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Growing Trade, Investments and Global Integration Recent developments in South Asian countries (SACs) – the re- emergence of democratic governments, new growth momentum despite the global economic downturn and greater openness – warrant a fresh look at the region’s prospects for further liberalization SA is currently the 2 nd fastest-growing region in the world – GDP in SACs has grown strongly at about 6% since the 1990s, and almost 7% in during and around 6% in the post-2009 period This higher growth trend is directly attributable to the opening up of the economies among other factors Trade and investment reforms implemented since the 1980s & 1990s have increased the region’s level of global integration: trade and FDI have grown consistently since then Since opening up, trade dependence ratio of all SACs have increased and shown an increasing trend over the years, and all SACs have shown high growth of exports and imports
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Opportunities and ChallengesSaman Kelegama
Institute of Policy Studies of Sri LankaSAFA Conference 2016, Lahore, 30 January 2016
Outline of Presentation
Growing Trade, Investments and Global Integration
Challenges still Remain
Trade and Investments – Opportunities
Trade and Investments -- Impediments
Trade and Investments – Challenges
Way Forward
Growing Trade, Investments and Global IntegrationRecent developments in South Asian countries (SACs) – the re-emergence
of democratic governments, new growth momentum despite the global economic downturn and greater openness – warrant a fresh look at the region’s prospects for further liberalization
SA is currently the 2nd fastest-growing region in the world – GDP in SACs has grown strongly at about 6% since the 1990s, and almost 7% in during 2004-2009 and around 6% in the post-2009 period
This higher growth trend is directly attributable to the opening up of the economies among other factors
Trade and investment reforms implemented since the 1980s & 1990s have increased the region’s level of global integration: trade and FDI have grown consistently since then
Since opening up, trade dependence ratio of all SACs have increased and shown an increasing trend over the years, and all SACs have shown high growth of exports and imports
Substantial Challenges Still RemainWhile the advent of globalization has ushered in a new era of economic
growth and development in SA, the region remains mired in highly uneven and polarized growth patterns
Poverty remains a big challenge for the region – the incidence of poverty is still high and the absolute number of people living below the poverty line has actually increased
Low intra-regional trade between SACs has been a constant concern at less than 6% of SA’s total trade with the world, compared to 52% in East Asia and the Pacific, 17% in Latin America and Caribbean and 11% in Sub-Saharan Africa (ADB 2009)
Cross-border trade in services remains low and so is investment --negligible at around 1 %
In the context of the current economic slowdown in industrialized countries, the case for stronger regional ties becomes all the more important
Opportunities
Trade in GoodsSACs trade with the rest of the world has been
growingIntra-regional trade is at US$ 20 bn and amounts to
5.8% of South Asian global trade, but this figure may be close to US$ 45 bn if the informal trade taking place in the region (estimated at US$ 25 bn, RIS, 2015) is also taken into account
South Asian informal trade has been growing at 112% between 2005 and 2012 (RIS, 2015)
With a growing youth bulge and increasing middle class consumers in the SACs, the demand for intra-regional trade will be more in the coming years
Agriculture and industry still paly a vital role in SACs and these two sectors can play a vital role in stimulating regional trade
Exceptional Growth of Trade in ServicesTrade in services and investment flows have been the key
drivers of many economies in recent decades – services have become the single largest sector in many economies
The 'new economy' of the 21st century refers to a services-based economy and SACs are no exception, with over 50% of GDP in many SACs
Growing contribution of services to region’s trade basket and high growth of services exports: Consistent increase in SA’s share in world services trade over the
last 15 years SA trade in services during the last two decades have been
growing faster than trade in goods Although SA accounts for only 3% of world services exports, its
services exports have grown more rapidly than world services exports since 1993
The region’s RCA in services has risen steadily and improved over RCA in merchandise trade
Exceptional Growth of Trade in Services
Source: World Bank (2008)
Emerging Patterns of Comparative Advantage and Complementarity in Services
Category of Services
Sector Countries with Revealed Comparative Advantage
(RCA>1)Labour and resource intensive
Transport India, Pakistan
Labour and resource intensive
Travel Maldives, Nepal
Labour intensive Construction India, BangladeshSkill and technology intensive
Communications Bangladesh, India, Nepal, Pakistan, Sri Lanka
Skill and technology intensive
Computer and information services
India, Sri Lanka
Skill and technology intensive
Financial and insurance services
India, Pakistan Notes: Considers average RCA (31) for the period 2000 to 2006Source: RIS (2008)
India’s emergence as a Global ICT Outsourcing Hub
India has emerged as a global hub for outsourcing of ICT software and BPO services –exports of these services totaled $ 65 bn in 2014-15
