ECONOMIC INTEGRATION OF SOUTH ASIA: THE ROADBLOCKS

by Nidhi Goswami (Intern, ICWA, New Delhi & Postgraduate Student at South Asian University)

INTRODUCTION

Regional integration is the phenomenon of the day as more and more countries become party to one regional organization or the other. In the level of analysis, regions are vantage points, below the level of the global and above the national level. Therefore, for the study of International Relations, they are ideal to determine and understand the behavior of states towards other states. As regions are constructed, so are regional groupings are constructed by states. Although, countries that are part of a regional organization, mostly, are geographically contiguous, the delimitations of a region are set by states in the pursuit of their national interest, for realists, in the spirit of cooperation, for liberalists. According to the scholars of regional integration, it is not a nouveau phenomenon and the likes of regional integration initiatives were seen by nineteenth century Europe in the face of the Bavaria-Wurttemberg Customs Union, the Middle German Commercial Union, the German Zollverein, the North German Tax Union, The German Monetary Union and the German Reich (Mattli, 1999) that interestingly were created to achieve economic integration, the aspect of integration that the paper would focus on. However, Walter Mattli terms these regional integration processes as ‘voluntary regional integration initiatives’ (Mattli, 1999), that reaffirms firstly our premise that regions and regional groupings are constructed and that they do not occur naturally and secondly that states delimit or define these regions to achieve their stated objectives.

World Bank scholars Maurice Schiff and Alan L. Winters while focusing on the aspect of trade in regional integration processes, highlight how trade since the 18th century has been considered as a facilitator for creating and maintaining peaceful relations between countries. They attribute the trade dynamics to peaceable relations between countries by highlighting its role in trust-building between states as due to high economic interdependence, the costs of war go up that discourages them further from increasing uneasy frictions between them.

The paper would thus, try to make economic logic of integration its focal point as it deals with the prospects for South Asian economic integration. The paper also highlights the apprehensions of South Asian states that deter them from economic integration.

TRADE IN SOUTH ASIA AND THE ROADBLOCKS

The present status of trade in South Asia is meagre. According to the World Bank, it is one of the least integrated regions in the world with intra-regional trade accounting for even less than 5% of total trade. The region has a distinct geography with India, the largest in terms of area, population and economy at its center and a shared historical affiliation and cultural heritage among almost all the states in the region. The region also is characterized by an institutional arrangement for cooperation i.e., the South Asian Association for Regional Cooperation or SAARC, although, but intra- state economic cooperation remains a distant dream.

World Bank scholars Sadiq Ahmed and Ejaz Ghani discussing the potential for trade in South Asia say that South Asia has since the 1990s, recorded 6% of economic growth per annum and this is remarkable as other developing states in this period had ceased to grow at such a pace (Ahmed & Ghani, 2006). Apart from India, improvements in trade potential were noticed in Bangladesh and Pakistan. To Ehsan and Ghani, these changes were mostly policy induced as it meant greater global integration, macroeconomic stabilization and economic deregulation. This made the South Asian economies more competitive and attractive to foreign investors. But trade protectionism towards the South Asian neighbors remained the characteristic feature of South Asian states. Measuring the level of economic integration of a region in terms of intra-regional trade in goods, capital and ideas South Asia ranks very poorly. Intra-regional investment too remains negligible.

The South Asian states have not been able to extract benefits of their geographical proximity and historical or cultural affinities. Potential also remains unrealized of the gravitational pull of goods, people and ideas that could have facilitated trade within the region. The states of South Asia have experimented with a South Asian Free Trade Agreement (SAFTA) but even that has not been able to record much success as the number of items included in the ‘sensitive’ lists of trade items is more than the positive ones. Priyanka Kher, in an UNCTAD report notes that the pre-conditions required for successful regional integration as laid down by the World Bank are all almost missing in the South Asian Region thus hampering the integration process (Kher, 2012).The other restraining factors include high trade costs and investment restrictions , insufficient policy-relevant analytical work on gains of regional integration in both trade and investment in order to make informed policy decisions, skeptical mindset from previous failures in regional cooperation, misinformation, and lack of vocal champions for regional cooperation, relative asymmetry in size among the South Asian countries, historical political tensions, mistrust, cross-border conflicts and security concerns, limited transport connectivity, logistics and regulatory impediments (Ahmed & Ghani, 2006). While these are some conventional reasons attributed to the low amount of interest states in South Asia display in integrating, there are some technical economic considerations that also need to be taken into account.

