Regional Economic Cooperation and Connectivity in South and South-West Asia:

Regional Economic Cooperation and Connectivity in
South and South-West Asia:
Potential and Challenges
Saman Kelegama
Institute of Policy Studies of Sri Lanka
Presentation to the High level Policy Dialogue on
Development Challenges Facing the Sub-Region,
15-16 December 2011, Delhi
Outline
 Introduction
 Trade and Investment
 Transport, Energy and ICT Networks
 Financial Cooperation
 Other Key Sectors
 Conclusion and Way Forward
Introduction
 South and South-West Asia (SSWA) has been part of the recent growth and
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dynamism in Asia-Pacific (AP) region
Growth prospects of economies in SSWA has improved in 2010 – the subregion
is estimated to have grown at 7.5% in 2010 as compared to 3.9% in 2009, with
India leading this growth momentum
Yet, high inflation, along with high poverty levels, remains a key macroeconomic
challenge for the subregion
Also, the subregion – especially South Asia (SA) – is the least integrated
subregion in the world, and has been slow in responding to the global trend of
regionalism
An integrated market can be especially important for small economies in the
subregion to boost domestic and regional sources of demand – particularly in
the aftermath of the global financial crisis and ongoing economic downturn in
the West
To maximize the benefits of higher growth, regional cooperation and
connectivity thus needs to be strengthened
Trade and Investment
Market-Led Intraregional Trade and Investment
Merchandise Trade
 The intraregional trade share in SSWA is relatively low at 38%, compared to
an average of 51.5% for the AP region, and is also below the modeled value
derived from gravity equations, suggesting that the subregion has room for
expanding intraregional trade
Intraregional Trade Shares of the Asia-Pacific Subregions: 2006-2009
70
% of Total Trade
60
50
40
Actual
30
Modelled
20
10
0
NCA
SSWA
Pacific
Subregion
ENEA
SEA
Source: ESCAP 2011 based on data from IMF, Direction of Trade Statistics, 2010 and UN Statistics Division
Trade and Investment Cont.
 SSWA is not yet part of production networks, which has been the primary
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
driver of intraregional trade in East Asia – trade in parts & components in SA
was a mere 1.3%, compared to 56.3% for East Asia (ADB, 2010)
Similarly, close to half (43.4%) of East Asia’s trade in final goods was within
the region, compared to only 2.8% of SA’s
Complementarity indices calculated by ESCAP (2011) reveal a high degree of
complementarity between ENEA and SEA, but a low value for SSWA
Yet the value for trade between SSWA and other subregions is somewhat
higher – exports from SSWA are more complementary with imports from
ENEA and the Pacific
This suggests the desirability of pursuing a broader approach to trade
integration in the SSWA subregion, not only within SSWA but also across
other subregions
It is particularly important for the subregion to get connected with production
networks in East Asia, to realize full benefits of intraregional trade
Trade and Investment Cont.
Services Trade
 Services are playing an increasingly important role in SSWA – the largest
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increase in AP between 1999-2010 was recorded in the regional share of SSWA
– more than 30%, mostly due to India
But it still remains only the 3rd largest contributor to regional services trade at
15%, suggesting potential for further growth
India has played a major role in services trade – in 2008, India accounted for
around 70% of Asia's exports of computer and IT services (WTO)
Most of India's computer services exports however were destined for North
America and ADB (2010) analysis shows that intraregional trade shares in
services are negligible in SSWA
The subregion's low level of bilateral flows of services trade, and the high growth
of total services trade, signal a potential for increased intraregional trade in some
services sectors
Also, unlike merchandise trade, services trade is more complementary – India
specializes in computer and IT services and other economies in traditional
services (travel, transport)
Trade and Investment Cont.
Intraregional Investment
 Investment integration measured using the annual FDI (AFDI) share – the %
of regional FDI inflows to the total FDI from the investing region – show
that SA and Central & West Asia are least integrated among the subregions
Intraregional FDI Shares in Asia and the Pacific: 1995-2005
80
70
60
Percentage
50
ASEAN
40
Central and West Asia
30
East Asia
20
South Asia
The Pacific
10
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
-10
-20
Year
Source: Asia Regional Integration Center (ARIC)
2004
2005
Trade and Investment Cont.
