Oct 26, 2016 -

The future of regional integration in South Asia

News Hour:

There are convincing evidence that deeper regional integration is needed in South Asia for generating and sustaining economic growth, poverty alleviation, ensuring food security and larger participation in the global value chain. Furthermore, the peace dividends, through intra-country stable political relations, will be immensely high.

How to make a regional integration initiative effective? From a political economy perspective, there could be three interconnected drivers for a deeper regional integration: economic drivers, political economy drivers and extra-regional drivers.

South Asian Network on Economic Modeling (SANEM) organized a press briefing on Future of Regional Integration in South Asia on October 26, 2016 at their office in Dhaka, Bangladesh, where these contexual issues were discussed with in-depth enlightenment.

Speaker in the press briefing included Dr. Selim Raihan, a professor at the Department of Economics, University of Dhaka and the Executive Director of SANEM. Dr. Raihan holds a Ph.D. from the University of Manchester, UK. He possesses vast expertise in research on international trade, labor market dynamics, poverty, economic growth and political economy analysis of growth and development.

Dr. Raihan briefed that the economic drivers include four integration processes:

  1. market integration,
  2. investment integration,
  3. growth integration, and
  4. policy integration.

‘Market integration’ emphasizes on the integration in trade in goods and services through the removal of tariff and non-tariff restrictions. ‘Growth integration’ is the integration of economic growth processes of the respective countries in a way that growth in one country benefits growth processes in other member countries. The ‘investment integration’ calls for promotion of regional investment and trade nexus. Finally, the ‘policy integration’ is the harmonization of economic and trade policies of the countries for a deeper regional integration.

The political economy drivers include five drivers. The first political economy driver is the ‘primary institution’ which are the official institutions at the regional level and in respective countries entrusted to carry out the agenda of regional integration. In South Asia, the SAARC Secretariat and relevant ministries in the member countries are such institutions. The second political economy driver is the ‘secondary institution’ which are private sectors, private sector associations, civil society organizations and media. The third political economy driver is the ‘regional public good’ which includes regional infrastructure and the status of regional trade facilitation. In South Asia, status of such ‘regional public good’ is very weak. ‘Structural factor’ is the fourth political economy driver which includes historical processes and geographic factors that shape the types of political, economic and socio-cultural institutions. In South Asia, landlockedness of Nepal, Bhutan and Afghanistan, political rivalry between India and Pakistan, and huge differences in the sizes of the countries where India accounts for around 80 percent of the regional GDP as well as population, and trade among the South Asian countries primarily through land borders are such structural factors. The final and most critical political economy driver is the role of the ‘political elite’. Strong and visionary leaderships are needed from the political elites to eliminate any ‘trust deficit’, which can emerge as a result of a variety of the ‘structural factors’ mentioned above. In South Asia, such ‘trust deficit’ is often highlighted as one of the major barriers for a deeper regional integration.

There are concerns from the smaller countries in South Asia with regard to their growing bilateral trade deficits with India. These concerns have led especially Bangladesh and Nepal to maintain long sensitive lists of products outside of the free trade under South Asian Free Trade Area (SAFTA) amid the fear of potential accelerated import from India. Also, there are also apprehensions with regard to hesitant and inconsistent leaderships from the political elites of these countries, especially from India, in taking the regional integration agenda to a higher level.

Finally, the extra-regional drivers include a wide range of global economic and political factors that can have influence over the region.

Though there is a strong demand for a deeper regional integration in South Asia, the progress has been rather slow. Intra-regional trade in South Asia has been low. Intra-regional services trade and intra-regional investment are also low in South Asia. Furthermore, actual implementation of agreements often does not match the declared ambitions, and in this context, lack of political will and leadership, institutional weaknesses and capacity and resources constraints have been argued to be the major impeding factors. The political rivalry between India and Pakistan has often constrained the SAARC to be a functional regional forum. The recent cancellation of the SAARC summit casts a dark shadow over the progress towards a unified South Asia. There is also no positive indication that the situation will improve in the near future. All these suggests that the critical driver to make the South Asian regional integration effective, i.e. the political economy driver, is very weak.

