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SAARC, The Road-Map for Economic Cooperation
South Asian Perspective
Dr. Sikander Khan
Pro Rector and Professor
Superior University, Lahore, Pakistan
Cell: +92-323-481-5420; +46-70-5785641; Skype: sikander.khan
Address: 17 km Raiwind Road, Lahore, Pakistan
email: sikander.khan@telia.com, skkhan@superior.edu.pk
Visiting Professor at Fudan University, School of Management, Shanghai, China
Paper presented at “The Merits of Regional Cooperation – The case of South Asia”, South Asia
Democratic Forum, 11 October 2012, Brussels
©
Dr. Sikander Khan
ABSTRACT
The paper deals with the road-map for economic cooperation among South Asian Association for
Regional Cooperation (SAARC) member countries. A South Asian perspective is used. In terms of
population, SAARC with its 8 member states is the largest of any regional organization with over 23%
of world population. However, the total GDP of the SAARC member states is only 3% of the world total
GDP.
India’s economy is disproportionately larger than other SAARC members, i.e. 80% of SAARC total
GDP. On the other hand India’s trade with its two big neighbours is low (Bangladesh and Pakistan).
Moreover, SAARC trade with the rest of the world is also low.
The reason for small share in trade is that most of the SAARC members’ economy are not so open,
and they do not trade much with each other. SAARC members have not been as aggressive in
attracting FDI (foreign direct investment) as ASEAN (Association of South East Asian Nations).
The paper examines the reason for low level of trade and regional integration among SAARC member
states. Despite the political issues which will take a long time to resolve, India and Pakistan can
continue with trade liberalization and free movement of people. We can see that China and India have
had unresolved disputes since 1962 and the total trade between the two countries was just $1 billion
in 1990s. In 2011 it has reached to US$ 74 billion. Similarly, China and Taiwan trade has reached
US$100 billion, although China has territorial claim over Taiwan.
If India and Pakistan open up their borders, harbours, railway lines, and airports, and continue with the
liberalization of trade then, it is estimated that the trade potential will increase from the present US$
2.6 billion to maybe US$ 50 to 100 billion.
Recently, there are some positive signs that India and Pakistan are improving their economic
cooperation.
Assuming that the bilateral relations between India and Pakistan improves, then SAARC will become
one of the largest trading block in the world. The expectations are that successful outcome of SAFTA
(South Asian Free Trade Area) could play an important role in strengthening trade ties within the
region. With the reduction in tariff and non-tariff barriers, the informal trade will be also reduced. By
eliminating or reducing the impediments to economic cooperation, SAARC will become one of the fast
growing region with full of economic vitality.
Note: Secondary material has been used in this report. The author has worked in SAARC countries as
an international agency advisor and also as an advisor to the private sector.
Key Words: SAARC, FDI, trade policy, economic co-operation, regional integration, South
Asia
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This paper is presented in four parts:
1. Brief introduction to South Asian Association for Regional Cooperation (SAARC);
2. Reasons for low level of trade and regional integration among SAARC member states;
3. Arguments for the road-map for economic cooperation among SAARC member states with a
South Asian perspective;
4. Conclusions.
1 Introduction to SAARC
The South Asian Association for Regional Cooperation (SAARC) was formed in 1985. The current
eight members are: Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka
(see Figure 1). Afghanistan, Bhutan and Nepal are landlocked countries. Observer countries are:
Australia, Burma, China, European Union, Japan, Iran, Mauritius, South Korea and the United States.
Purpose of the organization is collective economic, technical, social, and cultural development of
member states. The headquarters of SAARC are located in Kathmandu, Nepal. SAARC detailed
objectives and principles can be found on SAARC website: www.saarc-sec.org [11].
All the SAARC members have joined the World Trade Organization (WTO), except Afghanistan and
Bhutan.
Figure 1: SAARC member states
Tables 1 and 2 provides the data on population and total GDP of SAARC member states. In terms of
population, SAARC with its 8 member states is the largest of any regional organization with over 1.6
billion people (23% of world population). Two third of the population of Bangladesh, India and Pakistan
are below the age of 30. However, the total GDP of the SAARC member states was US$ 2.1 trillion in
2011, i.e. only 3% of the world total GDP [16].
