South Asia Development andCooperation Report 2008

RISResearch and Information System for Developing Countries (RIS) is an autonomous policy think-tank, established in 1984 in New Delhi, and specialised in trade and development issues. Its workprogramme focuses on multilateral trade negotiations, regional economic integration in Asia, South-South Cooperation and new technologies and development, among other issues.

The work of RIS is published in the form of research reports, books, discussion papers and journals.For more information about RIS and its work programme, please visit its website: www.ris.org.in.

South Asia Development andCooperation Report 2008

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ContentsForeword ................................................................................................................................................ vii

Acknowledgements ............................................................................................................................... viii

Preface ..................................................................................................................................................... ix

List of Tables, Figures, and Boxes ..........................................................................................................xi

List of Abbreviations .......................................................................................................................... xiii

Executive Summary ......................................................................................................................... xvii

Chapter 1 : Global Economic Environment ................................................................................ 11.1. Introduction........................................................................................................ 11.2. Global Economic Outlook ................................................................................ 11.3. Downside Risks and Uncertainties ................................................................ 51.4. Addressing the Global and Regional Challenges ......................................... 91.5. Concluding Remarks ...................................................................................... 12

Chapter 2 : Macroeconomic Performance and Outlook of South Asia ............................... 152.1. Introduction...................................................................................................... 152.2. Growth Performance over the Past Decade and Outlook ........................ 152.3. Factors underpinning the South Asian Resurgence .................................. 182.4. Sustaining South Asia’s Dynamism ............................................................. 222.5. Concluding Remarks ...................................................................................... 25

Chapter 3 : Trade Performance and Competitiveness ............................................................ 273.1. Introduction...................................................................................................... 273.2. Emerging Trends and Patterns in Merchandise Trade Performance ..... 273.3. Services in SAARC Countries’ Trade .......................................................... 373.4. Trade Policy Developments: Preferential Trading ................................... 39

Arrangements in South Asia3.5. Challenges for Improving Export Competitiveness .................................. 42

Chapter 4 : Foreign Direct Investment Flows and Investment Climate ............................. 474.1. Introduction...................................................................................................... 474.2. FDI Flows in South Asia: Trends and Patterns .......................................... 474.3. Investment Climate and Potential of Intra-regional FDI Flows .............. 504.4. South Asia’s Emergence as a Source of Outward FDI .............................. 534.5. Concluding Remarks ...................................................................................... 56

Chapter 5 : Deepening Regional Economic Integration in South Asia: ............................. 59SAFTA and Beyond5.1. Introduction ...................................................................................................... 595.2. Potential of South Asian Economic Integration for ................................... 59

Balanced Regional Development5.3. South Asian Free Trade Agreement (SAFTA): ........................................... 67

Enhancing its Effectiveness5.4. Deepening South Asian Integration Beyond SAFTA: ............................... 71

Towards a South Asian Economic Union (SAEU)5.5. Concluding Remarks ...................................................................................... 74

Chapter 6 : Trade Facilitation Measures in South Asia ......................................................... 776.1. Introduction ...................................................................................................... 776.2. TF Initiatives in South Asia ............................................................................ 776.3. TF Measures Undertaken by South Asian Countries ................................ 786.4. Deepening TF Reforms ................................................................................... 846.5. Conclusions and Policy Recommendations ................................................ 87

Chapter 7 : Transport Infrastructure for Deeper Regional Integration: ............................. 93Emerging Challenges and Policy Options7.1. Introduction ...................................................................................................... 937.2. Development of Physical Infrastructure in South Asia ............................ 937.3. Cross-Border Infrastructure in South Asia: ................................................ 97

Challenges for Regional Cooperation7.4. Looking Forward: Towards a Vision of Borderless South Asia ............ 103

Chapter 8 : Regional Cooperation for Energy Security ........................................................ 1158.1. Introduction .................................................................................................... 1158.2. South Asia’s Energy Profile ......................................................................... 1158.3. Regional Energy Supply Security Impulses .............................................. 1208.4. Rationale for Regionally Integrated Energy Cooperation ...................... 1228.5. Energy Trade and Regional Cooperation: Unlocking Potentials ......... 1228.6. Important Barriers to Regional Energy Trade .......................................... 1278.7. Concluding Remarks .................................................................................... 128

