If the success of regional economic integration in other parts of the world is any guide, a free trade arrangement among the South Asian countries - namely India, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan and the Maldives - will be a big step towards their greater economic welfare.
India already has signed a free trade agreement (FTA) with Thailand, is set to sign one with the Association of Southeast Asian Nations (ASEAN), and expects to sign another specifically with Singapore early next year. All these agreements could be the first step towards closer economic integration among the nations in this part of the world.
On the Asian continent, while several Regional Trade Agreements (RTAs) involving ASEAN and Mercosur (Argentina, Brazil, Paraguay and Uruguay) have come into being, the South Asian Preferential Trade Agreement, the South Asian Free Trade Area, and the ASEAN Free Trade Area, if seriously implemented, should complement each other, thus making regional economic integration viable. To this end, the trade policies of these countries must further the cause of regional cooperation towards developing their external sector.
While advanced countries have successfully formed their own larger RTAs, such as the North American Free Trade Agreement and the European Union's accord - there is every possibility that South Asian countries will become marginalized unless they can present their arguments with one voice and a collective responsibility. Once they realize that free trade among themselves is a sine qua non for their economic uplift, there should be no foot-dragging in translating this concept into reality.
What made RTAs so popular? According to a recent World Bank policy research report, this is a period of qualitative and quantitative changes in regional integration, and these changes call for closer cooperation among the nations of a particular area, like South Asia. The strongest argument for removing trade barriers, says the report, is the recognition that effective integration necessitates more than reducing tariffs and quotas. Many other trade barriers have the effect of segmenting markets and obstructing the free flow of goods, services, investments and development schemes that call for joint efforts. Therefore, wide ranging policy measures are essential for removing all kinds of tariff and non-tariff barriers.
Moreover, a direct move from closed to open regionalism has the advantage of being more outward-oriented and more committed to liberalizing, rather than controlling world trade and commerce. From the point of view of globalization, this advantage for Asian countries in general and South Asian countries in particular cannot be exaggerated. No wonder the World Bank Experts Group has given special emphasis to this point while examining the economic problems of South Asia.
In a liberal trading regime, South Asia will not only reap the benefits of an increased volume of trade, larger investment flows and a rise in the level of production, but also new technologies that were hitherto unknown to the workforce, much of it illiterate.
Trade facilitation has been defined both narrowly and broadly. The World Trade Organization (WTO), the United Nations Conference on Trade and Development (UNCTAD), and the Organization of Economic Cooperation on Trade and Development have restricted their definitions to a relatively free movement of goods, and more specifically to customs procedures and technical regulations that could impair or delay trade. The World Bank, however, takes a broader approach to its trade facilitation work program, which primarily covers reforms in customs, regulatory frameworks and standards. The World Bank, the South Commission and UNCTAD all have emphasized that given their stark variations in growth indicators, the countries of South Asia "could somewhat level pegging if they could plan their economic development under a free trade mechanism of growth".
One example underscores the nature of this variation: India is over 10,000 times larger, 3,000 times more populous and has a gross domestic product over 800 times greater than the Maldives, the smallest country in South Asia. It is also most striking that in South Asia it is India which is changing the dynamics of interaction among the countries of the region. This is evident not only in terms of New Delhi's physical size but also its geographical location, which has made it "central" to the region. While there is great diversity in the region, home to over a fifth of the world's population and has more or less similar economic development, South Asia has a disproportionate number of people living below the poverty line.
According to Raymond Bonner, author of South Asia: Issues and Challenges, since poverty is the common factor in South Asia, a common market with complete withdrawal of all trade barriers is the key to the region's economic development.
It should be pointed out here that a free trade area in South Asia would provide numerous microeconomic benefits such as transparency and the allocation efficiency of trade in goods, services and investments. Regional trade agreements are normally criticized for promoting trade diversion rather than trade creation. Such debates are rather sterile in the specific context of South Asia. The rest of Asia, particularly East Asia and Southeast Asia, is comprised of keenly competitive economies and Indian enterprises' exposure to their competitive aggression will have a wholesome tonic effect on the country's manufacturing sector.
But also there are some competitive problems among Asian countries. The major problem is that basically they supply the same kind of products to the global market. Naturally, competition problems impede trade arrangements. Just as India and Sri Lanka cannot get over their rivalry in agro-products, such as tea, rubber, coconuts, and so on, Indonesia, Malaysia and Thailand have their own rivalry in the field of garments, while Singapore and Malaysia compete in electronics. Japan and South Korea share many common articles as well. China is in a league of its own.
This rivalry is not unique to South Asia; the RTAs of advanced countries also have this problem. Therefore, the best way forward in this maze is to synergize, for rivals to cooperate and adopt a joint marketing strategy to enter into new unexplored markets. Like the idea of forming tea cartels to enable India, Kenya and Sri Lanka to join and work together for their common good, ways must be found for a wider spectrum of Asian countries to settle their differences and look for common ground.
Durgadas Roy was a professor of economics at the State University of New York and is now director of the Indian Council for Economic Research.