Trade Costs
 The large potential and opportunities for intraregional trade and investment
is severely hindered by the presence of various trade-related costs
 Intraregional trade costs in the SA region are particularly high - they are only
1% lower than those between SAARC and ASEAN or those between SAARC
and the EU (ESCAP, 2011)
 Trade procedures in SSWA till take 50% more time to complete than in
South-East Asia
 Trade Facilitation measures are essential in dealing with trade costs, but
remains a big challenge:
 Complexity of measures and resource requirements
 Their effectiveness is dependent upon the level of infrastructure and the
quality of the business regulatory environment, which are poor in SSWA
Trade and Investment Cont.
Policy-Led Intraregional Trade and Investment
Subregional Groupings/PTAs in the SSWA Subregion
Grouping Member States
Scope
Challenges
SAARC
(1985)
Afghanistan,
Bangladesh, Bhutan,
India, Maldives,
Nepal, Pakistan, Sri
Lanka
• SAFTA (2006) aims at working
towards the formation of a FTA by
2016, under which the customs
duties on products from the region
will be progressively reduced
• SAARC Agreement on Trade in
Services (SATIS) and a SAARC
Development Fund were established
in 2010
• Regional politics which is impeding
the progress of SAFTA
• An ineffective institutional structure
– a number of (overlapping)
committees without proper
coordination
•Lack of adequate resources in the
SAARC Secretariat to monitor
implementation of activities
• Large sensitive lists, lack of binding
commitments, non-tariff barriers
ECO (1985)
Iran, Turkey,
Pakistan,
Afghanistan and 6
Central Asian
countries
• Under the ECO Trade Agreement
(ECOTA), aims to establish a single
market for goods and services
through agreements relating to
tariffs, para-tariffs and NTBs
• Has embarked on several projects
in sectors including energy,
transportation, agriculture and drug
control
• Little progress has been made due
to the marked similarity of ECO
economies, which all specialize in a
small group of primary products
(Pomfret 2009)
•Lack of appropriate infrastructure
and institutions to make full use of
resources
Trade and Investment Cont.
Subregional Groupings/PTAs in the SSWA Subregion
Grouping
Member States
Scope
Challenges
IOR-ARC
(1997)
19 Indian Oceanrim states including
SSWA countries
• 4 key components of the IOR-ARC
roadmap include trade liberalization, trade
and investment facilitation, economic and
technical co-operation and facilitating
movement of people
• There are three different working groups –
trade and investment, business forum and
academic group – that engage in a variety of
projects and work programmes
• The association has remained
dormant for a long time now –
an effective road map has not
been developed to address
economic issues
• Has huge potential to
contribute to cooperation in
areas like climate change
ACD
(2002)
30 members
including
Bangladesh, Bhutan,
India, Iran, Pakistan
and SL from SSWA
• 2 vital dimensions – dialogue and projects
• The areas of cooperation include a range of
issues, from road safety to biotechnology, and
are organized according to the concept of
prime-mover and co-prime-mover countries
•Despite its wide-ranging
scope, progress has been
limited to discussions (the
dialogue dimension)
 SACs are also part of APTA (1975) and BIMSTEC (1997), which cover trade, investment
and infrastructure development cooperation programs
 Important FTAs in the subregion include the India-SL FTA, the Pakistan-SL FTA, the
India-Nepal FTA and the India-Bhutan FTA, and the possibility of a Bangladesh-Iran FTA,
while PTAs include the Pakistan-Turkey PTA and the SL-Iran BTA
Connectivity through Transport, Energy and ICT Networks
Transport Infrastructure
 Infrastructure Quality indicators presented by the Global Competitiveness
Report 2011-2012 shows that the quality of SSWA’s infrastructure lags
significantly behind the G7 country average and the world average, and also has
the poorest quality in all indicators among all AP subregions
 Air transport in SSWA (and AP) is the closest to G7 levels, while electricity
supply lags furthest behind
Region
Overall
Infrastructure
World
4.3
G7 Countries
5.7
Asia-Pacific
4.27
CA
4.05
NEA
5.12
SEA
4.56
SSWA
3.83
Pacific
4.13
Road
Railroad
Port
4
5.69
3.91
3.33
4.39
4.45
3.66
3.97
3.1
5.3
3.68
3.4
5.22
3.08
2.93
3.8
4.3
5.39
4.12
2.98
4.97
4.45
3.86
4.4
Air
Transport
4.7
5.74
4.69
4.1
5.12
4.99
4.17
5.07
Electricity
Supply
4.5
6.41
4.32
4.07
5.78
4.69
3.23
4.43
Connectivity Cont.
