Opportunities and Challenges
Saman Kelegama
Institute of Policy Studies of Sri Lanka
SAFA Conference 2016, Lahore, 30 January 2016
Outline of Presentation
 Growing Trade, Investments and Global Integration
 Challenges still Remain
 Trade and Investments – Opportunities
 Trade and Investments -- Impediments
 Trade and Investments – Challenges
 Way Forward
Growing Trade, Investments and Global Integration
 Recent developments in South Asian countries (SACs) – the re-
emergence of democratic governments, new growth momentum despite
the global economic downturn and greater openness – warrant a fresh
look at the region’s prospects for further liberalization
 SA is currently the 2nd fastest-growing region in the world – GDP in
SACs has grown strongly at about 6% since the 1990s, and almost 7% in
during 2004-2009 and around 6% in the post-2009 period
 This higher growth trend is directly attributable to the opening up of
the economies among other factors
 Trade and investment reforms implemented since the 1980s & 1990s
have increased the region’s level of global integration: trade and FDI
have grown consistently since then
 Since opening up, trade dependence ratio of all SACs have increased
and shown an increasing trend over the years, and all SACs have shown
high growth of exports and imports
Substantial Challenges Still Remain
 While the advent of globalization has ushered in a new era of economic
growth and development in SA, the region remains mired in highly
uneven and polarized growth patterns
 Poverty remains a big challenge for the region – the incidence of
poverty is still high and the absolute number of people living below the
poverty line has actually increased
 Low intra-regional trade between SACs has been a constant concern at
less than 6% of SA’s total trade with the world, compared to 52% in
East Asia and the Pacific, 17% in Latin America and Caribbean and 11%
in Sub-Saharan Africa (ADB 2009)
 Cross-border trade in services remains low and so is investment --
negligible at around 1 %
 In the context of the current economic slowdown in industrialized
countries, the case for stronger regional ties becomes all the more
important
Opportunities
Trade in Goods
 SACs trade with the rest of the world has been growing
 Intra-regional trade is at US$ 20 bn and amounts to 5.8% of
South Asian global trade, but this figure may be close to
US$ 45 bn if the informal trade taking place in the region
(estimated at US$ 25 bn, RIS, 2015) is also taken into
account
 South Asian informal trade has been growing at 112%
between 2005 and 2012 (RIS, 2015)
 With a growing youth bulge and increasing middle class
consumers in the SACs, the demand for intra-regional
trade will be more in the coming years
 Agriculture and industry still paly a vital role in SACs and
these two sectors can play a vital role in stimulating
regional trade
Exceptional Growth of Trade in Services
 Trade in services and investment flows have been the key drivers of
many economies in recent decades – services have become the single
largest sector in many economies
 The 'new economy' of the 21st century refers to a services-based
economy and SACs are no exception, with over 50% of GDP in many
SACs
 Growing contribution of services to region’s trade basket and high
growth of services exports:
 Consistent increase in SA’s share in world services trade over the last 15 years
 SA trade in services during the last two decades have been growing faster
than trade in goods
 Although SA accounts for only 3% of world services exports, its services
exports have grown more rapidly than world services exports since 1993
 The region’s RCA in services has risen steadily and improved over RCA in
merchandise trade
Exceptional Growth of Trade in Services
Growth Rate of Services and Merchandise Trade
in South Asia
Average Annual Growth Rate (%)
30
25
20
Services
15
Merchandise
10
5
0
1991-2000
Source: World Bank (2008)
1991-2006
2001-06
Emerging Patterns of Comparative Advantage and
Complementarity in Services
Category of Services
Sector
Countries with Revealed
Comparative Advantage (RCA>1)
Labour and resource
intensive
Transport
India, Pakistan
Labour and resource
intensive
Travel
Maldives, Nepal
Labour intensive
Construction
India, Bangladesh
Skill and technology
intensive
Communications
Bangladesh, India, Nepal, Pakistan,
Sri Lanka
Skill and technology
intensive
Computer and
information services
India, Sri Lanka
Skill and technology
intensive
Financial and insurance
services
India, Pakistan
Notes: Considers average RCA (31) for the period 2000 to 2006
Source: RIS (2008)
India’s emergence as a Global ICT Outsourcing Hub
 India has emerged as a global hub for outsourcing of ICT software and
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BPO services –exports of these services totaled $ 65 bn in 2014-15
In terms of the Global Services Location Index complied by A.T.
