South Asian economic integration?

Dhar Even though South Asian countries have agreed to put in place the mechanism to promote free trade amongst themselves, it is still doubtful if they will actually move towards economic integration.

The spoiler could, once again, turn out to be Pakistan, which, for tactical reasons, is buying peace with India now to get over its many difficulties but may, in due course, revert to its confrontationist posture.

Pakistan has accepted the South Asian Free Trade Agreement at the recent Islamabad SAARC Summit and to operationalise it by the end of 2006, but its leadership continues to harbour reservations about allowing unrestricted entry to Indian imports and also exports to India, to the extent feasible, given the limited span of its economic superstructure.

During my recent Pakistan visit, it was heartening to see that the people harbour a strong desire for strengthening political and economic relations with India, burying the controversial and hostility-ridden past and open a new chapter of cooperation which would boost the living standards of millions of the people living in the two countries.

Savings in defence expenditure would also make resources available for development and upgradation of social services, which, in Pakistan, are practically non-existent.

Textiles are Pakistan's strong point and revolutionary changes in the world textile trade are expected after 2004 when the quota system ends and a free-for-all in this sector prevails.

Textile exporters of the world are getting ready for the new challenges, including small entrepreneurs in Pakistan.

It is realised that, to survive, Pakistan has to upgrade technology to improve its manufactured products and produce cheaply to meet international competition.

It is no use arguing that Pakistan is a small country and hence cannot compete with India, because small countries like Belgium, Denmark and the Netherlands, living in the neighbourhood of France and Germany, are thriving with industries known for their excellence.

They are focussing on core areas of competence and competitiveness and upgrading their capabilities constantly through research and market surveys.

Pakistan's industrialists and exporters have to learn to accept lower profits and spend more money on research and market surveys.

Hence, fears regarding free trade are unjustified.

Actually SAFTA does not introduce free trade, but merely sets up a framework in which a free trade area is to be set up.

It is not a customs union and does not imply need for coordination of economic policy that would, in any way, compromise the economic sovereignty of the members.

It does not prevent any country from restricting imports from another country.

But, it is not clear how far SAFTA, when it comes into effect, will take into account the effect of domestic subsidies on the prices of products.

For instance, the Indian farmers enjoy huge power subsidies, whereas Pakistan farmers do not, which makes a difference to the price of the end product.

Judging by the experience of the European Union, agricultural issues are likely to be the most contentious.

Pakistan, India and Sri Lanka are committed to reducing their tariffs to the zero to five per cent level by 2013, the rest of the SAARC countries by 2016.

The significance of January 1, 2006 when the agreement will come into effect upon notification by the member states is that it is the cutoff date for all governments to file their lists of "sensitive items" to which tariff reductions will not apply.

That will set the scene for prolonged negotiations and many trade-offs.

The expectation is that the SAFTA Agreement will not be a non-starter like its predecessor SAPTA (South Asia Preferential Trade Agreement).

SAFTA is taking place within less than a year to go before the WTO regime comes into effect and can be seen as a desperate measure to create a defence against this.

The WTO framework accommodates pre-existing regional arrangements, like the European Union, ASEAN and NAFTA, but the rules change for those free trade areas, which comes into existence afterwards.

Though SAFTA will not have been operationalised by the time the WTO comes into force on January 1, 2005, the framework agreement being signed will give it the relevant benefits.

However, India is trying to speed up the process by mentioning 2015 as a target for economic union, rather than 2020.

As far as single currency, which was not put on the agenda, it is not being considered seriously at this juncture.

No doubt, India and Pakistan have embarked on a process of reconciliation after a frosty two-year period.

South Asia represents an extreme conflict of realities.

Between commonality and exclusivity, past and present, and the challenge of our times and reluctance to meet them.

This is one of the most contiguous regions in the world with commonality of historical and cultural roots.

Yet, the present is marred by distances that are, in turn, in conflict with the demands of the 21st Century.