Transport Cooperation in SSWA
Initiative
Countries Involved
Description
SAARC Regional
Multimodal Transport
Study (SRMTS)
8 SAARC Member
States
Identified 10 road corridors, 5 rail corridors, 2
inland waterway transport corridors, 10
maritime corridors and 16 aviation gateways as
having great potential to improve regional
connectivity
Subregional Transport
Logistics and Trade
Facilitation Projects
Bangladesh, Bhutan,
India, and Nepal
Rehabilitated rail links (Bangladesh, India),
improved road corridors (Bhutan, India),
improved trade corridors, transit arrangements
and facilities (Nepal, Bhutan)
Improving Connectivity Bangladesh, Bhutan,
and Destination
India, Nepal, and
Infrastructure for
Sri Lanka
Subregional Tourism
Development
Promoting new tourism circuits, improvement of
key cultural heritage sites, capacity building
programs to strengthen tourism and heritage site
management
Transit transport
framework agreement
Outlines 12 objectives to stimulate trade and
facilitate the movement of goods from landlocked
regions to existing ports
ECO Member states
Connectivity Cont.
Energy
 Iran is a net exporter, while other countries in SSWA are net importers of
energy, among which the most significant are India and Turkey
 There is thus huge potential for mutually beneficial energy trade in the SSWA
subregion
 In fact, the SSWA region is mostly linked by energy trade, but is below
potential due to various tensions and issues:
 Though a majority of India's crude oil imports come from Iran, imports have
decreased in recent years, largely due to issues with processing payments
 The Iran-Pakistan-India gas pipeline project was launched in the 1990s, but India
withdrew in 2008 following terror attacks in Mumbai
 SAARC energy cooperation
 Has established Experts Groups on ; Oil and Gas, Electricity, Renewable Energy and
Technology/knowledge sharing (including energy efficiency, coal etc.).
 Agreements on establishing a regional energy grid, importing natural gas from
outside the SAARC region, and setting up regional oil-refineries and LNG-terminals
were signed in September 2011
Connectivity Cont.
Energy Cooperation in SSWA
 Gas pipeline projects:
 The Iran-Pakistan gas pipeline project to build a 7.5 bcm pipeline by 2015
 Gas pipelines linking Iran with Pakistan; India and Pakistan; Myanmar with
Bangladesh and India
 A project by Afghanistan, India, Pakistan and Turkmenistan is expected to bring 33
billion cubic metres of natural gas per year from Turkmenistan to Pakistan and India
via Afghanistan
 Electricity Trade:
 Bhutan exports 75% of its hydroelectricity to India
 Afghanistan and Pakistan import electricity from Iran
 The power system of Nepal is interconnected with the power systems of the states
of Uttar Pradesh and Bihar in India, and talks are under way to set up a 130-km
power transmission link connecting Behrampur in India and Bheramara in
Bangladesh
 One of the biggest challenges faced by several countries is improving
electricity supply, and thus strengthening cooperation in this area is crucial
Connectivity Cont.
Information and Communications Technologies (ICT)
 The most significant development in SSWA’s ICT connectivity has been the rapid
diffusion of mobile telephone networks and services
 Nevertheless there is still significant inequality in ICT connectivity, where SWA
is well above SA – SACs can develop ITC infrastructure by forming linkages with
SWA
80
70
Number of Users
60
50
ICT Indicators in SSWA, 2009
5000
4500
4000
3500
3000
2500
40
30
20
10
0
2000
1500
1000
500
0
Source: World Bank, World Development Indicators, 2011
Internet Bandwith Bits
90
Fixed Lines
Mobile subscriptions
Internet usage
Internet bandwith bits per second per capita
Connectivity Cont.