The Backwash Effect of Integration as proposed by Gunnar Myrdal who said that if one part starts growing or developing, it attracts human and physical capital to gravitate to that region and it therefore leaving the other areas disadvantaged. It means that growth in one area could adversely affect the growth in another area. The asymmetry in the size of the states and their economies in South Asia is disadvantageous to the regional integration process. The smaller states in the region are apprehensive of an Indian economic domination of the region as India being the largest manufacturing and service producing economy of the region, in a free trade agreement area could create a pull factor for capital, humans and ideas from all the smaller states of the region with comparatively smaller economies. This would jeopardize the development potential of the smaller states as Indian economy would continue to benefit from this integration at the expense of the other smaller states. According to Maurice Schiff and Alan Winters, this usually produces an opposite effect as states would not be willing to lose out their benefits to other states in the region. As all of these economies are categorized under developing or least-developed countries, the central leadership in these states somehow feels that integration has more costs than benefits.

The second reason could be related to the trade creation and trade creation aspect of integration. It means that trade creation in a regional grouping, because of being preferential, takes the trade away from a state that is not part of the regional agreement. This could be problematic as cheaper and qualitatively better imports from a state could be replaced by average products from a regional partner. This brings inefficiency into the market. This could be exemplified by a hypothetical situation in which after signing a regional trade agreement Bangladesh imports computer parts from India that are average in quality compared to the South Korean imports it previously got that are better in quality and cheaper than the Indian product. This is mainly because India did not have a comparative advantage in computer parts manufacturing but because Bangladesh was obligated under an agreement, it had to make do with average goods from India. The developing industries in these small states require raw materials and production resources at rates that are cost effective.

While dealing with hurdles in economic integration processes, one cannot undermine the role of domestic business and industrial lobbies in hindering free trade between countries. As every state seeks to develop its domestic production capacity, it would not like to be much dependent on other states for the same. Also important is to note that the industries in small states are sometimes not able to compete with products from economically and technologically developed nations. Allowing imports from other states therefore involves the risks of its domestic industries and businesses being subjected to losses as they would not be able to withstand the competition for long. Therefore, the business and industrial lobbies do not support the states’ policies in going in for integration especially when it involves the risk of being subjected to competition from cheaper and better imports from other states of the regional grouping. This could be the case in smaller South Asian states too as their industries are still at a developing stage. Although, this does not deter them from participating in global trade, but the obligations accompanied by entering into a regional trading agreement seem threatening to their individual interests.

However, according to Ahmed and Ghani, if the South Asian countries decide to strengthen the already existing SAFTA, smaller states stand to gain more from it as they will have access to large and rapidly growing markets in India. Smaller states in the region like Sri Lanka, Pakistan and Bangladesh stand to gain more from it than India (comparing its percentage to its total trade) (Ahmed & Ghani, 2006).

CONCLUSION

So, what is the way forward for South Asian integration? The South Asian regional integration process would involve a multi-pronged strategy of integration important to which are the various theoretical frameworks we have covered in the paper. While a federalist argument would seem more like a distant dream, the functionalist and neo-functionalist ideas on the initiation of regional integration arrangements seem more effectual. This would mean increasing cooperation on various fronts including environmental and energy policy to social welfare policies like combating hunger and terrorism, fighting human trafficking etc. to explore ideas of establishing a common market. But, more importantly the task still at hand is to bring the ‘South Asian Identity’ into the mainstream discourse to nurture the feeling of belongingness and mutual interdependence in the region.