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Table 1: SAARC population in 2012 (estimates)
Million
Afghanistan
26.00
Bangladesh
153.00
Bhutan
0.73
India
1,210.00
Maldives
0.32
Nepal
27.00
Pakistan
181.00
Sri Lanka
21.00
Total
1,619.05
23% of world population (World population: 7,043 billion)
Sources: United Nations (2012); CIA World Fact book (2012); & Economist Country Briefing (2012)
Table 2: SAARC GDP in 2011 (estimates)
Billion US$ (nominal)
Afghanistan
18.2
Bangladesh
113.1
Bhutan
1.5
India
1,677.2
Maldives
2.0
Nepal
18.6
Pakistan
211.0
Sri Lanka
59.1
Total
2,100.7
3% of world GDP (World GDP: 71 trillion US$)
Source: The International Monetary Fund's World Economic Outlook (WEO) Database, April 2012
edition.
Table 2 shows that India’s economy is disproportionately larger than the other SAARC members. In
2011, India accounted for 80% of SAARC total GDP, Pakistan accounted for 10%, Bangladesh 5.5%,
Sri Lanka 2.8%, and the rest of the four countries accounted for less than 2 percent (Afghanistan,
Bhutan, Maldives and Nepal).
Average growth rate during the last decade in the SAREC countries have been 5% or more [12]. India
is part of the BRIC countries (fastest growing emerging markets: Brazil, Russia, India and China).
Regarding the two Asian BRIC countries, it is worth to note the following:
China was a closed economy until the Communist Party Leader Deng Xiaoping led China towards the
market economy in December 1978. The Indian economy was also until 1991 a closed economy with
low international trade, high tariff and non-tariff barriers, and a tightly controlled capital account. The
focus of economic policy was on self-sufficiency. Both China’s (1978) and India’s (1991) integration
into the world economy was set with deregulation after a severe balance of payments crisis. The
results of the liberalization were a large increase in exports, imports, and foreign direct investment
(FDI), with external debt declining and foreign reserves recording strong improvements [9].
India is the third largest Asian economy after China and Japan. Among the major emerging markets,
India ranks second in terms of economic growth with the IMF forecasting a GDP growth rate of 6.0
percent for 2012. India is the second most populous country in the world, approximately thirty percent
of the country’s 1.2 billion inhabitants reside in urban areas. India is the major contributor to human
capital development in SAARC through education and health [3], [6], [7].
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2. Reasons for low level of trade and regional integration among SAARC
member states
Let us look at some statistical data dealing with SAARC members:
Figures 2 and 3, and tables 3 to 5 shows India’s trade with different regions. In every respect India is
dominating SAARC region. However, India’s trade with its two big neighbors is low (Bangladesh and
Pakistan). Moreover, SAARC trade with the rest of the world is also low.
Figure 2: Regions’ share of world exports of goods and services, 1995 - 2010
Sources: IMF Direction of Trade Statistics; IMF World Economic Outlook 2012, and Ding Ding &
Ayabo Masha, page 6 [4], [13]
1/ ASEAN-4 comprises Indonesia, Malaysia, Philippines and Thailand
%
Figure 3: India: Share of Trade by Regions
Source: IMF Direction of Trade Statistics [13]
Table 3: Share of World Exports to Developing Asian Countries
Sources: IMF, Direction of Trade Statistics [3], [13]
1/ASEAN-4 comprises Indonesia, Malaysia, Philippines, and Thailand.
2/Excluding India, Afghanistan and Bhutan not reported.
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Table 4: South Asia – Selected Indicators, 2009 – 2010 average
Source: The International Monetary Fund's World Economic Outlook (WEO) Database, April 2012
edition [13]
SAC: South Asian Countries
Table 5: FDI Flows 2005 – 1010 ($, millions)
Source: UNCTAD World Investment Report, 2011 [15]
SAARC countries export less as compared to other Asian countries such as China and ASEAN-4. The
reason for small share is that most of the SAARC members’ economy is not so open, and they do not
trade much with each other. SAARC members have not been as aggressive in attracting FDI as the
East Asian. For India’s trade performance from 1980 to 2010, refer to Ding Ding & Ayabo Masha [4].
Trade between EU and SAARC in 2011 was 103.3 billion Euros. SAARC had a trade surplus with the
EU of 6.7 billion Euros the same year. A large part of exports from SAARC to EU consisted of textiles,
clothing, and primary products. Whereas EU major exports to SAARC consisted of manufactured
products, machinery and transport equipment, chemicals and related products [10].
Figure 4 shows that the formal trade between India and Pakistan is low. On the other hand, it is widely
belived that unofficial trade between the two countries is sizeable. The total trade between India and
Pakistan is expected to accelerate, given that Pakistan recently granted most favoured nation (MFN)
status to India. Note: India granted MFN status to Pakistan in the 1990s.