ICT Initiatives
 SAARC has adopted several policies and plans for the development of the ICT
sector in member countries:
 Plan of Action on Telecommunications (2004) – recommends the reduction of
telecom tariffs within the SAARC region to the lowest extent feasible and the use
of direct links or of a hubbing/transit facility for intra-regional traffic
 SAARC Common Position on the Information Society (2005) – calls for harnessing
ICT for social and economic development, preservation of linguistic and cultural
diversity, increasing literacy rates, and access to information for all
 SASEC Information Highway Project (2001) – this has 3 components; the
establishment of the SASEC regional network, building the SASEC village network
and establishing the SASEC regional research and training network
 However, the extent to which these have been implemented remains unclear
Financial Cooperation
Financial Market Development
 The prospects for regional financial integration depend to a large extent on
how developed and stable financial markets are
 In the SSWA subregion Iran has the least developed financial markets, while
India and SL perform relatively well and above the world average, but lag
behind East Asian economies
Financial Market Development Indicators in the SSWA Subregion, 2010-2011
7
6
Score
5
Availability of financial services
4
Financing through local equity market
Ease of access to loans
3
Soundness of banks
2
1
0
World
Bangladesh
India
Iran
Nepal
Pakistan
Sri Lanka
Source: Global Competitiveness Report, 2011-2012
Turkey
0.7
16
0.6
14
12
0.5
10
0.4
8
0.3
6
0.2
4
0.1
2
0
0
2002
2003
2004
2005
2006
Source: Asia Regional Integration Centre
2007
2008
2009
Percentage
Coefficient of Variation
Financial Cooperation Cont.
Financial Integration
 Financial integration in SSWA is low, as most Asian financial markets are more
closely integrated with those in the US and Europe, in part due to the
underdevelopment of national markets and a lack of institutions
 Price indicators for the SA subregion show that financial integration has been
deepening (falling CoV values), but deteriorating since 2007; Quantity
indicators (portfolio share) show a massive drop in 2004, but has been picking
up since 2006
Portfolio Share (%)
CoV of Bond market rates
CoV of Money market rates
Financial Cooperation Cont.
Initiatives
 Financial cooperation initiatives are mainly limited to SEA (Chiang Mai
Initiative, Asian Bond Fund, Asian Bond Market Initiative, ASEAN
Infrastructure Fund)
 ACD is the only grouping that links both South and South-West Asia in terms
of financial cooperation, which takes the form of periodic meetings of finance
ministers and central bank governors and exchange of information and
expertise – initiatives stated above are also part of ACD
 SAARC Finance:
 A regional network of the SAARC Central Bank Governors and Finance
Ministers/Secretaries set up in 1998, whose aim is to promote cooperation among
its members through close consultation and coordination of macroeconomic
policies, enhancement of institutional capacity and monitoring of international
issues on the financial and monetary systems
 SAARC Development Fund (SDF):
 Set up in Bhutan in 2010 as a part of SAARC financial cooperation to finance
various social, economic and infrastructure projects in the subregion, including the
preparation of feasibility studies
Other Key Sectors
Food Security
 The recent rise and volatility in food prices has driven the policy focus to the
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importance of food security in the AP region
This issue is particularly relevant for the SSWA subregion, where high inflation
– primarily driven by food inflation – remains a serious problem
The subregion has the highest proportion of undernourished population in the
AP region
According to the FAO, more than 21% of India’s people are already
categorized as malnourished, with 27% in Bangladesh, 26% in Pakistan and
19% in Sri Lanka also suffering from malnutrition
Food price inflation has in fact exceeded overall inflation rates in many
economies in 2010
As food inflation affects the poor disproportionately, it is a serious problem for
SSWA countries with a high incidence of poverty
Underscores need for concerted effects for regional cooperation among
countries
Region
Proportion of Population Undernourished (Average, %)
ENEA
SEA
SSWA
NCA
Pacific
Asia-Pacific Total
Developing
Countries
World
1990-1992
15
24
25
8
15
20
20
1995-1997
12
18
22
9
14
17
18
2003-2005
10
16
21
11
12
16
16
16
14
13
Source: ESCAP 2009 based on FAO 2008
Country
Overall Inflation (%)
Food Inflation (%)
Pakistan
14.2
20.4
India
8.2
15.7
Bangladesh
8.2
11.0
Sri Lanka
10
12.9
Source: FAO 2011
Other Key Sectors Cont.
