CHAPTER-5 CONSTRAINTS TO REGIONAL INTEGRATION IN SOUTH ASIA

Transcription

1 CHAPTER-5 CONSTRAINTS TO REGIONAL INTEGRATION IN SOUTH ASIA As per the World Bank database, the South Asian region is one of the fastest growing economic regions in the world, averaging around 6.8 percent growth during Despite the opportunities, progress in achieving regional cooperation in South Asia has been at best modest because of a number of economic and political factors. On the economic side, the main inhibiting factor has been the competitive rather than complementary nature of products in South Asia. The exports of South Asian countries are highly concentrated towards labor-intensive products except India. The countries mainly export laborintensive products, such as textiles and agricultural products and import petroleum and capital-intensive goods. Efforts for integration are further impeded by low growth and demand within the region, reliance on industrial countries for capital finance and inherited mutual suspicion. Despite huge potentials, economic integration is at low level and not flourished in the South Asian region. Varieties of factors have prevented effective regional integration and have deprived South Asian nations from more rapid development and benefitting from cross-border trade and investments. Following are some of the major factors that have retarded the region s economic integration. 5.1 Trade Related Constraints The regional trade of South Asia remains dismally low at 4.8 percent as compared with the regional trade of the European Union at 66.7 in 2008, the North American Free Trade Agreement (NAFTA) at 33.2 percent, Asia- 133

2 Pacific Economic Cooperation (APEC) at 65.5 percent, the Association of Southeast Asian Nations (ASEAN) at 25.8 percent, So far the progress in this region has been modest 22. Some of the reasons behind slow growth of trade are: Identical Comparative Advantage The basis of bilateral and multilateral trade is economic comparative advantage in the production and trading of goods and services. Most of the countries of South Asia produce and export similar goods and services that comprise largely of raw materials and traditional products, such as food, textiles and garments, and some countries of SAARC region are in direct competition in the world market for the export of these products (Table-5.1). On the other hand, the imports of the region consist mainly of capital goods and high-tech products. In this scenario, the South Asian region can hardly be characterized as self-reliant and therefore, the trade pattern of the regional countries is automatically titled towards trade with the developed countries. Table-5.1 South Asian Countries Major Exportable and Importable items Country Name Afghanistan Major Exportable Items opium, fruits and nuts, hand woven carpets, wool, cotton, hides and pelts, precious and semiprecious gems Major Importable Items importable commodities are machinery and other capital goods, food, textiles, petroleum products, etc. 22 UNCTAD

3 Bangladesh jute and jute products, tea, readymade garments, frozen fish, and shrimps, seafood leather and leather goods, fertilizer, spices, vegetables, manpower Petroleum (Crude), Official Equipments, Plant, and Machinery, Automobile, Construction Materials, Dyestuffs Chemicals, Ferrous and Nonferrous Metals, Minerals, Iron and Steel Textile, Edible Oil, Milk Products, Raw Cotton, Cement, etc. Bhutan Timber, Dolomite, Spices, Calcium Carbide, Gypsum, Electricity, Cement, Fresh and Canned Fruits and Juices, Alcoholic Beverage cardamom, Timber Products, Minerals. Petroleum Products, Machinery, Iron and Steel, Automobile, Textiles, Agriculture equipments. Consumer Goods, Sugar, Edible Oil, Rubber, Tires, Wheat. India Maldives software, pearls, jewelry and precious stones, pharmaceuticals, machinery, vehicles, metal products, tea mate, clothing, iron ore and steel, films, cotton products, petroleum, handicrafts, leather and products. dried skipjack, canned fish, frozen skipjack, shark liver oil salted dried skipjack and reef fish, apparel and clothing accessories, red coral, cowries shells and mica. 135 crude petroleum products, machinery, pearls, precious and semiprecious stones, chemical products, edible oils, vegetables and fruits, food stuff, vehicles, fertilizers, rock salt, cotton, sugar, ceramics and melamine. consumer goods, petroleum and food items, manufactured goods, machinery, vehicles, chemicals, steel, rice, cement wheat, sugar, tobacco, beverages, paper.