Figure 4: Trade between India and Pakistan
Source: The Wall Street Journal, 1 March 2012, New York [14]
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Some of the reasons given for low level of trade and regional integration among SAARC member
states [1], [2], [4], [9], [10], [12], [18]:
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Share some basic similarities – low income, abundant labor, and comparative advantage in
similar commodities;
Challenging business environment;
High levels of overall protection;
Infrastructural constraints and institutional restrictions;
Restrictive rules of origin and destination;
Substantial informal or illegal trade.
SAARC region is turbulent with the war on terror going on in Pakistan and Afghanistan, Kashmir and
various other border disputes, particularly, between India and Pakistan. High potential tourism industry
is at a standstill in Afghanistan and Pakistan. However, things have stabalized in Sri Lanka and
several bilateral agreements on various matters have been signed among SAARC member states.
3. Arguments for a road-map for economic cooperation among SAARC member
states with a South Asian perspective
Studies have indicated that when a major economy coexists side by side with smaller countries,
spillover effects of the major economy’s growth on the smaller economies is often high. A recent IMF
study looks into how India’s growth affects the growth of its immediate neighbors. The study found that
the spillover effects of India’s growth to other SAARC countries were positive, but low [4].
In order to facilitate trade and strengthen intraregional links, India granted duty-free access to goods
from most of the SAARC countries in November 2011. Within the framework of the South Asian Free
Trade Area (SAFTA) signed in 2004, the custom duties of all traded goods are expected to be reduced
to zero by 2016 (source: www.saarc-sec.org) [11].
Political issues
SAARC has intentionally laid more stress on "core issues" mentioned above rather than more divisive
political issues like the Kashmir dispute and the Sri Lankan civil war. However, political dialogue is
often conducted on the margins of SAARC meetings. SAARC has also refrained from interfering in the
internal matters of its member states. During the various SAARC summits, extreme emphasis has
been laid upon greater cooperation between the SAARC members to fight terrorism (Source: Official
SAARC website) [11].
At present, there are very few border crossings which are opened between India and Pakistan.
Practically, no direct flights are taking place (after November 2008 Mumbai attacks) with the exception
of PIA (Pakistan International Airlines). Direct shipping connections together with railway lines are also
limited.
However, there are some positive signs, such as:
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India’s decision to allow Pakistani entrepreneurs to invest in India,
Pakistan’s decision to liberalize trade with India, and
Relaxation of the visa regime between India and Pakistan.
There are also some other positive sign of collaboration among the SAARC members. Energy sector
and infrastructure develoment are the two good examples, where Indian public and private sector is
playing an important role. Moreover, remittances from immigrants in India provide some economic
growth in Bangladesh and Nepal. Furthermore, SAARC members earn sustantial amount of revenues
from remittances send to respective countries from their labour force working particularly in the Middle
East. These remittances have a positive effect on economic growth.
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Assuming that the bilateral relations between India and Pakistan improves, then SAARC will become
one of the largest trading block in terms of manufacturing, and services including tourism.
The partnership between India and Pakistan can take place in many forms:
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Government-to-government basis
Corporate-to-corporate basis
Public-to-public basis
Public-to-private basis
All these actions will lead to peace and harmony, and in alleviation of poverty for over 400 million
people in India and Pakistan [8].
4.
Conclusions
Analysis of trade baskets of SAARC countries shows that export baskets of major SAARC countries
are significantly similar, reflecting that they are competing with one another in same industries in the
international market. One of the studies found that India has relative trade comparative advantage in a
larger number of industry groups than other SAARC countries and all major SAARC countries have
some type of advantage in textile sector. This study concludes that despite significant business cycle
convergence in major SAARC countries (India, Pakistan, Bangladesh and Sri Lanka), trade integration
is growing only at a slow pace [9]. Moreover, Indian industry dominance, competitive and scale
advantage scares its neighbors.
One of the major objectives of formation of SAARC forum was to accelerate the process of economic
and social development in member States. Subsequently, trade promotion was also actively pursued
as an area of economic co-operation. At present, intra-SAARC trade is quite low as compared with
that of Association of South East Asian Nations (ASEAN). Furthermore, the growth of intra-regional
trade in SAARC has remained at a low level due to considerations other than economic issues.
Some of the impediments that are slowing the economic cooperation and regional integration:
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Lack of adequate physical infrastructure which hampers SAARC global competitveness;
High level of protectionism existing among SAARC countries;
High tariff and non-tariff barriers;
Unfavorable Rules of Origin;
Lack of harmonization of customs and other procedures, mutual recognition of certificates and
standards and trade facilitation measures;
High barriers to FDI;
High cost of trading across borders, i.e. high level of protection;
Procedural formalities are cumbersome;
Low level of cross-border energy trade with the exception of Bhutan, India and Nepal.
