RAMESHORE PRASAD KHANAL
A group of 12 people, ranging from former finance minister of Pakistan to a prominent NGO activist of India, met in Kathmandu a couple of weeks ago under the banner of South Asia Region Chief Economist´s Advisory Council of the World Bank. They are not movers and shakers in the region but they certainly are opinion makers. For some reason, council members from Afghanistan and Maldives could not participate. The first part of the meeting centered on themes that each country in the region is trying hard to grapple with such as food inflation, poverty and inequality and approaches to generating more productive jobs. During the second part of the meeting, council members were broken into three groups, each given the same question to answer.
The question was: What should be the areas of research that would help shape better economic policies in the region? It was an open-ended question without any guidelines and limitations. After about two hours of discussion, the groups came back to report to plenary. The first group explained how South Asia remains a least integrated region in the world in spite of so much of cultural similarity and potential for growth from within. The group recommended that action-oriented research on regional economic integration be the focus of the World Bank intervention in the coming years. The second group stood up to say “ditto”. The third did the same in sequence. It is rare for one to see such similarity of thought in South Asian forums.
South Asia is home to over 1.5 billion people accounting for almost a quarter of world population and around a third of the population lives in extreme poverty. South Asia is a single biggest market in the world, however, its internal dynamics have remained very poor for individual member countries to take advantage of this market and consequently reduce poverty. Intraregional trade is less than 2 percent of GDP, while the same is 20 percent for South-East Asia. Under SAFTA, efforts have been made to ease trade barriers, but much of the focus seems to be on easing tariff barriers. The recently concluded SAFTA Ministerial Council agreed to prune down the sensitive list by as much as 20 percent in the current list by the next SAARC summit. Member countries have implemented agreed reduction in tariff. The total trade volume has not gone up sizably commensurate with the trade liberalization policy because of severe non-tariff barriers. Although tariffs have gone down and so has the sensitive list, the cost of trading across borders in South Asia is one of the highest in the world. Trade between Nepal and Bangladesh through Fulbari-Banglabandh land route gives a pathetic scene where trucks from each side join their backs to ferry consignments. In the absence of harmonized approach to quarantine, quality assurance and paperwork, intra-regional trade has remained wishful thinking.
There are two more barriers to effective trade within the region. The cross-border transport and customs infrastructure in the region is very poor. If SAFTA is to yield any result, improvement in trade infrastructure is a must. Asian Development Bank (ADB) through South Asian Sub-Regional Economic Cooperation (SASEC) has been focusing on improvement of transport infrastructure in the quadrangle of Bhutan, Bangladesh, India and Nepal but the actual move on critical infrastructure has been slow. The other barrier for trade between small producers in the region is currency. Trade between most of the countries are carried out in US dollars, as a result there is little preference for goods originating from within the region. A simple mechanism of currency swap would help small producers in the individual countries find market within the region. If countries agree to allow trade of up to a certain range in the currency of respective countries and central banks swap such currency reserves periodically, then the trade within the region can get a boost even without making much improvement in the other non-tariff barriers. A simple currency swap arrangement can, in course of time, lead to full convertibility of currencies in the region. If a currency swap arrangement is agreed upon by all central banks of South Asia, then currencies would not be required to move physically as most of the settlements will take place in the books. The net differentials may only be moved physically once in agreed period framework. Exchange rates between the two currencies may be allowed to move as the market conditions demand, except in cases where two currencies are pegged with each other.
South Asia boasts of rapid rise in tele-density in the first decade of this millennium. However, one study shows that only 7 percent of the international calls are regional, which compared to South East Asia’s 71 percent is meager. This is an indication of how low the economic integration in the region is.
Currency swap arrangement would also open up two other potential areas in the region, namely, tourism and education. If a Bangladeshi needs to cough up US dollar to come to Nepal, he/she might choose to go to Thailand in place, so does a Nepali. Many Sri Lankans would like to come to Nepal to visit Lumbini and Nepalis would just as love to go to Kandy in Sri Lanka. Many Nepalis each year travel to New Delhi but few think of going to Lahore or for that matter Karachi. Countries in South Asia have world-class educational institutions but because of currency restrictions many good Pakistani, Bangladeshi or Nepali institutions do not receive South Asian students. If one has to procure US dollars for foreign education, the natural choice would be a country outside South Asia. Currency swap arrangements would also promote students mobility in the region. Visa restrictions have not been such a problem for many in the region, but in critical cases, this has been an issue. It is reported that the recently established South Asian University, funded by all member countries on the basis of an agreed formula, has been facing difficulty receiving Pakistani students and academicians due to visa-related problems.
South Asia is energy deficient. All of the countries in the region have power shortages of one or the other type, while a substantial portion of the potential remains unutilized. Nepal and Afghanistan have used less than 1 percent of the generation potential they have. Only Bhutan and India in the region have better arrangements for power trading. Transmission link among other countries is either non-existent or very limited. If South Asia is to create better investment climate in the region and prosper, then energy connectivity is a must.
South Asia boasts of rapid rise in tele-density in the first decade of this millennium. However, one study shows that only 7 percent of the international calls are regional, which compared to South East Asia’s 71 percent is meager. This is an indication of how low the economic integration in the region is. Until a few years ago, calls within the region were far more expensive than calls to North America. Call rates have dropped a bit with the entry of private operators in all countries of region, but mobile roaming charges are still exorbitantly priced. With advanced technology and optical fibers, telephone calls in the region can be offered at local rates. Better ICT integration can be achieved without much political problems.
While half a billion population in South Asia lives in poverty, an estimation puts that about a million people will join labor force each month for the next decade in the region. This is an immense challenge and this can only be faced effectively with enhanced economic integration of the region.
The past efforts for economic integration have not been adequate. Aside from the formal forums of SAARC, there is little political traction at the operational level. India remains the key but more than the central government, the state governments of the Indian Union bordering SAARC countries such as Uttarakhanda, UP, Bihar and West Bengal for Nepal, West Bengal and Assam for Bangladesh, Punjab, Rajasthan and Gujarat for Pakistan and Tamilnadu for Sri Lanka need to realize the importance of regional economic integration for their own benefit. That is where political traction is missing at this point. SAARC forums do not debate at that level. A very important issue but often less debated is the security perception and the role of Intelligence Bureaus (IBs) of countries in the region. IBs everywhere in the world secure their business by projecting the darker side of the problems and fail to highlight the opportunities. Whatever said and done, South Asian Regional economic integration cannot gain momentum and speed as long as IBs in the region do not modernize themselves and think differently.
Peace and stability in the region can only be achieved if people see improvements in their economic life and this would be possible by promoting economic integration of the region. This seems to be the realization in every country. Now is the time to put them in action. Fortunately, for the first time in history of the region, all countries have elected governments. Therefore, this is the right time that some of the less painful but concrete steps are implemented for economic integration.
The writer is former Finance Secretary
rameshorek@gmail.com