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 

 





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

  





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

  





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   

  

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   





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 www.ips.lk