SAARC: Why not India and Pakistan find ways and means to benefit economically?
Sridhar .K. Khatri
Executive Director, South Asia Center for Policy Studies, SACEPS
Let me begin my comments by stating the simple facts. There is no dearth of vision on how SAARC should proceed in achieving meaningful cooperation in the region, but there is only lack of clarity on how the strategy should be implemented in the region. There have been many inputs from civil society on what steps need to be taken, but the absorption capacity of intergovernmental institutions have been limited in this regard. Even for the seminal Report of the SAARC Group of Eminent Person established by the SAARC Summit in 1997 at Male was not fully discussed at the intergovernmental level nor endorsed in its entirety. But subsequent Summits in 1999 and thereafter have taken in many of the recommendations of the GEP in a piecemeal manner, without establishing adequate mechanisms (except for ISACPA on the question of poverty alleviation) to monitor their implementation.
Among these include the commitment of SAARC to the following goals:
• Endorsement of South Asian Free Trade Area, followed by a Customs Union leading to South Asian Economic Union
• Energy cooperation; Strengthening transportation, transit and communication links across the region; • Harmonization of standards and simplification of customs procedures; • Public and private sector cooperation through joint ventures’ • Setting up a South Asian Development Bank; Establishment of a South Asian Development Fund’; Cooperation among Central Banks
• Developing tourism in the region; South Asian Development Goals for Poverty Alleviation
• Strengthening the SAARC Secretariat; • Dealing with the threat posed by terrorism
• Establishment of South Asian University.
Although valid criticisms can be made about SAARC that it has not produced any concrete result which people of the region can relate to, there have nevertheless been significant progress made in a number of areas.
• Although SAFTA was originally scheduled to be in operation by 2005, it was moved forward to 2002 by the SAARC Summit in Male in 1997. SAFTA finally “came into operation” in January 2006, and important clauses relating to “rule of origin”, “mechanisms for compensation of revenue loss for LDCs”, and “operation certification procedures” were finalized 6 months later. Despite the current hitch posed for full participation of Pakistan, which wants to trade with India on the basis of “positive list” rather than “negative list”, SAFTA is nevertheless almost ready for implementation.
• Similar progress has been made regarding poverty alleviation in the region, despite the unrealistic deadline set to ‘eradicate’ poverty in South Asia by 2002 earlier. The reconstituted Independent South Asia Commission on Poverty Alleviation (ISCAPA) has adopted a more reasonable approach by suggesting a 24-point approach for halving poverty in South Asia by 2010, as opposed to MDG of the UNDP that requires South Asia to do so by 2015.
• The establishment of South Asia University seems to be off to a promising start, which the inter-governmental committee of experts has already approved the draft prepared by Dr. Gowher Rizvi and is likely to be endorsed by the Summit in New Delhi. The novel recommendations of the report is that the University might materialize as a joint public and private sector enterprise which could be operated free of governmental controls.
• After years of discussion, and to some extent large degree of negligence, the South Asian Development Fund is also making some headway with assets amounting to around $300,000,000.
• The SAARC Secretariat has also prepared a comprehensive report with the assistance of ADB in developing a multi-modal transport system in the region.
As many of you will agree, the main obstacle to realizing the connectivity of South Asia is political. But even on issues that were considered to be sensitive, we are today seeing greater flexibility. The ‘composite dialogue” between India and Pakistan over the past two years has led to opening of bus and railway services, and dialogue over strategic issues on Siachin, Sir Creek and the future of divided Kashmir. Indo-Pakistan dialogue has had a salutary affect on regional cooperation where both India and Pakistan are willing to consider key areas of cooperation more openly than before. Moreover, there is also a newly found confidence in the region, which is in large part reflected by the surprising growth rates in India and Pakistan, along with the smaller countries of the region.
Given SAARC’s checkered history over the past two decades, there is no denying that in the coming years SAARC is likely to muddle through as it has done in the past, without making any significant dent on the lives of its people and in the political economy of the region. But there are positive indications that South Asia will begin to exhibit its dynamic character in the future despite of itself and the inhibitions it has demonstrated over the past two decades. This optimism regarding the region’s future is based not on the belief that governments will one day realize their tardiness and then turn around and take some serious measures to bring South Asia into the mainstream of the international development process. It is based rather on the belief that, despite the failures of governments, there are positive trends that indicates South Asia is on a positive trajectory for greater cooperation, which governments will be forced to follow in the years to come.
