics, pharmaceuticals, textiles, apparel and light engineering goods are amenable to this kind of trade. If the governments are successful in removing non-tariff and other barriers, this sort of trade should flourish in the region.
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As for the naysayers’ argument that South Asia is resource poor and doomed to poverty and even conflict over resources, we also have our strengths. We are population rich, and have a healthy demographic profile which should last well into the 21st century, giving us the markets and the demand we need to keep growing. And, despite these constraints, we have maintained a healthy growth momentum in the recent past.
Edited excerpts from the keynote address of National Security Advisor Shiv Shankar Menon at the Asian Relations Conference on Transforming South Asia, on March 9 in New Delhi