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Regional integration in the areas of trade, investment and capital market development in South Asia is yet to be on the priority agenda of the South Asian countries. There have been significant changes in the world economic order, including many eventful shifts in paradigms in the socio-economic and politico-financial arena in South Asia in recent times. The changing scenario makes it pertinent to take a fresh look at the case of economic integration.
There are a number of obstacles to the feasible economic integration in the South Asian region. The two important reasons are political differences and lack of intraregional trade among the South Asian countries. Political disputes among the countries act as the main challenge to a strong economic integration in this region.
On December 05, 1985, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka formed the South Asian Association for Regional Cooperation (SAARC). Cooperation was sought in economic, social, scientific and cultural areas. Since the formation of SAARC, the benefits of the association have not been achieved because of internal and external conflicts within and between member states, political instability, rigid and inflexible economic policies, bureaucratic inflexibility, and unbridled corruption.
Despite common heritage, history, linguistic, cultural and social practices shared by these nations, South Asia has emerged as the least integrated region in the world. Geographic dependency of other member countries of SAARC on India is a critical issue for integration in the region. India has its borders with all member countries in SAARC except Afghanistan and Maldives. Nepal and Bhutan are land-locked and they are totally dependent on India for transit to move to the outside world. Bangladesh has the access to international sea but it is surrounded by India on all other sides.
Intra-regional trade in SAARC is the lowest compared to other regions of the world. The SAARC member-countries exchange more goods with countries outside the region than within the region. In contrast, the European Union (EU) member-countries exchange more than sixty per cent of their goods within the member-countries. This has led the EU to become a successful economic and political union and it has been a model for all other countries and regions who want to exchange goods within a strong economic region. The other regional economic groups like North American Free Trade Agreement (NAFTA) and Association of Southeast Asian Nations (ASEAN) have a substantial intra-regional cooperation within the member-countries. The scenario in South Asia is quite different. Intra-regional trade as a ratio of total foreign trade in South Asia was only 4.9 per cent in 2010 while this ratio was higher (26.1 per cent) during the same period within ASEAN member-countries.
In South Asia, the highest level of intra-trade was 60.51 per cent for Nepal and then 43 per cent for Afghanistan in 2011. India, a key player for the economic integration in South Asia, shared only a very insignificant trade (2.7 per cent) within the member-countries of SAARC. Although India's trade with SAARC region has expanded in recent years, it is very low compared to India's total world trade.
In spite of the formation of South Asian Free Trade Area (SAFTA), trade flows within SAARC region are far below the desirable level. This is perhaps on account of the disparities in the market size of SAARC economies unlike other regional groupings. For instance, Bhutan or Nepal cannot be the major export destinations for India and Pakistan. Thus, one cannot reasonably expect more than a modest potential in the intra-SAARC trade, particularly of big SAARC countries with small SAARC economies. In stark contrast, the small economies of Bhutan and Nepal have maintained strong trade links with India. For instance, Nepal and Sri Lanka import around 46 and 16 per cent of their imports from India but these cover a negligible portion of Indian exports. (Jain, Rajeev and Singh, J. B)
The countries in South Asia should have been natural trading partners which unfortunately they are not. As the countries are trying for export-led development they are exporting their goods to industrialised developed countries. The main trading partners of South Asian countries are basically non-Asian countries. North America and the EU are the two major trading partners of most of the SAARC member countries.
Among the trading partners of SAARC member countries, USA and EU are the major export destinations of Bangladesh, India, Pakistan and Sri-Lanka. Among all the South Asian countries only two countries, Nepal and Bhutan, conduct the major portion of their international trade within the South Asian region. The reason is that they are geographically constrained and land-locked by India, and the size of their economy is small. Bhutan trade almost 95 per cent of export and 75 per cent of import with India. In the same way, India is the largest trading partner of Nepal and it shares more than 80 per cent of export and import with India.
Manufactured products have the major share of export and import of all countries in south Asia. In case of agricultural products, all countries in the region, except India, are major importers. India is a net exporter of food items. Only Maldives exports a large amount of agricultural items. All countries are importers of fuel. Exports of this region are dominated by labour-intensive manufacturing, i.e., textiles and garments, for its very low cost labour. The products constitute more than 75 of export earnings of Bangladesh and Pakistan and more than 5 per cent of Sri-Lanka and nearly 3 per cent of India's export (Das, 2007).
Although South Asia is a large regional trade block, its achievement in regional economic integration is very insignificant. The two main reasons are political barriers among countries of this region and lack of intra-regional trade among the SAARC member-countries. The intensity of regional economic cooperation in a region largely depends on the intra-regional trade among the member countries.
Dr Muhammad Abdul Mazid is Chairman Chittagong Stock Exchange and Senior Vice Chairman of South Asian
Federation of Exchanges (SAFE).