Food Security Initiatives
 The rationale for regional action on food security is in part driven by the
assumption that regions are a logical and natural location for policy responses
and government actions on issues that cannot be addressed easily by individual
countries
 SAARC Food Bank (SFB):
 The SFB came in to operation in 2008 as a follow-up to the non-operational
SAARC Food Security Reserve
 Has 2 main objectives: (a) to act as a regional food security reserve for SAARC
member countries during normal times, food shortages and emergencies and (b) to
provide regional support to national food security efforts, foster inter-country
partnerships and regional integration, and tackle regional food shortages through
collective action
 However, the SFB has so far been inadequate in addressing food crises during
emergency situations – there is no existence of a clear-cut transportation
mechanism, border formalities, institutional mechanisms, and appropriate delivery
method of the food grains to the recipient countries
Other Key Sectors Cont.
Environment and Sustainable Development
 SA has among the world’s highest levels of urban air pollution, with cities in
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Bangladesh and Pakistan suffering from acute air contamination
Water scarcity, rapid population growth rates and increasing urbanization are
also common challenges in SSWA countries
Deteriorating environmental conditions and extreme weather conditions
could undermine economic progress in many countries in the region
The region is also vulnerable to projected sea-level rises – by 2050,
Bangladesh alone is likely to lose about 11% of its land, affecting an estimated
15 million people (HDR Report, 2011)
Climate change is also posing severe threats to the region and will exacerbate
water scarcity – temperatures are expected to increase more rapidly in the
arid areas of northern Pakistan and India and western China
Approximately $105 billion is needed annually just to finance adaptation to
climate change, especially in SA and sub-Saharan Africa (HDR Report, 2011)
Other Key Sectors Cont.
Environment Cooperation
 "SAARC Environment Action Plan” (1997):
 SAARC Coastal Zone Management Center (SCZMC) (2004) – promotes
cooperation in planning, management and sustainable development of coastal
zones, including research, training and awareness in the region
 SAARC Forestry Center (SFC) (2007) – protection, conservation and prudent
use of forest resources
 SAARC Convention on Cooperation on Environment was signed during the 16th
SAARC Summit in 2010 and will enter into force once ratified by all Members
 The SAARC Action Plan on Climate Change (2009-2011) identifies 7
thematic areas of cooperation
 Regional cooperation in SSWA is still low, but joint activities are slowly
evolving under the Arab League:
 Regional workshop on Disaster Risk Reduction and Climate Change in Nov. 2009
 Adaptation to climate change dealt with by the Arab Water Council
 However, no agreements in place to regulate sharing of water sources which
is an urgent problem
Other Key Sectors Cont.
Adopting Environmentally Sustainable Technologies
 Trade and investment in CSGTs have recently received much attention where
trade, climate and environment, and development all benefit
 Global trade in CSGTs in the AP region is gradually rising, with ENEA and
SEA accounting for the largest share of total Asia-Pacific CSGT trade
 Notably, India and Turkey are among the top 10 exporters and importers of
CSGTs – India accounts for 2.6% of exports and 4.1% of imports, while the
figures are 1.4% and 3.5% for Turkey
 ESCAP analysis of the revealed comparative advantages at the sector level
shows that some AP developing economies have the potential to become
CSGT exporters in at least some of these products. In SSWA:
 India and SL feature as potential leaders in the production of solar photovoltaic
and efficient lightning
 Comparative advantage for Pakistan is found in the production of generators
associated with clean coal
Other Key Sectors Cont.