Chapter 9 : Social Infrastructure and Human Development in South Asia: .................. 133The Road Ahead9.1. Introduction .................................................................................................... 1339.2. Overview of the Poverty and Progress in Health and ............................ 133

Education Sectors in South Asia9.3. MDGs and SAARC Development Goals: A Report Card ...................... 1399.4. National and Regional Initiatives for Social Infrastructure ................... 1439.5. The Way Forward ......................................................................................... 149

Foreword

South Asia has emerged as one of the fastest growing regions in the world with anaverage rate of growth of 8 per cent sustained over the past five years. Despitesuch robust growth, the region is home of more than 40 per cent of world’s poor.Large sections of the South Asian people do not have access to education, health,nutrition and such basic amenities like safe drinking water and sanitation. Hence,the developmental challenge faced by the region is acute.

Acceleration of growth is important for the region’s ability to fight the menace ofpoverty and unemployment and needs to be sustained and made more inclusive. Forsustaining the dynamism, the region has to mobilize resources for development ofphysical and social infrastructure and focus on human development.

Regional economic integration has been adopted as a strategy for expedited andbalanced regional development in different parts of the world with the formation ofthe European Union, NAFTA, ASEAN Free Trade Area, COMESA and SADC in Africa,and MERCOSUR and Andean Pact in the Latin America. The experiences of existinggroupings suggest that regional economic integration could lead to expedited andequitable development.

With the implementation of South Asia Free Trade Agreement (SAFTA), SAARCregion is also moving towards regional economic integration. However, we need totake steps to implement SAFTA in a comprehensive manner and move beyond toexploit the promise of the regional economic integration for sustaining the newfounddynamism of the region to meet many developmental challenges that it faces besidesfostering interdependence, shared prosperity and peace.

The South Asia Development and Cooperation Report 2008, prepared by RIS on theeve of the 15th SAARC Summit presents an analysis of the macroeconomic performanceof the South Asia region, highlights the developmental challenges it faces and makesseveral proposals for deepening regional economic cooperation in the different areas.

I am happy to commend the Report to the leaders, policymakers and developmentthinkers of the region.

New Delhi

Arjun Sengupta, M.P.Chairman, RIS

Acknowledgements

The South Asia Development and Cooperation 2008 has been prepared by a research team ledby Dr Nagesh Kumar, Director-General, RIS. The core team comprised Dr Ramgopal Agarwala,Senior Adviser; Dr S.K. Mohanty, Dr Ram Upendra Das, Dr Sachin Chaturvedi, Dr PrabirDe, Fellows; Dr Beena Pandey and Priyadarshi Dash, Research Associates, and Dr SameerRanjan Pradhan, formerly Research Associate, RIS (currently Senior Researcher, GulfResearch Centre, Dubai). Inputs have also been received from Dr Saman Kelegama, ExecutiveDirector, Institute of Policy Studies, Sri Lanka and Professor Manmohan Agarwal, AdjunctSenior Fellow, RIS.

The Report benefited from the contributions, discussions, comments and presentationsmade by a number of experts in different contexts and at the events organized by RIS includingthe Regional Conference on Economic Cooperation in SAARC: SAFTA and Beyond organizedby RIS on 19 March 2007 in collaboration with the South Asia Centre for Policy Studies (SACEPS),Kathmandu; Conference on SAARC Economic Cooperation organized in Kolkata on 1-2September 2007 jointly with Ministry of External Affairs, Federation of Indian Chambers ofCommerce and Industry, and the Global India Foundation; the Regional Consultation Meetingon South Asian Trade in Services organized by RIS jointly with the SAARC Secretariat on 6-7February 2008 in New Delhi; and Seminar on Regional Cooperation and Integration Prospectsin Asia, 5 December 2007. These experts include Poonam Barua, Biswa Bhattacharyay, RameshC. Chitrakar, Muchkund Dubey, Satish C. Jha, Sultan Rahman Hafeez, Naved Hamid, SridharKhatri, Mahendra P. Lama, Deshal de Mel, I.N. Mukherji, S.D. Muni, Rajat Nag, Pulin B.Nayak, M. Rahmatullah, Ananya Raihan, A.N. Ram, Jayant Kumar Ray, Ajitava Raychaudhury,Mohan Man Sainju, Rehman Sobhan, and Ibrahim Hussain Zaki, among others. However, theviews presented are those of the members of the core team.