However, we shouldn’t abandon the SAARC process, Dr. Raihan emphasized. There should be efforts to bring down the political rivalry in South Asia. The roles of civil society, private sector and media are very important to exert pressure on the respective governments for regional stability and peace. There are several bodies of SAARC and they should continue their works. There have been many achievements so far, and we can’t afford losing them.

Against the aforementioned context, sub-regional cooperation can be an answer to the deadlock of regional integration in South Asia. A potential effective platform is the BBIN initiative, which is a sub-regional coordinative architecture of countries in South Asia. Larger and effective achievements in such sub-regional architecture can exert some positive pressure on the region as a whole to avoid conflicts.

However, deeper integration among the BBIN countries has also been impeded by several NTMs and associated procedural obstacles (POs) which are exacerbated by lack of trade facilitation and cumbersome custom procedures at the land border ports.

As far as intra-BBIN trade is concerned, there are substantial potentials for rise in intra-regional trade. However, despite that India has already provided almost full duty-free-quota-free of its market access to exports from South Asian LDCs, Bangladesh, Nepal and Bhutan are facing escalated challenges to at least secure and then to increase their exports to Indian market. These challenges are related to their limited export capacities, lack of diversification of their export baskets, and various NTMs and POs both at home and in the Indian market.

The largest export market in South Asia is the Indian market, the size of which is around US$ 460 billion as per India’s total import figure in 2014. Other three major markets are the markets of Pakistan (US$ 59 billion), Bangladesh (US$ 46 billion) and Sri Lanka (US$ 21 billion). Bhutan has however a very small market size of US$ 1 billion, whereas for Nepal the size is around US$ 8.5 billion. In the context of the BBIN sub-region, however, it should be kept in mind that, though the other three smaller countries, namely Bangladesh, Bhutan and Nepal, primarily aim to increase their exports to the Indian market, there are sizeable scopes for increasing bilateral trade even among these smaller countries.

There are much larger welfare gains from reduction in transaction costs in bilateral trade than mere tariff cut in South Asia. There is no denying that NTMs/NTBs, associated procedural obstacles and lack of trade facilitation are responsible for high degree of transaction costs in bilateral trade among the South Asian countries. Therefore, reduction in such transaction costs through streamlining NTMs or elimination of NTBs would generate larger welfare gains for all the South Asian countries.

Streamlining of NTMs and removal of associated POs are likely to intensify further market integration in the BBIN sub-region through development of regional value chains. This will also encourage larger intra and extra regional investments in the BBIN sub-region which can be instrumental for growth integration among these countries. To make these happen there is a need for policy integration among the BBIN countries.

