Regional Economic Cooperation and Connectivity in … · Regional Economic Cooperation and...

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

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

Potential and Challenges

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

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

Market-Led Intraregional Trade and Investment

Merchandise Trade

0

10

20

30

40

50

60

70

NCA SSWA Pacific ENEA SEA

% o

f T

ota

l T

rad

e

Subregion

Actual

Modelled

Intraregional Trade Shares of the Asia-Pacific Subregions: 2006-2009

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


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)

Services Trade


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 Investment

-20

-10

0

10

20

30

40

50

60

70

80

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Pe

rce

nta

ge

Year

ASEAN

Central and West Asia

East Asia

South Asia

The Pacific

Intraregional FDI Shares in Asia and the Pacific: 1995-2005

Source: Asia Regional Integration Center (ARIC)


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 Costs


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

Subregional Groupings/PTAs in the SSWA Subregion

Policy-Led Intraregional Trade and Investment


Grouping Member States Scope Challenges

IOR-ARC

(1997)

19 Indian Ocean-

rim 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)

Subregional Groupings/PTAs in the SSWA Subregion

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

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

Transport Infrastructure

Region Overall

Infrastructure

Road Railroad Port Air

Transport

Electricity

Supply

World 4.3 4 3.1 4.3 4.7 4.5

G7 Countries 5.7 5.69 5.3 5.39 5.74 6.41

Asia-Pacific 4.27 3.91 3.68 4.12 4.69 4.32

CA 4.05 3.33 3.4 2.98 4.1 4.07

NEA 5.12 4.39 5.22 4.97 5.12 5.78

SEA 4.56 4.45 3.08 4.45 4.99 4.69

SSWA 3.83 3.66 2.93 3.86 4.17 3.23

Pacific 4.13 3.97 3.8 4.4 5.07 4.43

Connectivity Cont.

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

and Destination

Infrastructure for

Subregional Tourism

Development

Bangladesh, Bhutan,

India, Nepal, and

Sri Lanka

Promoting new tourism circuits, improvement of

key cultural heritage sites, capacity building

programs to strengthen tourism and heritage site

management

Transit transport

framework agreement

ECO Member states Outlines 12 objectives to stimulate trade and

facilitate the movement of goods from landlocked

regions to existing ports

Transport Cooperation in SSWA

Connectivity Cont.

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

Energy

Connectivity Cont.

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

Energy Cooperation in SSWA

Connectivity Cont.

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

Information and Communications Technologies (ICT)

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

0

10

20

30

40

50

60

70

80

90

Inte

rne

t B

and

wit

h B

its

Nu

mb

er

of

Use

rs

Fixed Lines

Mobile subscriptions

Internet usage

Internet bandwith bits per second per capita

Source: World Bank, World Development Indicators, 2011

ICT Indicators in SSWA, 2009

Connectivity Cont.

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

ICT Initiatives

Financial Cooperation

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

0

1

2

3

4

5

6

7

World Bangladesh India Iran Nepal Pakistan Sri Lanka Turkey

Sco

re

Availability of financial services

Financing through local equity market

Ease of access to loans

Soundness of banks

Source: Global Competitiveness Report, 2011-2012

Financial Market Development Indicators in the SSWA Subregion, 2010-2011

Financial Cooperation Cont.

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

Financial Integration

0

2

4

6

8

10

12

14

16

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

2002 2003 2004 2005 2006 2007 2008 2009P

erc

en

tag

e

Co

eff

icie

nt

of

Var

iati

on

Portfolio Share (%)

CoV of Bond market rates

CoV of Money market rates

Source: Asia Regional Integration Centre

Financial Cooperation Cont.

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

Initiatives

Other Key Sectors

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

Food Security

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

Region Proportion of Population Undernourished (Average, %)

1990-1992 1995-1997 2003-2005

ENEA 15 12 10

SEA 24 18 16

SSWA 25 22 21

NCA 8 9 11

Pacific 15 14 12

Asia-Pacific Total 20 17 16

Developing

Countries

20 18 16

World 16 14 13

Source: ESCAP 2009 based on FAO 2008

Source: FAO 2011

Other Key Sectors Cont.

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

Food Security Initiatives


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)

Environment and Sustainable Development


"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

Environment Cooperation


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

Adopting Environmentally Sustainable Technologies


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

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

Disaster Risk Reduction and Management

Subregion Events Killed Affected ('000s) Damage ($

Mn)

ENEA 908 162,804 2,567,214 578,602

NCA 297 34,644 17,231 15,636

Pacific 406 5,425 19,126 39,078

SSWA 1,283 566,423 1,914,696 141,506

SEA 1,069 394,687 272,777 48,220

Total 3,963 1,163,983 4,791,044 823,041

Source: ESCAP 2010 based on data from EM-DAT


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

Cooperation in Disaster Risk Management


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

Migration and People-to-People Contacts

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Bangladesh Bhutan India Iran, IslamicRep.

Nepal Sri Lanka Turkey

Pe

rce

nta

ge

Country of Destination

Other Countries

Turkey

Sri Lanka

Pakistan

Nepal

Maldives

Iran, Islamic Rep.

India

Bhutan

Bangladesh

Afghanistan

Source Country

Intra-Regional Migration Flows in SSWA, Millions, 2010

Source: World Bank, Bilateral Migration and Remittances, 2010


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

Migration Cooperation Initiatives – Regional Consultative Processes (RCPs)

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

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