The production of the Report was coordinated by Tish Kumar Malhotra and PriyadarshiDash with DTP assistance from Pradeep Kumar.

Preface

The South Asia Development and Cooperation Report 2008 is fourth in the series of Reportslaunched by RIS to provide an analysis of the macro-economic performance and outlookof South Asian economies against the background of global trends and the policychallenges faced by them with a special focus on the role that regional economicintegration could play.

Since the launch of the first Report in the series in 1999, these Reports have becomeamong the very few sources of comprehensive economic analysis available for the SouthAsia region as a whole. RIS has also been encouraged to continue the series of Reportsby the SAARC Network of Researchers on Global Financial and Economic Issues at itsvarious Meetings. The previous Reports have been presented and discussed in differentSAARC capitals and have elicited an encouraging response and feedback.

RIS has an active programme of research on regional economic cooperation inSouth Asia since the early 1990s when a Report on Economic Cooperation in the SAARCRegion: Potential, Constraints and Policies was prepared. RIS also hosted the Meetingof Experts for finalization of the regional study on Trade, Manufacturers and Servicesthat laid out the road map for the economic cooperation in the framework of SAARC.RIS recently completed a regional study on Potentials of Trade in Services in the SAFTAin collaboration with the national think-tanks in each of the South Asian countries as apart of the mandate given by the Dhaka Summit. The Study has since been adopted bythe SAFTA Ministerial Council. RIS also brings out the South Asia Economic Journaljointly with the Institute of Policy Studies, Colombo under the aegis of SAARC Networkof Researchers.

In preparation of this Report, we have benefited from overall guidance of theChairman of the RIS Governing Council, Hon’ble Professor Arjun Sengupta, M.P. andChairman, National Commission on Enterprises in the Unorganized Sector. ProfessorMuchkund Dubey, Chairman, Research Advisory Council of RIS has been an importantsource of inspiration and advice throughout. We have also benefitted from the guidancefrom Ambassador L.K. Ponappa, Vice-Chairperson, among other members of the RISGoverning Council.

This Report has been prepared by a Research Team of RIS comprising the seniorfaculty members of the Institution, as listed elsewhere. I would like to place on recordmy appreciation for their sincere efforts and hardwork put in the preparation of thisReport. We are also grateful to the editorial and production team at the OxfordUniversity Press for publishing it on an expedited schedule.

New Delhi Nagesh KumarDirector-General, RIS

South Asia Development and Cooperation Report 2008x

xviiExecutive Summary

RESPONDING TO THE DETERIORATINGGLOBAL ECONOMIC ENVIRONMENTThe development prospects of South Asianeconomies, like those of others, are affectedby global economic environment and outlook.After putting in a robust performance for thepast five years, the world economy is headingfor a slowdown in 2008 largely led by thedeepening financial crisis that has thrown theUS economy on the brink of a recession.

Continued robust growth in the emergingeconomies such as China and India is assistingin moderating the threat of the globalslowdown from turning into a globalrecession and the world economy is likely togrow at about 3.7 per cent in 2008. Thedownside risks to this outlook arise from thedeepening of the US recession, re-emergenceof inflation, rising oil prices, creepingprotectionism in the developed world and

Executive Summary

South Asia has emerged as one of the fastest growing regions of the world with anaverage rate of growth of 8 per cent sustained over the past five years. The regionhas also strengthened its place in the international division of labour with risingshare in global trade and foreign direct investment flows besides other impressiveachievements in economic and human development. Yet the region continues to behome for over 40 per cent of the world’s poor and fares poorly in terms of differentindicators of human development such as education, health, nutrition, andsanitation. Although the growth outlook is still robust, the downside risks posedby dramatic deterioration of external environment are serious. The region now facesa threat of slowdown in growth and a sharp rise in inflation which may hamperprogress in poverty alleviation and achieving development goals.