WHAT NEEDS TO BE DONE?
  1. There are some signs of heightened ‘new’ commitment among political elites of the BBIN countries. The recent speedy resolution of LBA between Bangladesh and India, the positive reception of the India-Bangladesh Maritime Arbitration Award announced in July 2014, establishment of border haats along the border between India and Bangladesh, and the BBIN Motor Vehicle Agreement are signs of such political commitments. However, the BBIN Motor Vehicle Agreement is yet to be implemented properly. A large infrastructural development is needed for this.
  2. Also, the aforementioned ‘new’ commitments have not yet been translated much to resolve the issues related to NTMs and POs discussed above. There is a need to put renewed emphasis on this.
  3. It is important to emphasize that many NTMs are legitimate and thus cannot be negotiated away. For example, sanitary and phytosanitary (SPS) measures and TBT are there to protect consumers and environment; pricing and licenses are there to regulate domestic markets; anti-dumping duties, subsidies, quotas are there to protect domestic firms; and rules of origin is there to avoid unintended trade deflections.
  4. Due to various procedural obstacles, which are related to insufficient and poor infrastructure, complicated bureaucratic process, delays, corruption, and frequent changes in the policies, many legitimate NTMs turn into NTBs. In South Asia, a significant part of the NTBs is related to procedural obstacles. Therefore, policy effort is critical to ensure that NTMs serve their intended legitimate purposes.
  5. Poor trade infrastructure and lack of trade facilitation are major challenges hindering cross-border trade among the South Asian countries. In South Asia, most of the trade happens through land ports. The conditions of land ports are far from satisfactory. Inefficiency and excessive costs at ports are further exacerbated by poor customs services. Apart from the delay in obtaining customs clearance, the payment of ‘extra’ money is required to complete the formalities and procedure. Also, inland transportation suffers from poor road communication. All these increase the cost of production substantially. Under this circumstance, many exporters find it extremely difficult to be competitive. An example of the recent initiatives to solve the trade infrastructural problems at border is the setting up of Integrated Check Posts (ICPs) at major entry points on the land borders by the Government of India, to overcome the existing problems of inadequate infrastructure and lack of support facilities and to cater to growing demand of traders on both sides of the border between India and Bangladesh. Such ICPs need to be established at the borders between India and Nepal and India and Bhutan.
  6. Domestic capacities of the exporters in Bangladesh, Bhutan and Nepal need to be improved to meet different international standard requirements. Unless and until these exporters develop their capacities, they will not be able to diversify exports and become competitive in the regional and international markets. A number of supply-side factors at home can actually undermine the exporters’ competitiveness and constrain economic and export diversification. These factors are directly associated with the domestic production and investment environment. Most prominent of these factors are access to finance, weak physical infrastructure, inefficient ports and high transport costs, shortage of skilled workers, technological bottlenecks, lack of entrepreneurship and management skills, lack of information, and high costs of doing business.
  7. There is a need for cooperation among different primary institutions in the BBIN countries to deal with NTMs and POs. There are already some initiatives for such cooperation. For example, Bangladesh Standards and Testing Institute (BSTI) and the Bureau of Indian Standards (BIS), the two organizations controlling the standards of products and services in the two countries, have signed an agreement to add an impetus to trade between the two neighbors. However, still cooperation is needed in a number of areas: (i) There is a need for harmonization of TBT and SPS measures. (ii) Mutual Recognition Agreements (MRAs) among respective organizations of the South Asian countries are needed for specific products or industrial sectors. (iii) There is a need to allocate adequate human and financial resources to Standards Organizations. (iv) The accreditation bodies or agencies of partner countries may set up accreditation centers in collaboration with a designated National Agency to facilitate mutual cooperation with necessary capacity building under technical and financial assistance from mutli-lateral or bilateral development partners. (v) Expedite and prioritize introduction of increased automation of customs clearance procedure. (vi) The South Asian Regional Standards Organization (SARSO), a common certification panel for the member-countries of SAARC, which aims to develop harmonized standards for the region to facilitate inter-regional trade, needs to be strengthened.
  8. There is a need to pursue a policy advocacy strategy to deal with NTMs and POs. It should be kept in mind that the policy makers need to hear very clear analysis, information and updated data on NTMs in the country and the region as a whole. These need to be relevant along with concrete examples for which effective measurable actions can be undertaken. Any vague analysis or recommendations should be avoided, which might make the advocacy ineffective. Analysis should address how much of the magnitude of any NTM has to be solved by the partner country and how much of it is actually related to exporters’ lack of capacity to meet the required standards.
  9. Finally, there is a need put much weight on regional investment and trade nexus. Promotion of intra-regional investments and attracting extra-regional FDIs in goods and services sectors in general, and energy and infrastructural sectors in particular will be a key driver for a greater success in the BBIN sub-region.

 
The press briefing was organized as a part of SANEM Press Briefing Series which is aimed to share and disseminate knowledge on current economic issues. SANEM is a non-profit research organization and a network of economists and policy makers in South Asia with a special emphasis on economic modeling. It aims to promote the production, exchange and dissemination of basic research knowledge in the areas of international trade, macro economy, poverty, labor market, environment, political economy and economic modeling.

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