In terms of the Global Services Location Index complied by A.T. Kearney, India has continued to occupy the 1st rank among different countries since 2004
In 2007, Sri Lanka and Pakistan were also included for the 1st time in recognition of their potential for location of services, and rank at 21 and 28 respectively in 2011
The emergence of India as a major hub for exports of software and BPO services generates opportunities for other SACs in expanding their exports of these services
Thus, a strategy of regional economic integration and enterprise cooperation across SA may assist the other SACs to benefit from a ‘flying geese’ model from the success story of India in IT services
Complementarities in services trade between SACsWhile India leads the region in ‘modern’ or sophisticated
services (ITES, BPO etc.), other SACs specialize in ‘traditional’ services, such as travel and transport
Trade in services within the region is thus more balanced with smaller and poorer economies generally enjoying surpluses with larger economies, thereby helping to bridge asymmetries that exist in trade in goods in the region
There are other areas like maritime transport, tourism, and energy services where SA has export potential owing to factors such as geography, history, and natural resource endowments: Bangladesh has huge reserves of natural gas, with potential to
export to other countries in the region through cross border supply; Paksiatn can be a conduit for a gas pipeline from Central Asia
SL has potential in shipping and port services, given its geographic location
India & SL have considerable scope to export travel & tourism services, given their rich cultural, natural, and historical heritage
Remittances
SACs are labour abundant countries, and consequently the region is one of the most important exporters of services through the natural movement of persons – both high-skilled and low-skilled
The relative significance of trade in services via Mode 4 is also evident from the large volume of inflow of remittances received by SACs – the largest global recipient of overseas remittances is India
Official remittance flows to SA have been rising continuously over the past 2 decades from US$ 5.6 bn (1.4% of GDP) in 1990 to US$ 81.2 bn in 2010 (8.8% of GDP) to US$ 118 bn in 2014 (9.3 % of GDP)
Remittances are the largest source of external fund flows in SA – in 2006, they were almost as twice as large as private debt and portfolio equity, 3 times as large as FDI and 7 times as large as official development assistance – this trend continued till about 2014
Compared to other regions, remittances in SA are a far more important form of external fund flows than FDI
Investments in South Asia: OpportunitiesServices such as telecommunications, banking, energy, transport, and
software services are among the main drivers of FDI in the regionRecent years have seen a rise of FDI in SA – FDI inflows to SA have
increased by nearly 8 times between 1996 and 2006 and by 4 times between 2007 and 2014 (Out of US$ 41 bn FDI to South Asia in 2014, US$ 34 bn went to India)
However, despite these trends, the share of SA in world FDI remains at less than 2% of world FDI inflows
Also, post-2008 has seen a decline in FDI, following the global economic downturn – highlights need for intra-regional FDI
As in the case of exports, India is the most important player in driving FDI flows in services in SA
Outward FDI from India increased from US $ 5 bn in 2005/06 to US $ 12.8 bn in 2006/07 to US$ 38 in 2013/14 but less than 10% of this has gone to SACs
Investment Opportunities Cont.
Indian outward FDI has been generally directed towards developed economies, yet neighbouring SACs are increasingly looking to India as a source of FDI : In Nepal and Bhutan, India is the predominant source of FDI - over 100 Indian
joint ventures currently operate in Nepal, accounting for 36-40% of its total FDI It has also emerged as the largest investor in Sri Lanka and many Indian
companies are also involved in the IT and ready-made garments sectors in Bangladesh
Indian companies are also involved in cross-border FDI e.g. Tata purchasing Tetly, Tata Motors purchasing Jaguar/Land Rover, Tata Steel purchasing Corus, Hindalco-Novelis
India has invested in hydro projects in Bhutan and buys back the electricity, and has played an important role in infrastructure development in Nepal
India’s Investment Boom
Impediments
Persistent Barriers to TradeDespite reductions in tariff rates, nontariff barriers (NTBs)
are still significant, and are currently increasing their shares in total trade costs in the region
Trade facilitation has become the leading NTB that reduces intraregional trade in SA: Airports and maritime ports in SA are less advanced than those
in China and other countries in East Asia Weak land networks across national borders also pose a
formidable barrier to trade in SA, particularly for the landlocked countries
poor roads lengthen transportation time and reduce the longevity of vehicles, imposing higher per unit costs for cargo
According to a World Bank study the costs of trading across borders in SA are among the highest in the world
SA is also characterized by inefficient and complicated administrative procedures and lack of transparency in inspection and documentation requirements
Constraints from Domestic Regulation
Domestic regulation is a critical issue for developing countries – SA has historically been plagued by over-regulation
Numerous external & domestic regulatory barriers to SA’s services exports exist in Mode 4 and Mode 3 immigration and labour market regulations and recognition