This Report argues that South Asia can face these challenges much moreeffectively with deeper regional economic integration. It makes specific proposalsfor deepening cooperation in trade and investment, for strengthening transportinfrastructure, trade facilitation, energy security and human development withinthe region for mutual benefit.

By helping to create supply capacities in the poorer and lesser developed parts,regional economic integration can provide new opportunities for fostering tradecreation and equitable development. The Report makes a strong case for expeditiousimplementation of the South Asia Free Trade Agreement (SAFTA) while extendingits coverage besides further deepening the scope of cooperation to cover services,investment, industrial development, finance and capital markets while movingtowards the cherished goal of a South Asian Economic Union. An integrated SouthAsia, the Report argues, will be able to secure its due place in the emerging broaderregional architecture in Asia and exercise its role in shaping the global economicgovernance.

For far too long, the economic logic of integration in South Asia has beenoverwhelmed by geopolitical considerations. Now with deteriorating globalenvironment, renewed efforts must be made to give economic integration a chancein order to realize fully South Asia’s potential for rapid and inclusive growth.

South Asia Development and Cooperation Report 2008xviii

stalled Doha Round negotiations, and slowprogress of climate change negotiations. TheUS financial crisis of 2008 and the risks ofglobal slowdown have created urgency forrestructuring in global and regional financialinstitutions. International cooperation is alsoneeded for disciplining oil prices and formanaging climate change with an equitableregime of emission targets and provision oftechnology and resources to developingcountries. Asia as the new emerging powerhouse has to take a leadership role andundertake the dual task of ‘democratizing’ theglobal institutions and creating new regionalinstitutions which can address not only theregional but also global problems. Inparticular, regional cooperation in Asia inthe form of a regional financial mechanismfor mobilizing foreign exchange reservesfor infrastructure development could playan important role in addressing thechallenges arising from the ongoingfinancial crisis. Secondly, in the context ofemergence of Asia as the centre of gravityand final demand with the rise of China andIndia and against the background ofstalling Doha Round negotiations, South-South cooperation and broader regionaleconomic integration bringing togetherdifferent sub-regions of Asia assume a newrelevance and urgency besides deepeningthe sub-regional cooperation. In thatcontext, the comprehensive economicpartnership proposed in the framework ofthe East Asia Summit could be a usefulbeginning towards creating a pan-Asianregionalism by extending its scope beyondIndia to cover all other South Asiancountries in due course. An integratedSouth Asia will be able to seek its due placein the emerging broader regional architecture.

MACROECONOMIC PERFORMANCEAND OUTLOOK FOR SOUTH ASIASouth Asian countries embarked on newhigher growth trajectory since 2003 with anaverage rate of growth of over 8 per centsustained over five years making the regionas one of the fastest growing in the world.

This dynamism is broad-based and is a sub-regional phenomenon. Among thecontributing factors to the dynamism havebeen the ability of the region to mobilizedomestic resources and structuraltransformation in favour of services andindustry. The outlook for growth continuesto remain robust despite the global slowdownalthough some deceleration in growth isexpected. The growth outlook for 2008-9 at7.8 per cent for South Asia and at 8.2 per centfor India shows a slowdown compared to the2007-8 growth rate but is still robust. Thedownside risks posed by, in particular,deepening of the US recession, rising oil andfood prices are serious. The acceleration ofgrowth is important for the region’s abilityto fight poverty and unemployment, andneeds to be sustained and made moreinclusive. Sustaining dynamism with pricestability and inclusiveness becomes a majorchallenge for the region’s policy makersespecially in the deteriorating externalenvironment. For facing these challenges, thedevelopment strategy in the South Asiancountries will have to address the supplyconstraints on physical and socialinfrastructure, enhance inclusiveness ofgrowth, address the growing menace ofinflation, exploit the potential of non-conventional sources of energy and adoptenvironmental friendly technologies. ThisReport argues that deepening regionaleconomic integration should form animportant component of such a strategy.

