Nepali economy is relatively open among South Asian countries; its trade volume is almost 40 percent of its GDP. Similar figure is about 18 percent in case of Sri Lanka, 9 percent for Bangladesh, and 4 percent for Pakistan and 2.5 percent for India. On the import front, the average import tariff rate to non-agricultural products is about 18 percent in Nepal, 19 percent in Pakistan, 22 percent in India, and 26 percent in Bangladesh. Nepal imposes about 20 percent import duties to agricultural products compared to 28 percent to 40 percent in case of the majority of the countries in the region. These empirics reveal differing degrees of openness of the economies in the region despite their association in the common trading block.
Within the SAARC region, Nepal trades almost 35 percent of its overall international trade compared to 10 percent of Sri Lanka and 5 percent of Bangladesh. The picture is embarrassingly low in case of India and Pakistan; these biggest and second-biggest economies in the region share less than 3 percent of their international trade to the regional member countries. A significant share of Pakistan’s international trade is with other Muslim countries whereas that of India with US and European Union countries. These pictures disclose that South Asian economies have still a long way to develop natural partnership in foreign trade; so far socioeconomic relations have become important factors in developing trade relations rather than physical proximity.
South Asia needs to develop some strategic measures to promote regional trade and create export potentials in the global market. Import liberalization within the region can become an opportunity to the economies in the region in developing import competition and ultimately fostering its export potentials in the global market. This idea stems from infant industry argument that supports protection to the infant industries for some time but once the industry becomes adult, it should be exposed to external competition. Although some argue that regional trade openness does not make much sense if the country already has WTO accession, the reality is that trade openness in the region helps develop competitiveness gradually that creates a background in becoming able in facing fierce competition at the global market. Therefore, regional trade integration also gives opportunities to the relatively small and backward economies such as Afghanistan, Nepal, Bangladesh and Bhutan.
THE PATH AHEAD
Fibre and textile production in South Asia lacks adequate diversity; therefore, their demands in the international market are quite limited. South Asian fibre and textile is considered costly and cotton-based. The high costs are due to numerous non-tariff barriers, fuel and transportation cost, low factor productivity, and many local taxes. These have caused weaker performance of South Asian exports as compared to its major competitors in the global market – East Asia. Moreover, notwithstanding East Asian economies, poor South Asian countries Nepal and Bangladesh are competing to export their garments and apparels at the same US and Western Europe market. Only after that, the competition is with East Asian suppliers. Solving this problem is an urgent need. India and Pakistan are known as textile exporters in the global market but other countries in the region do not possess that potentiality whereas Nepal, Sri Lanka and Bangladesh do export garments and apparels. However, the last three years of statistics reveal that more than 80 percent import of textiles and fibres in Bangladesh and Sri Lanka come from non-SAARC countries. Therefore, vertical integration of major industries in South Asia requires top priority in trade agenda.
Regional trade in South Asia has not effectively penetrated to the region to the extent it was envisaged a couple of decades ago. For a strong regional economy, different industries in the region require vertical integration among them.
To make this prospect materialize, two major economies of South Asia – India and Pakistan – require export facilitations to other South Asian countries, at least to fabric and textiles. Furthermore, small economies such as Bangladesh, Sri Lanka and Nepal whose export potentials are mainly based on imported raw materials require some export facilitation in the South Asian market at least for garments and apparels. The diversifications require right from the production of textiles and apparels and should be reflected in the export of readymade garments and other apparels. In this approach, the export competitiveness develops at unison within the South Asian market first and then it extends to the global market. It also helps in defining the identity of South Asian export potentials with adequate product diversification.
There are a few other issues that also need efforts. Regarding the rules of origin, several problems are apparent and the exporters need to pass through them not only in case of textile and garment products but in almost all exportable items. Every country in the region has a long list of sensitive products that block the entry of substitute goods from another SAARC country. Studies show that import liberalization among regional economies is beneficial before export diversification; and SAARC countries need to realize this fact to open their markets for each other and improve their factor productivity and eventual export competitiveness.
Another important issue is to address the factor and product market liberalization along with inter-regional investment. So far, SAARC has a major focus on product market liberalization and less attention to factor market liberalization. On top of that is the growing need of inter-regional investment that is expected to result in low cost supplies of primary raw materials, improvement in production efficiency, and reduction in business risk. Besides, if the free movements of the SAARC country people come in effect, it fosters the free movement of both labor and capital in the region that is expected to bring factor reallocation effects on overall growth of the region. SAARC countries should streamline the port and cargo services to enhance the movement of people and merchandise products within the region.
NEW VISION
Regional co-operation is a dynamic issue that goes on changing over time. If needs are felt very strongly, the regional cooperation becomes very strong and productive. The example of ASEAN (Association of South East Asian’s Nations) in which Cambodia, Brunei, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam are members, is very pertinent in this regard. The association was established for the welfare of the poor farmers living in the Mekong-delta region. The regional cooperation among member countries for the productivity growth in the delta region made regional cooperation very tangible since the very beginning. Later, regional cooperation was linked with trade. Furthermore, establishment of East Asia Energy Conservation Program was considered necessary to boost the economic growth in the region.
South Asia also possesses a bright future due to the constant emergence of new entrepreneurial groups in the region. This new generation is more skillful, updated with new technology, with an aptitude for harnessing regional opportunities and better educated to address the challenges of increasing volatility in this globalized world. India being the biggest and fastest-growing economy in the region should help in tapping this potential in the region.
South Asia needs to extend cooperation with big and emerging Asian economies of Japan, China and South Korea. Although Japan established SAARC-Japan fund in 1993 to foster economic growth in the region, South Asian economies were not able to enjoy fruits from it. Japan has been the single-biggest donor to the economic development of all the member countries of South Asia for the last two decades. Technology transfer should be the major agenda of Japanese investment and cooperation in the region. Likewise, growing economies of China and South Korea are not only rising stars in Asia but also in the whole world especially for the consumer market and electronic and metallic industries, respectively. Increasing cooperation between ASEAN countries and these three countries began as early as 1990. Now the ASEAN summits comprise ASEAN plus Three from 2006. Similar vision is essential in South Asia as well.
sanjaya@newera.wlink.com.np
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