A Closer South Asia: Re-energizing Regional Economic Integration

and Connectivityand Connectivity

6th South Asia Economic Summit,

Colombo, 2 September 2013

Nagesh Kumar

Relevance of regionalism in South Asia

• Rise of economics of neighbourhood– Regionalism to exploit the potential of efficiency-seeking industrial restructuring, economies

of vertical specialization and regional value chains

• Regionalism for more balanced and equitable development – relatively smaller and poorer economies grow faster because of production

restructuring; economic convergencerestructuring; economic convergence

• Regionalism emerged as a dominant trend in the world economy – with EU, NAFTA, MERCOSUR, CARICOM, SACU, ASEAN, ECO, RCEP, TPP……

• Changed new external context since the onset of 2008/09 crisis• Business-as-usual not an option

• Stalemate in WTO negotiations

• As a late starter, the region has many underexploited opportunities for regional economic integration

• More effective for addressing shared vulnerabilities and risks

• An integrated South Asia will be able to play its due role in emerging broader regionalism in Asia and the Pacific

Global economic integration but little diversification

• South Asian countries emerged as dynamic players in the world economy

– Total trade expected to triple from nearly $10 trillion to nearly $3 trillion by 2017

• Much of the export growth over the past decade benefited from expansion of global demand

9261501

2856

4508

0

1000

2000

3000

4000

5000

SAARC SSWA

Total trade, US$ billion

2011 2017

demand

• Have not fully exploited opportunities of export expansion through product diversification and moving up the value chain

– High concentration on few product lines and few markets, especially the LDCs

• Regional cooperation for moving up the value chain in sectors of common interest

– Garments, tea

– Leverage the Indian leadership to make South Asia as a bpo hub

– Coordination in global trade negotiations and for seeking their concerns

3

2011 2017

-50%

-30%

-10%

10%

30%

50%

70%

90%

110%

Market effect Growth effect Product effect Competitiveness effect

Unexploited potential of regional economic

integration• Bulk of intraregional trade potential remains

unexploited in SAARC – Intraregional exports in 2017 could be $72

billion

• Barriers to realization of intraregional trade– Significant informal trade; estimated $10 billion in

2011– Poor connectivity and trade facilitation: high trade

costscosts– Poor supply capabilities in LDCs

• Multiple overlapping frameworks for regional economic cooperation

– ECO, SAARC, BIMSTEC– Bilateral and trilateral initiatives: Bangladesh,

India and Nepal; India-Nepal, India-Bhutan, Pakistan-Afghanistan; India-Sri Lanka, Pakistan-Sri Lanka, among others

• Significant potential of welfare gains especially for the poorer countries from SAFTA

• India-Sri Lanka FTA has helped in balanced expansion of bilateral trade

• Recent developments have been helpful– India eliminating SAFTA sensitive list for LDCs– Pakistan-India trade moving towards negative list/ MFN

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Exploiting the potential of regional economic

integration• Expediting the implementation of RTAs

• Exploiting the potential of trade in services

• Liberalization of trade under SATIS

• Facilitating intraregional investments

• Early adoption of SAARC agreement on protection and promotion of investments

• Strengthening cross-border banking and financial links

• Capital raising and development finance

• Facilitating cross-border listings

• SAARC Development Fund to catalyze cross-border infrastructure investments

• SAARC, ECO and BIMSTEC consultations and coordination

• Long-term vision and target-setting

• Transport connectivity and trade facilitation

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Towards seamless

connectivity• South Asia better connected with Europe

than with itself

• Poorly developed land routes

• Case for integrated transport corridors

across the subregional groupings to

maximize network externalities

• Major gains from integrating ECO-

TIPI-BM highway corridor

(TUR-IRN-PAK-IND-BGD-MMR)

• Major gains from integrating ECO-

SAARC-BIMSTEC transport corridors:

• 2 proposals• TIPI-BM Highway Corridor• ITI-DKD Container Train

• Each country becomes a hub for each other, region as a hub of East-West trade

• Transport corridors generate economic activity, generate employment and reduce poverty