TRADE PERFORMANCE ANDCOMPETITIVENESSSouth Asia’s recent growth resurgence hasbeen accompanied by their more vigorousparticipation in international trade and theregion has emerged from the past five yearswith a deeper economic integration with theworld economy. The average growth rate ofexports accelerated from 5.3 per cent during1997-2001 to 14.3 per cent in the subsequentfive years. Although they have been able toenhance the share of manufactured goods inmerchandise exports, their export structure

xixExecutive Summary

is still heavily dominated by labour intensive,highly price sensitive and low value addinggoods such as textiles, garments, leathergoods, and primary products such as iron ore.Unlike the East Asian countries they have notbeen able to upgrade their export profile infavour of knowledge-intensive and high valueadding goods that are fast moving.Upgradation of the technology profile of theirexports would require strengtheningtechnological activity at various levels. Eventhough India has emerged as a global hub foroutsourcing of ICT services, South Asiancountries have yet to exploit the full potentialof trade in services. Judging from multiplepreferential trading arrangements beingnegotiated by them with different tradepartners, South Asian countries seem to haverecognized the importance of regionaleconomic integration as in other parts of theworld and have adopted a multi-prongedstrategy. They need to enhance value additionin the traditional exports by moving up thevalue chain, sometimes by forming consortiaof regional firms doing packaging, branding,and marketing for the partners. The textilesand clothing exporters need to prepare for thepost-2008 scenario when the remainingsafeguards on Chinese exports will be phasedout. Regional cooperation through intra-industry specialization and verticalintegration has the potential in strengtheningthe competitiveness of the region and makeit a global hub in textiles and clothing sector.Regional cooperation is also recommendedfor dealing with the emerging SPS measuresand standards in the developed countries andin benefiting from India’s lead in ICT fordeveloping outsourcing capabilities in otherSouth Asian countries. A coordinatedapproach to WTO negotiations can also behighly effective in shaping the trading systemin tune with their requirements.

FOREIGN DIRECT INVESTMENT FLOWSAND INVESTMENT CLIMATEFDI inflows to South Asia have grown in therecent years in response to policyliberalization and their robust economic

performance. South Asian countries have alsobeen able to increase their share in FDI inflowsreceived by developing countries especiallyin the past few years although it is still rathermarginal. South Asian region has notexploited the potential of intra-regional FDIinflows especially in the context of emergenceof South Asia as a significant source of FDI inrecent years with Indian companiesundertaking relatively large investments indifferent parts of the world. In this context,South Asia could take lessons from theexperiences of ASEAN that are trying toattract intra-regional FDI with the help ofASEAN Free Trade Agreement and ASEANInvestment Area. Deeper regional economicintegration in SAARC will also enable theregion not only to emerge as a more attractivedestination for FDI inflows in general but alsofor export-oriented FDI as well as intra-regional FDI.

DEEPENING REGIONAL ECONOMICINTEGRATION IN SOUTH ASIA:SAFTA AND BEYONDDifferent regions across the world haveadopted the strategy of regional economicintegration to exploit their synergies formutual benefit in a balanced and equitablemanner. The existing patterns of intra-regional trade in South Asia fail to capturethe extent of complementarities due to highincidence of informal trade and trade barriers.RIS analysis has found that lesser developedand smaller countries in South Asia lacksupply capabilities in tradeable items havingdemand in larger countries reflected in tradeimbalances. However, the intra-regional tradein South Asia has begun to grow and hasdoubled over the past five years. RIS analysissuggests that nearly three-fourths of intra-regional trade potential remains to beexploited which SAFTA can hope to realize.The available evidence also points tosubstantial potential of South Asian economicintegration in trade creation and fosteringstrong growth in a balanced manner. Therecent experiences resulting from India-SriLanka FTA indicate the potential of SAFTA