Let me just take a number of examples to support this argument. First is the case of poverty in South Asia. Not long ago it was common to hear South Asia compared with Sub-Saharan Africa where the dual phenomena of governance and poverty literally allocated the two regions as the wretched places on the planet. Jeffrey Sachs’ analysis suggests that this may no longer be the case. Looking at the two different periods, 1981 and 2001, he suggests that while almost half of Africa’s population lived in extreme poverty in the earlier period, that proportion has risen slightly over the two decades. In the case of South Asia there has been a marked improvement where the proportion of the extreme poor has gone down from 52 percent to 31 percent. Although this is not as significant as for East Asia, where the proportion has plummeted to from 58 percent to 15 percent, it is nevertheless a significant achievement for the region. Taking Bangladesh as an example, Sachs credits the change in the region to economic empowerment of the poor—where through ingenuity of NGOs like BRAC and Grameen Bank, and partly through investments that have been made—a country that was once considered a “international basket case” by Kissinger is today considered as “a country worth of attention, care, and development assistance.”
The second case is that of economic growth that has been exemplified by India since it began it liberalization programs in the 1990s. In the past two decades, the size of the middle class in India has quadrupled to almost 250 million people, and 1 percent of the country’s poor have crossed the poverty line every year. India is now the world’s fourth largest economic power and many expect it to surpass Japan to become the third- largest very soon. As Gurcharan Das suggests, “what is most remarkable is that rather than rising with the help of the state, India is in many ways rising despite the state.” The entrepreneurs, especially in the IT sector, are the catalyst in India’s economic miracle and have managed to fuel growth through the service sector and domestic consumption. India has managed to maintain an average of 7.5 percent growth rate for the past five years, despite archaic labor laws and “bureaucratic high modernism”.
India is not alone in registering positive growth trend in the region. Roberto Zagha did a study in 2005 which lists as ‘growth successes’ those countries with a faster per capita GDP growth rate than the US in the 1 990s, and a 1 980s growth rate of at least 1 percent. His list contains one Latin American country (Chile) a few small African countries (Botswana.,Lesotho), no Eastern European or Central Asian country, but six of the eight South Asian countries.
As the list suggests, there is clearly something going on in the region, unlike in Africa. Development experts have identified a number of reasons for Africa’s ‘growth tragedy’ among which includes lack of policy reforms, corruptions, civil conflict, macroeconomic instability, ‘natural resource curse’ and a rigid and fixed exchange rate system. Shantayanan Devarajan argues that although some of the same phenomena are present to some degree in South Asia, there has nevertheless been a turn for the better in the region due to a number of exceptional factors.
Despite endemic political disturbances in the country and listed by Transparency International as the most corrupt country in the world, Bangladesh is growing at 5 percent a year, with per capita GDP growing at over 3 percent. The country has made significant progress in human resource ‘development and is on track in reaching the Millennium Development Goal of reducing poverty by two-thirds by 2015. The reason for Bangladesh’s positive growth rate goes beyond conventional economics since people have not only “found ways of going around the government” but also because “the government made space for NGOs and private sector to function”. There is a parallel economy for service delivery in education and heath sector that have been financed by the government or donors, but it is not the government officials running the system. And Bangladesh’s world famous microcredit industry now has 14 million clients, mostly women, which is operates almost entirely outside the public sector.
• The case of Sri Lanka and Nepal illustrates that although internal conflicts can be extremely debilitating for countries and can hold back their potentials, the future prospects need not always be dim for nations caught in the conflict trap. Despite two decades of conflict Sri Lanka grew at over 3 percent per year. The growth centered largely in the western province, which was able to take advantage of trade reforms undertaken by it policy makers. The country’s high literacy rate also enabled it to take advantage in the niche garment market through its exports. The Sri Lakan example proves there can be growth in non-conflict areas of the country when the conflict is localized.
On the other hand, in Nepal at the height of Maoists’ insurgency (1996-2004) per capita private consumption grew at over 4 percent a year, or 40 percent over the eight-year period. The dramatic reduction in poverty was made possible by substantial remittances coming into the country both from the Middle East and India.
• As for the natural resource curse, the Maldives has averaged 9 percent GDP growth over the past two decades, with per capita GDP of $2,300. The growth has come primarily through the tourism industry. The homogenous population of the country may account for a shared interest in the development of the tourism sector.
• Bhutan has a fixed exchange rate with India, but its economy has been growing at 6.6 percent, with per capita GDP growing at 4.4 percent. Since India is also Bhutan’s largest trading partner and aid donor, the distortions caused by the exchange rate may be minimized.