Kearney, India has continued to occupy the 1st rank among different
countries since 2004
In 2007, Sri Lanka and Pakistan were also included for the 1st time in
recognition of their potential for location of services, and rank at 21 and
28 respectively in 2011
The emergence of India as a major hub for exports of software and BPO
services generates opportunities for other SACs in expanding their
exports of these services
Thus, a strategy of regional economic integration and enterprise
cooperation across SA may assist the other SACs to benefit from a
‘flying geese’ model from the success story of India in IT services
Complementarities in services trade between SACs
 While India leads the region in ‘modern’ or sophisticated services (ITES,
BPO etc.), other SACs specialize in ‘traditional’ services, such as travel and
transport
 Trade in services within the region is thus more balanced with smaller and
poorer economies generally enjoying surpluses with larger economies,
thereby helping to bridge asymmetries that exist in trade in goods in the
region
 There are other areas like maritime transport, tourism, and energy
services where SA has export potential owing to factors such as geography,
history, and natural resource endowments:
 Bangladesh has huge reserves of natural gas, with potential to export to other
countries in the region through cross border supply; Paksiatn can be a conduit
for a gas pipeline from Central Asia
 SL has potential in shipping and port services, given its geographic location
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India & SL have considerable scope to export travel & tourism services, given
their rich cultural, natural, and historical heritage
Remittances
 SACs are labour abundant countries, and consequently the region is
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one of the most important exporters of services through the natural
movement of persons – both high-skilled and low-skilled
The relative significance of trade in services via Mode 4 is also evident
from the large volume of inflow of remittances received by SACs – the
largest global recipient of overseas remittances is India
Official remittance flows to SA have been rising continuously over the
past 2 decades from US$ 5.6 bn (1.4% of GDP) in 1990 to US$ 81.2 bn in
2010 (8.8% of GDP) to US$ 118 bn in 2014 (9.3 % of GDP)
Remittances are the largest source of external fund flows in SA – in
2006, they were almost as twice as large as private debt and portfolio
equity, 3 times as large as FDI and 7 times as large as official
development assistance – this trend continued till about 2014
Compared to other regions, remittances in SA are a far more important
form of external fund flows than FDI
Investments in South Asia: Opportunities
 Services such as telecommunications, banking, energy, transport, and
software services are among the main drivers of FDI in the region
 Recent years have seen a rise of FDI in SA – FDI inflows to SA have
increased by nearly 8 times between 1996 and 2006 and by 4 times
between 2007 and 2014 (Out of US$ 41 bn FDI to South Asia in 2014,
US$ 34 bn went to India)
 However, despite these trends, the share of SA in world FDI remains at
less than 2% of world FDI inflows
 Also, post-2008 has seen a decline in FDI, following the global
economic downturn – highlights need for intra-regional FDI
 As in the case of exports, India is the most important player in driving
FDI flows in services in SA
 Outward FDI from India increased from US $ 5 bn in 2005/06 to US $
12.8 bn in 2006/07 to US$ 38 in 2013/14 but less than 10% of this has
gone to SACs
Investment Opportunities Cont.
India’s Investment Boom
 Indian outward FDI has been generally directed towards developed
economies, yet neighbouring SACs are increasingly looking to India as
a source of FDI :
 In Nepal and Bhutan, India is the predominant source of FDI - over 100
Indian joint ventures currently operate in Nepal, accounting for 36-40% of
its total FDI
 It has also emerged as the largest investor in Sri Lanka and many Indian
companies are also involved in the IT and ready-made garments sectors in
Bangladesh
 Indian companies are also involved in cross-border FDI e.g. Tata
purchasing Tetly, Tata Motors purchasing Jaguar/Land Rover, Tata Steel
purchasing Corus, Hindalco-Novelis
 India has invested in hydro projects in Bhutan and buys back the
electricity, and has played an important role in infrastructure
development in Nepal
Impediments
Persistent Barriers to Trade
 Despite reductions in tariff rates, nontariff barriers (NTBs) are still
significant, and are currently increasing their shares in total trade costs
in the region
 Trade facilitation has become the leading NTB that reduces
intraregional trade in SA:
 Airports and maritime ports in SA are less advanced than those in China
and other countries in East Asia
 Weak land networks across national borders also pose a formidable barrier
to trade in SA, particularly for the landlocked countries
 poor roads lengthen transportation time and reduce the longevity of
vehicles, imposing higher per unit costs for cargo
 According to a World Bank study the costs of trading across borders in
SA are among the highest in the world
 SA is also characterized by inefficient and complicated administrative
procedures and lack of transparency in inspection and documentation
requirements
Constraints from Domestic Regulation
 Domestic regulation is a critical issue for developing countries – SA has
historically been plagued by over-regulation
 Numerous external & domestic regulatory barriers to SA’s services
exports exist in Mode 4 and Mode 3
 immigration and labour market regulations and recognition requirements