Despite the above mentioned impediments to economic cooperation among SAARC members, there
are vast opportunities in the region to grow intra-SAARC trade if appropriate regional agreements are
put in place.
Moreover, In order to ensure stability and growth in economic cooperation, the Indo-Pak bilateral
relationship plays a very crucial role. The expectations are that successful outcome of SAFTA could
play an important role in strengthening trade ties within the region. With the reduction in tariff and nontariff barriers, the informal trade will be also reduced. By eliminating or reducing the above mentioned
impediments to economic cooperation, SAARC will become one of the fast growing region with full of
economic vitality.
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Finally, some of the questions that were raised at the recent 5th South Asia Economic Summit require
deeper research [12]:
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How SAARC cooperation can lead to sustainable development for its member states?
What opportunities do SAARC trade agreements offer in promoting investment cooperation
and other forms of deeper integration?
What role do inflows of remittances play in SAARC?
How can SAARC engage with China in order to enhance economic cooperation?
What are the prospects and opportunities for SAARC given the normalization of relations
between India and Pakistan?
What can SAARC learn from the experiences of other Asian regional blocks such as ASEAN?
Is there any way of insulating the SAARC regional economic cooperation from political
tensions?
What are the opportunities for renewable energy plants through biomass, solar energy, wind
energy, geo thermal, and hydropower resources?
What are the SAARC possible regional cooperation venues in transport, logistics and
communications sectors?
How can the prohibitive visa regimes be relaxed in order to enhance SAARC economic cooperation?
What are the relative merits and opportunities offered by South Asian Free Trade Area
(SAFTA) and other Trade Agreements among SAARC countries for fostering economic
integration in the region?
References
[1] Asian Development Bank (ADB), Sluggish Global Economy Weighs on Asia’s Growth, July 2012,
Manila
[2] CIA World Fact book (2012): www.cia.gov/library/publications/the-world-factbook/index.html
[3] Department of Commerce, US Commercial Service, Doing Business in India, 2010, Washington
[4] Ding Ding & Ayabo Masha, India’s Growth Spillovers to South Asia, International Monetary Fund
(IMF), IMF Working Paper, WP/12/56, February 2012, Washington
[5] Economist Country Briefing: www.economist.com/countries/India/
[6] India Brand Equity Foundation: www.ibef.org, New Delhi
[7] Kochhar, K., Kumar, U., Rajan. R., Subramanian, A., and I. Tokatlidis, “India’s Pattern of
Development: What happened, What follows?” IMF Working Paper WP/06/22, IMF, 2006,
Washington
[8] Mansoor Ahmad, Trade bloc can be largest common market in the world, The News, 21
September 2012, Lahore
[9] Rajeev Jian & J. B. Singh, Trade Pattern in SAARC Countries: Emerging Trends and Issues,
Reserve Bank of India, August 2010, Mumbai
[10] SAARC, EU Bilateral Trade and Trade with the World, DG Trade, March, 2012, Brussels
[11] SAARC official website: www.saarc-sec.org, Kathmandu
[12] SDPI (Sustainable Development Policy Institute), 5th South Asia Economic Summit, 11 - 13th
September 2012, Islamabad
[13] The International Monetary Fund's World Economic Outlook (WEO) Database, April 2012 edition,
Washington
[14] The Wall Street Journal, 1 March 2012, New York
[15] United Nations Conference on Trade and Development (UNCTAD), World Investment Report,
2011, Geneva
[16] United Nations, Department of Economic and Social Affairs Population Division, September 2012,
New York
[17] UN Yearbook (2012), New York
[18] World Bank, Ease of Doing Business: http://www.doingbusiness.org, Washington
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Glossary
Explanations of the terms and abbreviations used throughout this report.
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ADB: Asian Development Bank
ASEAN: Association of South East Asian Nations
BRIC: Brazil, Russia, India and China
CIA: Central Intelligence Agency
EU: European Union
FDI: Foreign Direct Investment
GDP: Gross Domestic Product
IMF: International Monetary Fund
MFN: Most Favoured Nation
PIA: Pakistan International Airlines
SAARC: South Asian Association for Regional Cooperation
SAC: South Asian Countries
SAFTA: South Asian Free Trade Area
SATIS: SAARC Agreement on Trade in Services
UN: United Nations
UNCTAD: United Nations Conference on Trade and Development
WTO: World Trade Organisation