South Asia Development and Cooperation Report 2008xx

in fostering balanced regional trade byassisting in creation of supply capabilitiesthrough intra-regional investments. To exploitits full potential of regional economicintegration, SAARC countries need toexpedite SAFTA’s implementation schedule,expand its scope by reducing the negativelists and addressing non-tariff barriers. Theyalso need to move on to expand the scope ofintegration beyond SAFTA to cover trade inservices, investment facilitation andindustrial cooperation, financial andmonetary cooperation including integrationof capital markets. SAARC countries shouldexpeditiously move towards creating aSouth Asian Customs Union by 2015 andfurther to the South Asian Economic Unionby 2020. The deepening of regionaleconomic integration would assist theregion to consolidate and sustain itsdynamism and attack the menace of povertymore effectively besides strengthening theregion’s place in the international division oflabour and in the emerging broader regionalarchitecture in Asia.

TRADE FACILITATION IN SOUTH ASIATrade facilitation measures need tocomplement the removal of tariff and non-tariff barriers under SAFTA to be effective.Simplification and harmonization of customsoperations need to be addressed on an urgentbasis. An important step in this directioncould be to consider creating a SAARC SingleWindow which would allow SAARC goodsto pass through customs more rapidly.Standards harmonization could be animportant step towards achieving a commonmarket. The free movement of goods andservices will not be possible if differentcountries have differing standards on health,environment and safety rules, among others.Along with common standards it is importantto harmonize conformity assessmentprocedures and pre-shipment inspections,product and systems certification and riskmanagement systems. The official processshould expeditiously move towards creationof the South Asian Regional Standards

Organization. Finally, implementation oftrade facilitation measures, often requiresadvanced infrastructure such as informationand communications technology (ICT) andcapacity building in the least developedcountries is important for harnessing itspotential.

TRANSPORT INFRASTRUCTURE FORDEEPER REGIONAL INTEGRATIONGiven the primacy of transport infrastructurein promoting economic development on theone hand and regional integration on theother, the Report undertook a detailedanalysis of the present state of national andcross-border infrastructure and the potentialfor cooperation among South Asian countries.The major challenge facing South Asia in itsquest for regional integration and increasingcompetitiveness is the poor quality andinefficient transport and communicationinfrastructure which constrains the capacityof the South Asian economies to gain from aliberal trading environment. RIS analysissuggests that South Asian countries havelagged behind other countries in terms ofinfrastructure attainment and the gap with theglobal best practice has widened. Bridging thegaps in infrastructure would thus hold the keyto achieve faster growth and povertyreduction. For achieving full regionalconnectivity South Asia needs a SAARCRegional Transport and Transit Agreement(SRTTA) that would facilitate surfacetransport links throughout the region. TheReport also makes a case for reviving anAfghanistan – Pakistan – India – Bangladesh– Myanmar (APIBM) international corridor,which could emerge as Asia’s new silk route,connecting Central Asia with East Asiabesides facilitating intra-SAARC trade, andmaking South Asia as the hub for pan-Asiantrade. The potential of intra-regionalconnectivity through road, railways, civilaviation, inland waterways, and seaportsneeds to be exploited for mutual benefitand for reducing freight costs in intra-regional trade. The Report recommends aSouth Asian Common Transport Policy

xxiExecutive Summary

(SACTP) for providing a comprehensiveframework for facilitating full regionalconnectivity through different modes oftransport. The Report also recommends aSouth Asia Regional InfrastructureDevelopment Facility (SARIDF) as a regionalfacilitation centre for cross-borderinfrastructure projects, within the ambit of theSouth Asia Development Fund.