 lack of uniformity in training and standards within the countries leading to
deficiencies and considerable divergence in the quality of service providers
 policies towards foreign commercial presence or presence of foreign service
suppliers remain restrictive
 However, regulation is important, particularly in the services sector
where the “good” cannot be inspected prior to consumption
 Thus what is required for liberalization is an effective but un-
cumbersome regulatory regime
Barriers to Investment in South Asia
 SA’s share in world FDI continues to be low mainly owing to:
 The relatively small size of individual country markets
 The relative failure of regional integration efforts in unifying these markets
by removing border and behind-the-border impediments and weaknesses
 Studies have shown that a country’s business environment and
institutional quality are equally, if not more, important for FDI than
low wages or concessions for investments - however, the regional
investment climate is far from satisfactory:
 SACs are considered among the least competitive in the world – The GCI
(2011-12) ranks these countries, except two countries, near the bottom in
the set of 142 countries that were considered
 SA remains relatively more difficult to conduct business compared to other
regions in the world – according to Doing Business Indicators (WB 2011),
SA is the 2nd hardest region to do business
Infrastructure and Manpower Constraints
 In order for trade and investments to develop, countries need an
appropriate infrastructure, including education, telecommunication,
aviation & connectivity
 Significant in the context of outsourcing (Mode 1 exports):
 Physical infrastructure constraints – underdeveloped telecommunications
infrastructure, slow network connectivity, insufficient bandwidth, high
connectivity costs, and erratic power supply
 Human resource constraints – lack of adequately trained & quality
manpower, low levels of computer literacy, high turnover rates, absence of
required language abilities & other specialized skills
 Infrastructure development also important in creating supply
capacities in relatively lesser developed members, leading to more
balanced regional development
Facing the Challenge
Slow Progress in SAFTA
 SAFTA has proved to be a slow process vulnerable to regional politics
 The imbalance of power among member states has resulted in India being
perceived as a risk to security and a source of possible economic domination
 These regional dynamics have stunted trade and cooperation by making the
progress of regional cooperation dependent upon the status of relations among
member states, rather than on economic opportunities
 Further progress in integration and expanding trade will thus be contingent
upon erasing the “trust deficit” that exists and creating improved relations
among member states
 Also, SAARC decisions are not properly implemented and a majority of the
South Asian people is yet to feel the impact of SAARC cooperation
 Less binding commitments, thus commitments are most often not
implemented
 With Global Value Chains increasingly determining trade, reducing tariffs in
the region has become vital for SACs integration process both to the world and
in the region
Slow Progress of SATIS
 Although SATIS came into operation in 2010, the
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submission of “offer” and “request” list for preferential
liberalization is very slow
Even in some of the “offers” they are not GATS-Plus
Afghanistan and Bhutan not being members of the WTO
are take considerable time for submission
Some countries are reluctant to open up services until
fixing the regulatory framework
ASEAN has made many advances in services liberalization
With increasing “servicification’ of the manufacturing
sector (services value added accounts for 26% of
manufacturing in developing countries), services
liberalization is important for SAC competitiveness
Investment Challenge
 Efficiency-seeking industrial restructuring in the region is
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at a very low level and this is seen from IIT indices
estimated in various studies
Joint ventures with buy-back arrangements and
subcontracting activities at a low level in the region
Verticle and horizontal integration of industries is
important for investment to drive trade and the tradeinvestment nexus to drive intra-regional trade
ASEAN Investment Area, ASEAN Industrial Cooperation,
etc., are partly based on this ideas and SAARC Investment
Area yet to come into operation
SAARC Investment Protection and Promotion Agreement
has not been signed due to minor points
Way Forward
 Moving forward as a region calls for making the best use of opportunities
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to overcome challenges
For SA, this can be best realized by exploiting the immense potential for
regional integration – and its subsequent trade, investment, and growth
opportunities – which to date remains untapped
Promoting greater regionalism is crucial in addressing challenges, as this
creates opportunities to harness the spillover benefits of India’s growth
success
Regional trade agreements are more viable as economies are on a levelplaying field and are more likely to have economic complementarity –
already evident in SA especially in services trade
Given its economic power, India will have to take on a disproportionately
larger responsibility for promoting regional cooperation in SA
Yet, regional integration will not be achieved by India’s unilateral actions
alone – other SACs will have to respond positively to Indian initiatives
for successful regional integration
Thank you