The implication of India (and one can add also China) as an engine of growth for South Asia will be substantial since it accounts for (in 2005) about 80 percent of South Asia’s GDP, trade and regional growth. In South Asia, India’s development into regional hub would attract more foreign direct investments into India, and from India to other South Asian countries that would boost economic growth in the whole region. The backward linkages that South Asian countries would develop with India would in turn mean greater demand for Indian imports for the rest of South Asia, which would reinforce each other’s needs. As the latest ADB report states, “India is not only crucial for the success of regional trade cooperation in South Asia; it could also transform the development and growth pattern of the entire region.”
The latest report by the World Bank, entitled Global Economic Prospects: Managing the Next Wave of Globalization, is even more upbeat. It predicts that in the next 25 years the growth in the global economy will be powered by the developing countries, whose share in global output will increase from about one-fifth of the global economy to nearly one-third. This means that despite population growth the number of people living in dire poverty (below $1 -a-day) is likely to fall to 550 million from 1.1 billion today, and those living on less than $2-a-day would fall from 1.9 billion to 800 million. It also means that some of the key drivers in the global economy will be some of the countries from South Asia and China. There are today six developing countries which have populations greater than 100 million and GDP of more than $100 billion. By 2030, there will be 10 countries that would have reached the twin 100s thresholds, and four of them will be from the vicinity of South Asia. In addition to India and China that have already reached that level, Pakistan and Bangladesh are also likely to be part of this dynamic group.
Taking the economic argument one step further, it is possible to envision a third case where economic compulsion in the region may eventually help to bring down the political barriers, particularly between India and Pakistan, in South Asia. The best example is between India and China where the two countries after fighting a war in 1962 have without resolving their territorial differences engaged each other since the later 1 980s. As a result, bilateral trade has boomed from less than $200 million in the early 1990s to nearly $20 billion in 2005. China is set to overtake the EU and the US as India’s largest trading partner within a few years. And despite some political and territorial differences, both countries agreed to set up a “strategic partnership” in April 2005, which has led to frequent high level visits by leaders to each other’s capitals.
The question is, will the approach adopted by India and China be applicable to India’s relations with Pakistan? My impression is that in time anything is possible. If two rivals, such as India and China can put their territorial differences aside to achieve major economic gains, it is also possible for India and Pakistan to find ways and means to benefit economically without even sacrificing their stand on political and territorial issues. The important thing is for Pakistan to overcome its fear that open trading arrangements with India, bilaterally or multilaterally, will not lead to Indian products swarming its market at the cost of its own industries. For its part India needs to be confident of its growing economic power to be able to devise ways to placate the Pakistani fears, both real and imagined. Past experience shows that this is easier said than done. But the start of the “composite dialogue” between India and Pakistan on some of the most vexing issues within the past year or so has been promising and indicates that both sides are ready to move beyond the official posturing that had been the hallmark of past negotiations.
There is already strong logic for a more liberal trade between India and Pakistan as the benefit that would accrue to both countries would be substantial. In 1996, The Economist estimated that although Pakistan’s import from the other six South Asian countries amounted to $138mn in 1994, about $1 bln in intermediate and capital goods from India alone reached Pakistan via countries such as Dubai, Singapore and Hong Kong. Smuggling across the 1,000km border which divided the two countries is thought to account for another $1 bn in trade every year. The Economist then reported that an official Indian study estimates that, if trade were liberalized, Indian exports to Pakistan would be about $2.5bn a year. A recent study by the ADB in 2006 estimates that if a liberal trade regime was established between India and Pakistan today the volume of trade would go as high at $10 billion.
A fourth major catalyst for deeper integration in South Asia could come from a force whose potential has largely gone unrecognized today. It is possible that we may see the private sectors and civil society playing a more decisive role in regional cooperation in the years to come. Within the last 10 years, it has been the practice for representative of the private sectors to be included in official delegations of governments during crucial trade negotiations. The role played by various business groups in framing the bilateral free trade agreements between India and Sri Lanka, and between Sri Lanka and Pakistan was substantial, as was the in the case of India’s bilateral trade agreements between with both Nepal and Bangladesh. It may be only a matter of time before the private sectors in the region begin to define for member countries of SAARC the logic of economic benefit of cooperation, instead of being led by bureaucratic elites as it has happened over the past half century.
(Excerpts from the paper presented by the author at a seminar held by the Institute of Foreign Affairs on March 27, 2007 in Kathmandu-ed.)