REGIONAL COOPERATION FORENERGY SECURITYHigher economic growth and demographicpressures have resulted in phenomenalconsumption of commercial energy in SouthAsia. The region is utterly vulnerable owingto inadequate energy endowments andoverwhelming dependence on imported fossilfuels. Considering the critical role of energyin modern economies and the perniciouseffects of any disruption, it is critical to ensureenergy security. The complementary energyresource endowments, viz., natural gas inBangladesh and Pakistan, coal and petroleumproducts in India, and hydropower in Nepaland Bhutan, provide a basis for regionallyintegrated energy cooperation. Regionalcooperation for energy security also coversregional transit facilities for energy tradewith the neighbouring countriessurrounding South Asia. For facilitatingregional cooperation, the SAARC WorkingGroup on Energy needs to be strengthened.Regional energy trade should be promotedin hydropower, bulk electricity, petroleumproducts, natural gas, and coal. SAARCEnergy Center (SEC) should fostercollaboration with multilateral bodies, withother energy blocs, and also with sourcesof energy technologies. As energy traderequires costly infrastructure involvinghuge investments with long gestationperiods, the Report makes a strong case fora regional cooperative framework forfacilitating transparent trade andinvestment in the energy sector andrecommends that SAARC adopts a SAARCEnergy Charter Treaty (SECT) to provide

the legal basis and level playing field to allstakeholders for regional trade andinvestment in energy sector.

SOCIAL INFRASTRUCTURE ANDHUMAN DEVELOPMENT IN SOUTHASIASocial sector development in terms of povertyreduction, education, and healthcare has seensignificant progress in South Asia. Yet theSouth Asia continues to be home for morethan 40 per cent of the world’s poor and farespoorly on human development indicators likeeducation, health, nutrition, and sanitation.Therefore, the region faces a dauntingchallenge of attaining the MillenniumDevelopment Goals and the SAARCDevelopment Goals by the year 2015. It isclear that growth by itself does not take careof human development and supportivepolicies are needed for poverty alleviationand building social infrastructure forinclusive growth. A number of initiativeshave been taken at the national levels, theregional level and by the civil societyorganizations towards empowerment of theunderprivileged people. Concerted effortsneed to be made for universal access toprimary health and education to empowermore than one billion people in South Asiasurviving on less than two dollars a day toenable them to share the fruits of the region’sdynamism. The Governments should alsopay necessary attention to substantiallyreduce the existing gender gaps in health andeducation through increased investments inproviding basic social services to women.The thrust of the educational system shouldbe on knowledge and skill formation throughvocational and technical training forproductive employment opportunities.Building an improved social infrastructurebase is a gradual process. Given thesimilarities in the initial social and economicconditions in South Asian countries, thereshould be systematic, comprehensive andwell-coordinated regional mechanisms fortimely achievement of MDG targets by 2015.

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South Asia has emerged as one of the world’s fastest growing regions with an average growth rate of 8 per cent sustained over the past five years. It has also strengthened its place in the international division of labour with a rising share in global trade and FDI flows besides other impressive achievements in economic and human development. Yet the region continues to be home for over 40 per cent of the world’s poor and fares poorly in terms of different indicators of human development such as education, health, nutrition, and sanitation. Although the growth outlook is still robust, the downside risks posed by dramatic deterioration of external environment are serious. The region now faces a threat of slowdown in growth and a rise in inflation which may hamper progress in poverty alleviation and achieving development goals.

In this Report, RIS argues that South Asia can face these challenges much more effectively with deeper regional economic integration. It makes specific proposals for strengthening cooperation in trade and investment, transport infrastructure, trade facilitation, energy security, and social infrastructure within the region for mutual benefit.

By helping to create supply capacities in the poorer and lesser developed parts, regional economic integration can provide new opportunities for trade creation and fostering equitable development. The Report makes a strong case for expeditious implementation of the South Asia Free Trade Agreement (SAFTA) besides extending its coverage and further deepening of cooperation in services, investments, industrial development, finance, and capital markets, while moving towards the cherished goal of a South Asian Economic Union.

An integrated South Asia, the Report argues, will be able to secure its due place in the emerging broader regional architecture in Asia and exercise its role in shaping the global governance.

For far too long, the economic logic of integration in South Asia has been overwhelmed by geopolitical considerations. Now with deteriorating global environment, renewed efforts must be made to give economic integration a chance in order to realize fully South Asia’s potential for rapid and inclusive growth.

South Asia Development and Cooperation Report is an invaluable resource for policymakers, business leaders, development thinkers and practitioners in South Asia and beyond.

Cover photograph: Racha Ramesh/Visage

RIS