• Easier to mobilize resources for infrastructure in a broader regional framework with improved viability

• Could be developed following a building block

approach

• Need for a regional transit transport

agreement

Istanbul-Tehran-Islamabad--Delhi-Kolkata-Dhaka (ITI-DKD) Railway Cargo Corridor

Regional cooperation for food security and

sustainable agriculture• A hunger hotspot:

• South Asia is net food exporter but has one third of food insecure people and over half of underweight children

• Rising food prices because of supply side factors e.g. crop failures, rising

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side factors e.g. crop failures, rising cost of inputs, speculation in commodities, biofuel conversion etc.

• Need for a second green revolution based on sustainable agriculture

• Regional cooperation in agricultural R&D for such a green revolution

• Regional food banks/ seed banks

• Cooperation in sharing weather forecasts, addressing pests, vet. diseases

Beginning to exploit potential of regional

cooperation for energy security

Energy security challenges• Exponentially growing demand,

energy poverty, lack of supplies, poor energy infrastructure

• High import dependence for fossil fuels

South and South-West Asia Energy interconnections• High import dependence for fossil

fuels

• Complementarities across region in terms of demand- supply mismatches which can be optimized through grid connections and cross-country pipelines

• Some energy interconnections have taken place, some are in process

• Development of regional energy markets in SSWA through creation of regional energy grids and cross-country pipelines as a part of the incipient Asian Energy Highway

8

Turkey

Islamic Republic

of Iran

Afghanistan

Pakistan

Maldives

IndiaSri Lanka

Nepal

Bhutan

Bangladesh

Central Asia Exports

Exports & Imports

Proposed connection

Regional solutions for disaster risk reduction

Islamic Republic Afghanistan

Bangladesh

ECO SAARC BIMSTEC

Environment

and Disaster

Management

Cooperation

framework

2006 – call for

regional early warning

programmes/ disaster

preparedness

Male Declaration for

Early Warning,

Disaster

Management and

Disaster Prevention

framework

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Turkey

Islamic Republic of Iran

Afghanistan

Pakistan

Maldives

India

Sri Lanka

NepalBhutan National Centre for

Medium Range Weather

Forecasting (NCMRWF),

India - Nodal centre for

disaster early warning

framework

SAARC Disaster

Management Centre

New Delhi 2007

Regional Integrated Multi-

hazard Early Warning System

covering South Asia –

secretariat in Maldives.

Asian and Pacific centre for the

development of disaster

information management (APIDM)

in the Islamic Republic of Iran

Annual Conferences

on Disaster Risk

Management

Global partnership for LDCs and LLDCs• Istanbul & Almaty programmes of action

• Major handicap for LDCs is poor productive

capacity – ESCAP Index of productive capacity the relative position of SSWA

LDCs is very low and has gone down

– Small base of investible resources

– LLDCs have additional handicap of access to seaProductive capacity in SSWA LDCs

Standard deviations from global average– LLDCs have additional handicap of access to sea

• National measures to address their constraints

– Stable macroeconomic framework

– Industrial policy and infrastructure development

– Domestic resource mobilization

• International support measures

– FDI, more effective ODA, innovative financing

– Market access, aid for trade

– Connectivity and transit facilitation

– Rise of South-South cooperation (e.g. China, India and Turkey now spend around US$ 1 billion per

year each in S-S cooperation)

– Also voluntary duty-free-quota-free market access Source: ESCAP productive capacity index

Standard deviations from global average

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Concluding remarks

• Regionalism assumes a new criticality in the changed external context

• Time to move towards the vision of integrated South Asian economic space, connected with itself and rest of the region

• Need to expedite the implementation of RTAs and further • Need to expedite the implementation of RTAs and further deepen them

• Importance of services liberalization and investment promotion

• Recognize the criticality and potential of regional transport and energy connectivity

• Closing the infrastructure gaps and upgradation of others

• Regional transit agreement to enable cross border movements

• Play due role in incipient broader regionalism in Asia and make the 21st Century the Asian Century

Thank you

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