Despite living in a global village, the two South Asian giants are separated in many ways.

Facing similar problems ranging from poverty and unemployment, their failure to harness natural and human resources to finding palpable space in the world, they have yet to learn how to be reliable partners in overcoming the maladies and backwardness.

It is now being realised in Pakistan that this can be achieved only through political harmony in the region, for which a beginning has now been made.

The tragedy is that a substantial portion of resources is diverted to military spending and very little is available for human development.

The greater the challenges, the more helpless they feel in tackling the same, as they have not learnt to live like good neighbours.

Answers must be found and found soon because their postponement will spell disaster.

It needs to be noted that South Asia has the most complementary economy for any region in the world.

It has been historically so and has continued with the introduction of new technology and equipment.

Historically also, South Asia has exported both ideas and material and remains a region which can, both as individual nations and together, feed and clothe, its people and still have sizeable surplus for export.

But, the ruling clans have kept the people down and prevented their energies from being harnessed for individual and common good.

There is still hope left that efforts be made sincerely to find a solution to the ghastly errors of the past, to rise above ethnicity and think collectively as South Asians committed to each other's welfare and prosperity.

Mutual recrimination and confrontation has harmed Pakistan more than it has India and the people realise it.

SAFTA cannot be regarded as a satisfactory agreement on all counts, but its significance lies in the fact that India and Pakistan have, at last, agreed to come closer economically without first resolving their political problems.

For instance, the treaty does not include trade in services, which is emerging as a major sector.

Actually, the Eminent Persons Group had suggested a more comprehensive and ambitious agreement in its report to the Secretary General.

These included achieving SAFTA by 2006, a Customs Union by 2015 and an economic union by 2020.

But the SAARC leaders have not mustered courage to accept these ambitious goals.

The Islamabad Declaration only makes a vague reference to the commitment at the Kathmandu Summit in 2002 for the creation of a South Asian Economic Union.

Another deficiency is leaving unnegotiated many critical points necessary to ensure its success.

These include drafting of rules, creating a fund for least developed countries, for loss of revenue reduction of customs duties and fixing deadlines for negotiating various unresolved issues.

Nothing has been done to ensure that the least developed countries should derive equitable benefits from SAFTA.

Bangladesh, for instance, has strong reservations on this subject and wants special and differential treatment for the LDCs.

The Eminent Persons Group had also suggested the creation of a SAARC Development Area.

Asian Security Grid, vertical industrial integration and harmonisation of fiscal and monetary policies.

The SAFTA also does not contain and provisions for pursuing the "additional measures" proposed in it, which gives the impression that it was a job done in a hurry and without seriousness of purpose.

The major players in the field, of course, remain India and Pakistan, which are trying to mend their relations and draw closer economically-at least the speeches of their leaders suggest this.

The official Indo-Pak trade in 2001-2002 was $204 million, but the unofficial figure is closer to $6 billion.

India's official trade with Bangladesh-the size of whose economy is a third of Pakistan's-is one billion dollars.

The two countries have not always had such poor trade.

Even after Partition, India was Pakistan's most important trading partner and 56 per cent of its exports were directed towards India and 32 per cent of its imports came from India.

Lahore and Amritsar were important trading hubs, as trade flourished with free flow of goods and services.

But, by 1950s the trade was reduced to a trickle and has not revived since due to strained relations between the two countries.

The biggest benefit of improved political relations between India and Pakistan could occur in the sphere of energy cooperation.

Pakistan's potential role in facilitating transmission of energy supplies, of which India's demand will grow at a tremendous speed, could be providing the transit route for oil and gas from Iran and Central Asia.

This would require construction of at least two pipelines running through Pakistan.

India has so far shown reluctance to accept energy supplies via Pakistan, but the scenario might change if relations between the two countries really normalise.

Huge investments on the pipeline will make sense only if political stability and economic realisability of the projects are ensured.