In a regional trade agreement where five out of eight members are LDCs, such a gesture is reflective of the salience of helping these countries catch up with the relatively better-off countries in the region.
Sustainability of any such arrangement depends on the extent to which benefits are equitably shared by all the participating countries. The European Union, which is considered by far the most successful example of a RECA, has been at the forefront of this initiative, which is demonstrated by what can be considered as a “distributional sensitive” strategy. A concrete example, provided by L.
Alan Winters is that the European Regional Development Fund was created to assist relatively poorer countries—Greece, Portugal, Spain and Ireland, the late entrants to the Union—and significant transfers were made to these countries in order to help them address their supply-side constraints, build credible institutions and, indeed, catch up with the rest of the members of the Union.
Although SAFTA, in effect since 2006, is not expected to transform the historically tardy process of regional economic cooperation in South Asia, nearly four years of implementation record of the agreement leave much to be desired. The problem is further exacerbated by the fact that LDCs, with the possible exception of Bhutan, are increasingly being marginalized from the regional trading arrangement.
Their imports from the region are increasing more rapidly than their exports to the region, with the result that their shares in intra-regional exports have been shrinking, resulting in widening trade deficits. Although Afghanistan is a recent entrant to the SAFTA and baseline data for Bhutan is not available, Bangladesh is the only LDC in the region which has managed to increase its exports to the region more than its imports from the region.
The intra-regional exports of both the Maldives and Nepal have failed to keep pace with the rise in their intra-regional imports, while the reverse is true for developing countries such as Pakistan and India.
One of the major reasons for the LDCs’ inability to take advantage of SAFTA is the persistence of several market access barriers. However, often overlooked are the supply-side constraints faced by these countries, including lack of adequate infrastructure, human capital, technology and finance that are needed to enhance the competitiveness of LDC exports.
A policy paper prepared by the Coalition for Action on South Asian Cooperation (CASAC) on regional integration had realized as far back as 2001, overcoming supply-side constraints and improving competitiveness of LDCs’ exports to the region hold the key to the sustainability of SAFTA. It suggested the “creation of a reasonably large sized fund” for the development of LDCs’ infrastructure, human resources, and export production and diversification capacity. Despite its potential contribution to enhance regional integration, not much attention has been paid to this issue.
Therefore, the revival of this issue during the Sixteenth SAARC Summit to be held in Bhutan on 28–29 April through a commitment at the highest political level of SAARC to create an LDC Integration Fund (LIF) would be a welcome development.
Regarding the modalities of the creation and operation of the LIF, as the “reasonably large sized fund” is not defined, it is important to first determine the size of the fund. Though it is difficult to quantify the size of the fund without adequate need assessments, an indicative portfolio with an annual contribution of US$1.1 billion, calculated at 0.07 percent of the gross domestic product of SAARC Member States, can be created.
The figure of 0.07 percent is 10 percent of what the United Nations has urged the “OECD Development Assistance Committee” to contribute in the form of Official Development Assistance (ODA). Similarly, with regard to its financing, the following modalities can be considered.
Core contributions: There are three major types of core contributions. First, Member States should contribute at least 50 percent of the resources based on their share in intra-regional trade. Second, SAARC observers can contribute 25 percent of the total requirement. Third, other multilateral and bilateral donors can contribute 25 percent of the total requirement. The last two contributions should be in addition to ODA commitments.
Project-based contributions: Since creating regional public goods such as cross-border road linkages, communication and trade facilitation are among the priority agendas of the World Trade Organization’s aid-for-trade initiative, it would be possible to capitalize on this for project-based funding. Examples include: A multi-donor North-South corridor initiative, jointly implemented by three regional groupings in Southern Africa; and Asian Development Bank-funded Greater Mekong Subregional Project and South Asian Sub-regional Economic Cooperation Programme, though the latter is yet to show tangible results.
Though the Second Meeting of the Sub-group on Technical Assistance to Least Developed Contracting States under Article 11(d) of SAFTA, as discussed above, has identified 10 areas and some of them can be counted as assistance for addressing the LDCs’ supply-side constraints, progress on this front is minimal. While the non-implementation has its roots in the “best endeavor” nature of this provision, the areas identified do not include “hardware” components such as creating infrastructure. To make this initiative effective, it should be regionalized and merged with the proposed LIF, with the developing Member States in a position to provide such assistance making direct contribution to the LIF, over and above their core contributions.
While the operational modality could be decided once the funding issue is settled, entrusting a professional management team with the responsibility to manage the fund is a sine qua non for the successful implementation of the projects in priority areas.
The following represents an indicative list of priority areas at regional and national levels, in addition to what has already been identified by the above-mentioned Sub-group on Technical Assistance: Development of transport corridors to improve regional connectivity and rural access; construction of a regional grid to facilitate trade in electricity and a regional pipeline to transport petroleum products; trade facilitation, particularly modernization of customs; construction of laboratories and testing facilities; and construction of warehouses and cold storages to facilitate trade in agricultural products.
ratnakar.adhikari@sawtee.org
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