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Informal trade in South Asia
Dr. Haripada Bhattacharjee and Md. Matiur Rahman

          SOUTH Asia is one of the poorest regions of the world and greater percentage of its population lives in poverty. More than one fifth of world population (22 per cent) is housed in South Asia but its total Gross Domestic Product (GDP) is only 2.0 per cent of the total world output, according to statistics in 2002. India is the largest country and followed by Pakistan, in terms both of surface area and population. Therefore, India and Pakistan play a crucial role for successful regional cooperation in the South Asian region.
South Asian countries have traditionally pursued stringent economic management policies including import substitution and exchange --controls. High tariff structures and import control arrangements were common and in place mainly to insulate domestic industries from stiff foreign competition. These trade control measures largely served to restrict international trade in the region.
Most South Asian countries -- India, Pakistan, Sri Lanka, Bangladesh and Nepal -- have implemented far reaching economic and trade policy reforms, moving their economies away from protectionism toward grater trade openness and global economic integration. Sri Lanka pioneered economic reforms in the region in late 1970's but other four countries delayed their reforms until late 1980's (World Bank 2003).
Trade liberalisation process in India was later reversed in 1997 and but returned again in 2002 with some tariff cuts. Bangladesh trade policy reforms have been slowed and somewhat reversed from mid-1990s. Pakistan embarked upon a comprehensive liberalisation of its trade policies including those on agriculture since 1996. However, India and Bangladesh still maintain high barriers against trade primarily through state trading enterprises (STEs), tariff rate quotas (TRQs) and quantitative restrictions (QRS).
In line with trade policy reforms, South Asian nations have revised their exchange rate policies. India, Pakistan and Sri Lanka have now moved to a floating exchange late regime, with Bangladesh, which had a moderately flexible exchange rate system since 1991, floating its currency since May 2003 and Nepal currency being pegged to the Indian rupee. In terms of openness to trade measured by the total trade to GDP ratio, the Maldives and Sri Lanka top the list with 94 per cent and 65 per cent respectively, and followed by Pakistan 33 per cent and Bangladesh, Nepal and India each having a share of trade around one fourth of their annual GDP in 2002.
Intra-regional trade has remained very low in South Asia compared to other similar regional trade blocs, approximately 2.4 per cent of total South Asian Association and Regional Cooperation (SAARC) trade in 1990. It increased only to 4.1 per cent by 1995 with almost 96 per cent still accounting for extra regional trade. This indicates that there is a substantial growth potential in Bangladesh's intra-regional trade provided right measures and instrument to boost the trade in the region are applied. It is imperative to identify the existing production capabilities of the region and match them with each member nation's demand structure to determine the magnitude of future trade potential. Such attempt should typically involve an extensive study to pinpoint existing impediments that have prevented or restricted potential trade in the region.
A recent study, using intra-regional trade data for 1997 and 1998 for the region showed that top 100 items (using six-digit HS classification) traded between SAARC members do not even meet the twin criterion of having adequate demand in receiving countries and adequate supply capabilities in the supply countries (source countries). The study finds that the South Asian Preferential Trade Arrangement (SAPTA) trade negotiations up to Third round have accommodated only a meagre of products having trade potential for concession. Nevertheless, intra-regional trade in South Asia has increased to only 4.6 percent in 2001, indicating that 95.6 per cent of SAARC trade is still extra regional.
During the period 1995-2001, SAARC intra-regional trade has registered an average of 8.9 per cent growth against 6.2 per cent average growth of total SAARC trade with the rest of the world (ROW). Increased concentration of trade growth within the region can perhaps be attributed to the progress made under the SAPTA agreement. It is indeed important that regional trade share is increased without substantial trade diversion with ROW. Regional blocs that generate net trade diversion effect will deteriorate the welfare of not only member countries of the bloc but also of the ROW.
Another study reveals that trade is heavily concentrated on only a fraction of potential markets in the region, especially with countries of historical trade relations. This has resulted in virtually ignoring the opportunities for trade expansion with other member nations, which could be a major obstacle to long-term goal of South Asian Custom Union and Economic Union.
The outcome of the descriptive analysis of SAARC trade data remains ambiguous and is not much help in drawing conclusion as to the trade-creating effect of the preferential trade arrangement in the SAARC region. It is, therefore, necessary to search for an alternative approach that is capable of capturing the impact of regional grouping on the bilateral trade flows of member countries.
Informal trade in the South Asian region: The South Asian countries have made several attempts at enhancing trade in the region. Despite such efforts, trade within the countries continues to be abysmally low. Clearly there would be other mechanisms that would inject vitality into trade flows in the region. One way would be to focus on the large and vibrant informal trade in the South Asian region. Available evidence suggests that informal trade is rampant and if such trade is brought within the ambit of official trade, a significant increase could be witnessed.