Disaster Risk Reduction and Management
 While disasters affect all subregions of AP, over the period of 1980-2009,
SSWA had the greatest number at 1,283. These subregion also experienced the
most fatalities mainly owing to the 2004 Indian Ocean Tsunami
Subregion
ENEA
NCA
Pacific
SSWA
SEA
Total
Events
Killed
Affected ('000s)
908
297
406
1,283
1,069
3,963
162,804
34,644
5,425
566,423
394,687
1,163,983
2,567,214
17,231
19,126
1,914,696
272,777
4,791,044
Damage ($
Mn)
578,602
15,636
39,078
141,506
48,220
823,041
Source: ESCAP 2010 based on data from EM-DAT
 ESCAP (2010), estimations of risk indices reveal that while the risk of loss by
climatological disasters has reduced, the risk of deaths by meteorological
disasters has increased in the SSWA subregion
Other Key Sectors Cont.
Cooperation in Disaster Risk Management
 South Asia:
 SAARC Meteorological Research Centre (1995) and a SAARC Coastal Zone
Management Centre (2004)
 SAARC Disaster Management Centre (SDMC) (2005) following the Indian Ocean
tsunami in 2004, to assist countries in formulating policies, strategies, and disaster
management frameworks, in conducting research, studies, training programmes,
and in disseminating information and good practices
 West Asia:
 Subregional cooperation is lacking, and has instead looked to organizations beyond
their neighbourhood such as the Arab League and Gulf Cooperation Council (GCC)
 The Asian Disaster Reduction Center (ADRC)
 The network involves 28 countries including 6 from South Asia and 1 from West
Asia
 ADRC’s most significant contribution is the Sentinel Asia project, which uses data
from EO satellites as the basis of a disaster management support system
Other Key Sectors Cont.
Migration and People-to-People Contacts
 Migration is an important area for cooperation among countries in SSWA –
the main destinations of migrants from SSWA have been the Middle East and
North Africa, followed closely by the SSWA subregion itself
Intra-Regional Migration Flows in SSWA, Millions, 2010
100%
90%
Source Country
80%
Other Countries
Percentage
70%
Turkey
Sri Lanka
60%
Pakistan
50%
Nepal
40%
Maldives
Iran, Islamic Rep.
30%
India
20%
Bhutan
Bangladesh
10%
Afghanistan
0%
Bangladesh
Bhutan
India
Iran, Islamic
Nepal
Rep.
Country of Destination
Sri Lanka
Source: World Bank, Bilateral Migration and Remittances, 2010
Turkey
Other Key Sectors Cont.
Migration Cooperation Initiatives – Regional Consultative Processes (RCPs)
 Colombo Process (CP):
 An RCP involving 11 countries – Afghanistan, Bangladesh, China, India, Indonesia,
Nepal, Pakistan, Philippines, SL, Thailand and Vietnam – on the management of
overseas employment and contractual labour for countries of origins in Asia
 Dialogues evolve around 3 themes: Protection of and provision of services to
migrant workers, Optimizing benefits of organized labour migration, Capacity
building, data collection and inter-state cooperation
 Abu Dhabi Dialogue:
 Brings together the CP countries with the GCC states, plus Yemen, Malaysia and
Singapore to promote welfare and well-being of workers
 The current priority is to identify the role and responsibilities of both the
government and the private sector at every stage of the contractual work cycle
 Currently negotiations are underway for the establishment of a South Asia
Migration Commission (SAMC) to oversee migration and enhance its positive
aspects in SA
Conclusion and Way Forward
 Economic integration and cooperation in the SSWA subregion is relatively
low, compared to ENEA and SEA
 In SA, SAARC has seen slow progress, while West Asia, discouraged by
prolonged conflicts, has yet to develop a single subregional organization
 Possibilities for mutually beneficial cooperation exist in the subregion:
 Energy trade, where Iran can export energy resources to other countries
 Financial cooperation, where Iran with poorly developed financial markets can
gain from collaborating with other countries
 Trade and investment cooperation in CSGTs led by India and Turkey
 Cooperation in food security – a pressing problem in the subregion
 Enhancing regional connectivity is a multifaceted task that will require the
implementation of bold policy initiatives at the national and regional levels,
and in many different areas
 However, connectivity and cooperation is vital in addressing key challenges in
the subregion, sustaining its dynamism and in reducing the wide disparities in
economic opportunities within and across SSWA countries
Thank you
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