4 Nepal cotton garments, woolen goods and carpets, oil seeds, pulses, hides and skin, niger seeds, jute and jute products, handicrafts, tea, leather goods, paper and paper products, silverware and jewelry, tooth paste, polyester yarn, toilet soap, vegetable ghee, pashmina products. food and live animals, chemicals and drugs, manufactured articles, construction materials, petroleum, oil and lubricants, raw wool, automobiles and transport equipments, machinery, fertilizer, textiles, edible oil cement, electrical goods, industrial raw material. Pakistan raw cotton, textiles, cotton cloth, cotton yarn, synthetic textiles, garments, hosiery rice carpets and rugs, leather, leather products including leather garments and footwear, ceramic, and fish and fish products. Sri Lanka tea, rubber, gems, marine foods, semi precious stones, coconut oil and coconut products, readymade garments. petroleum and its products, chemicals, nonelectrical equipments, machinery, transport equipments, iron and steel products, edible oils, electrical goods, fertilizers, tea. machinery, petroleum, chemicals, pharmaceuticals, iron and steel, vehicles, textiles, dairy products, fertilizers, pulp and paper products, sugar. Source: compiled from Export Import Data Bank, Government of India, Ministry of Commerce and industry, Department of Commerce Thus, in table-5.1 data shows that South Asian region is characterized by an almost identical pattern of comparative advantage in a relatively narrow range 136

5 of products and there is a lack of strong complementarities in bilateral trade structures. On the one hand there is Similarity in the trade structure, on the other hand absence of comparative advantage in capital intensive and high valueadded products, normally imported by countries in the region act as structural hindrance in the expansion of intra-regional trade and investments. Although, India has expanded into the production of a considerable volume of machinery, software and IT services, vehicles, and jewelry with comparative advantage and marketability in the South Asia region, but other South Asian countries are deficient in capital and lack well diversified industrial bases. Lacking in complementarity in trade, South Asian economies compete in their export markets in a narrow range of products, particularly in textiles and apparel and other light manufactured goods. These resource scarcity have prevented the South Asian countries from undertaking investments in high value-added exportable products, as a result these countries are dependent on industrialized countries for their capital goods and technology with the exception of India, which enjoys the best position in the region in terms of a relatively diversified export structure Restrictive Trade Policies Restrictive trade policies of South Asian countries are also responsible for the low level of intra-regional trade. Although the South Asian countries have substantially liberalized their economies during the past decade or so and some trade liberalization process has also occurred under the SAFTA regime. But the trade liberalization process of SAFTA has not made any significant impact on intra regional trade in South Asia. This could be due to several reasons. First, tariff concessions alone are unable to enhance intra-regional trade in an environment where other structural constraints are present. Second, tariff 137

6 concessions under the SAFTA regime are offered mostly on items that are of little export interest to the member countries. Third, the strictness of the SAFTA rules of origin restricts the member countries from taking advantage of the tariff concessions offered under SAFTA regime Low Levels of Intra Industry Trade The proportion of intra-industry trade in total trade is very low for most of the products, indicating a low intensity of intra-industry trade in the South Asian region. Leather products, textiles and clothing and some basic machinery and tools, these are some of the products in which there was intra-industry trade among South Asian countries. The historical pattern of intra-industry trade amongst the South Asian countries is highly inconsistent and there are a few products in which intra-industry trade take place in South Asia Lack of Balance in Inter-Dependence with in SAARC Economies There is a lack of balanced inter-dependence within SAARC. Since few of the countries of the region are at a higher stage of development, they are supposed to reap more benefits from trade integration, thereby, making the gains of the South Asian regional integration asymmetric in nature. Under the scheme of economic cooperation, countries like India, Pakistan and Sri Lanka are likely to gain more than the most underdeveloped countries like Bangladesh, Nepal, Bhutan and Maldives. The trade among the SAARC countries is characterized by persistent imbalances. India has a consistent surplus in balance of trade with all the SAARC countries. South Asian countries traded little with each other. 138

7 Table -5.2 Percentage of Trade between Individual South Asian Countries with the Rest of South Asia (as a proportion of trade worldwide) Year/Country Import Exports Imports Exports Imports Exports Afghanistan Bangladesh India Maldives Nepal Pakistan Sri Lanka Source: IMF Direction of trade and statistics Figures represent the percentage of trade by a single country with the rest of South Asia as a proportion of trade worldwide. Table-5.2 shows that with exception of Nepal most South Asian Nations traded little with other SAARC members in 1985 (foundation of SAARC). Since then intra SAARC trade has grown vary gradually over time with some declines in Maldives and Sri Lanka have increased their trade with other South Asian countries over time. India and Pakistan s trade with South Asia was very little relative to their trade with the rest of the world. There is increase in strong trade links of Afghanistan with other South Asian countries particularly in