requirements lack of uniformity in training and standards within the countries
leading to deficiencies and considerable divergence in the quality of service providers
policies towards foreign commercial presence or presence of foreign service suppliers remain restrictive
However, regulation is important, particularly in the services sector where the “good” cannot be inspected prior to consumption
Thus what is required for liberalization is an effective but un-cumbersome regulatory regime
Barriers to Investment in South Asia
SA’s share in world FDI continues to be low mainly owing to: The relatively small size of individual country markets The relative failure of regional integration efforts in unifying these
markets by removing border and behind-the-border impediments and weaknesses
Studies have shown that a country’s business environment and institutional quality are equally, if not more, important for FDI than low wages or concessions for investments - however, the regional investment climate is far from satisfactory: SACs are considered among the least competitive in the world –
The GCI (2011-12) ranks these countries, except two countries, near the bottom in the set of 142 countries that were considered
SA remains relatively more difficult to conduct business compared to other regions in the world – according to Doing Business Indicators (WB 2011), SA is the 2nd hardest region to do business
Infrastructure and Manpower Constraints
In order for trade and investments to develop, countries need an appropriate infrastructure, including education, telecommunication, aviation & connectivity
Significant in the context of outsourcing (Mode 1 exports): Physical infrastructure constraints – underdeveloped
telecommunications infrastructure, slow network connectivity, insufficient bandwidth, high connectivity costs, and erratic power supply
Human resource constraints – lack of adequately trained & quality manpower, low levels of computer literacy, high turnover rates, absence of required language abilities & other specialized skills
Infrastructure development also important in creating supply capacities in relatively lesser developed members, leading to more balanced regional development
Facing the Challenge
Slow Progress in SAFTA SAFTA has proved to be a slow process vulnerable to regional politics The imbalance of power among member states has resulted in India
being perceived as a risk to security and a source of possible economic domination
These regional dynamics have stunted trade and cooperation by making the progress of regional cooperation dependent upon the status of relations among member states, rather than on economic opportunities
Further progress in integration and expanding trade will thus be contingent upon erasing the “trust deficit” that exists and creating improved relations among member states
Also, SAARC decisions are not properly implemented and a majority of the South Asian people is yet to feel the impact of SAARC cooperation
Less binding commitments, thus commitments are most often not implemented
With Global Value Chains increasingly determining trade, reducing tariffs in the region has become vital for SACs integration process both to the world and in the region
Slow Progress of SATISAlthough SATIS came into operation in 2010, the
submission of “offer” and “request” list for preferential liberalization is very slow
Even in some of the “offers” they are not GATS-PlusAfghanistan and Bhutan not being members of the
WTO are take considerable time for submissionSome countries are reluctant to open up services until
fixing the regulatory frameworkASEAN has made many advances in services
liberalizationWith increasing “servicification’ of the manufacturing
sector (services value added accounts for 26% of manufacturing in developing countries), services liberalization is important for SAC competitiveness
Investment ChallengeEfficiency-seeking industrial restructuring in the
region is at a very low level and this is seen from IIT indices estimated in various studies
Joint ventures with buy-back arrangements and subcontracting activities at a low level in the region
Verticle and horizontal integration of industries is important for investment to drive trade and the trade-investment nexus to drive intra-regional trade
ASEAN Investment Area, ASEAN Industrial Cooperation, etc., are partly based on this ideas and SAARC Investment Area yet to come into operation
SAARC Investment Protection and Promotion Agreement has not been signed due to minor points
Way ForwardMoving forward as a region calls for making the best use of
opportunities to overcome challengesFor SA, this can be best realized by exploiting the immense potential
for regional integration – and its subsequent trade, investment, and growth opportunities – which to date remains untapped
Promoting greater regionalism is crucial in addressing challenges, as this creates opportunities to harness the spillover benefits of India’s growth success
Regional trade agreements are more viable as economies are on a level-playing field and are more likely to have economic complementarity – already evident in SA especially in services trade
Given its economic power, India will have to take on a disproportionately larger responsibility for promoting regional cooperation in SA
Yet, regional integration will not be achieved by India’s unilateral actions alone – other SACs will have to respond positively to Indian initiatives for successful regional integration
Thank you