Magnitude of informal trade: Total informal trade, according to a recent report, exceeds US$3.0 billion, which is almost double the formal trade in the region. India's informal trade with Pakistan is almost ten times that of formal trade, which with Nepal and Bangladesh is almost as large as formal trade, with Sri Lanka it is almost one-third of formal trade and that with Bhutan is three times as much as formal trade.
Since India is the only country which shares its borders with almost all the South Asian countries and, at the same time, no country shares its border with countries other than India within South Asia, the central actor in informal trade has been India. India shares a long and porous border with Bangladesh, Nepal and Pakistan. Informal trade with these countries largely takes place across the land borders. Informal trade with Sri Lanka takes place largely through air passengers, with small proportion being carried out by sea through country boats.
India has a trade surplus with Bangladesh, Pakistan, Sri Lanka and Bhutan on the unofficial trade account, while with Nepal it has a trade deficit. Interestingly, a similar pattern can be observed on the official trade account. Of the US$2.0 billion informal trade with Pakistan; almost half is traded through third countries (technically official trade) such as Dubai, CIS countries and Afghanistan, while remainder is cross-border informal trade.
As Bangladesh is sandwiched between the north-eastern region of India and the West Bengal borders of India, informal trade between India and Bangladesh takes place both along the borders between West Bengal and Bangladesh and between the north-eastern regions and Bangladesh. Commodities exported informally from India to Bangladesh through West Bengal comprise of cattle, sugar, kerosene oil, sarees, bicycles, automobile components and parts and other consumer goods like plastic items, razor blades, medicines etc. Items imported from Bangladesh into India through West Bengal comprise of synthetic fabrics, spices, and Hilsa fish. Informal exports from the north-eastern region to Bangladesh comprise fruits, fish, sugar, cattle, raw cotton, spices, medicines, sarees and coal. imports on the other hand consist of polythene, palm oil, plastic shoes and a range of miscellaneous consumer items.
Causes of informal trade: Of course, high tariffs and the presence of non-tariff barriers in the form of quantitative and other restrictions create a strong incentive to avoid formal channel of trade in the region. The unweighted tariff average was the highest in India at 39 per cent, followed by Pakistan (25 per cent), Bangladesh (20 per cent) and Sri Lanka (15 per cent). In the early 1990s, India and Bangladesh had the highest non-tariff barrier coverage ratio for primary and manufactured goods. India has a non-tariff barriers (NTBs) coverage ratio of 66 per cent and Bangladesh had a NTBs coverage ratio of 52 per cent.
Close ethnic ties between trading markets also encourage informal trade across counties. This is particularly important where the same ethnic community is divided into two national boundaries: for example, in the case of India, Bangladesh, Pakistan and Nepal. It has been observed that in Indo-Nepal, Indo-Bangladesh and Indo-Sri Lanka informal trading, ethnic ties are stronger in the informal channel than in the formal channel.
The lack of education deters from using the formal channel. Also lack of education would preclude traders from having information on trade policy. Most informal traders are not aware of the details of different trading arrangements. Informal traders in Sri Lanka have pointed out that the terms and conditions of trade agreements are available only in English and not in any local language spoken in the two countries. This fact is also supported by many past studies -- that is, in Indo-Nepal, Indo-Bangladesh and Indo-Pakistan trading. Level of education for formal traders are significantly higher than those of informal traders.
Transaction costs and transacting environment are also responsible for bulk informal trading in the region. The inadequate transport and transit systems have led to high transportation costs. Particularly in the case of perishable commodities, port congestion, excessive documentation, delays, slow movement of goods, non-availability of equipment and railway wagons, transhipment and other indirect costs increase transportation costs. Thus as long as transport costs are higher in the formal channel than in the informal channel, unofficial trade will continue to take place.
Intrinsic to the activity of trading is the issue of transacting environment. Studies have shown that formal trading procedures are extremely complex in the South Asian region. For instance, the number of documents that need to be filled up for formal trading is 29 for India, 83 for Nepal, 25 for Pakistan, 22 for Bangladesh and 15 for Sri Lanka. Also clearances have to be obtained from multiple agencies at various stages of trading that include obtaining licenses and getting clearances from banks. Apart from involved costs thereof, such procedures also lead to rent seeking activities. Traders are known to pay hefty bribes at various stages of trading before their destination.
Dr. Haripada Bhattacharjee is Professor, Department of Marketing, Dhaka University, and Md. Matiur Rahman is Director, Department of Customs Intelligence & Investigation, Dhaka


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