8 The dependence of different countries on group is not uniform. Maldives and Nepal are depended on the group in a substantial manner. Sri Lanka and Bangladesh are in the second category. India and Pakistan are least dependent on the group. Unless economic status of Bhutan, Afghanistan, Nepal and Maldives is upgraded it will not be possible for the group to emerge as a dynamic centre of trade. Chronic and huge trade imbalances of South Asian countries with India have created an atmosphere that is not favorable for regional cooperation Tariff Barriers SAFTA sets up a sensitive list where products exempted from the Trade Liberalization Programme are included. Each country has some sensitive industries that should not face increased competition even from relatively less competitive member countries. The contracting States will negotiate this list. In the agreement, it is stated that the sensitive list shall be reviewed within every four years or sooner, as may be decided by SAFTA Ministerial Council, in order to reducing the number of items in the sensitive list 23. It provided room for negotiations to ensure a maximum ceiling on the number of items that could be placed under the sensitive list by each member country. It appeared in the initial stages of negotiations that a fairly liberal approach would be adopted, perhaps limiting the sensitive list to 10 per cent of tariff lines (of a total of 2,224 tariff lines at the HS 6-digit level) but the final decision was to retain a sensitive list of 20 per cent of tariff lines for non-ldc member states and a close approximation of that for the LDC member countries. SAFTA has begun with a limited approach to liberalizing trade in the region. In 2004, nearly 53 per cent of import trade amongst South Asian countries, by 23 Agreement of South Asian Free Trade Area, Article 7(3b), p

9 value (at the time negotiations were initiated in 2004) is excluded from the tariff liberalization programme under SAFTA. In the SAFTA tariff liberalization process, The LDC member countries like Bangladesh, Maldives, and Nepal have protected up to per cent of their imports from south Asia by excluding them from being subject to tariff liberalization. Table-5.3 shows that Pakistan has maintained the highest number of tariffs lines in its negative list amongst the non LDC member countries a total of 1,183 tariff lines as against a list of 865 by India (for less developed countries 744 items). Sri Lanka- has the lowest number of tariff lines in its negative list 1,065 than the rest of the region. Table-5.3 Summary of Sensitive Lists Countries India No. of tariff lines 865 (for LDCs 744 items) Pakistan 1183 Bangladesh 1254 (for LDCs 1,249 items) Sri Lanka 1065 Nepal 1335 (for LDCs 1,301 items) Bhutan 137 Maldives 671 Source: SAFTA Current Status and Prospects, Dushni Weerakoon* 2010 * Promoting Economic Cooperation in South Asia: Beyond SAFTA, edited by Sadiq Ahmed,Ejaz Ghani,Saman Kelegama 141

10 Tariff liberalization process excluded just about 17 per cent of Pakistan s total imports from SAFTA member countries (Table-5.4). By contrast, Sri Lanka and India have restricted up to 52 per cent and 38 per cent respectively of their total imports from the SAARC region under the sensitive list category. There are huge imbalances in the degree of restrictiveness of the negative lists. Although Pakistan has restricted only 17 per cent of total imports from SAARC under its negative lists, Pakistan s exports of around 34 per cent are excluded under the negative lists of its trading partners in SAFTA. Sri Lanka (51.7 percent) and India (38.4 percent) also have restricted a high share of imports from being subject to tariff cuts. India s more than 57 per cent of exports to SAFTA member countries fall within the respective negative lists of its trading partners. On the other hand, 47 percent of Sri Lanka s exports to the rest of the region are subject to the negative list of the member countries where no tariff reductions will be enjoyed. Table-5.4 shows that LDC member countries have received better treatment, where the percentage of export trade restricted by negative list is substantially lower than the corresponding treatment meted to imports from SAFTA non- LDC partners. Table-5.4 Trade restriction under SAFTA sensitive list (in percent) Value of imports from SAARC subject to sensitive list India Pakistan Bangladesh Sri Lanka Nepal Value of exports to SAARC subject to sensitive list Maldives Source: SAFTA Current Status and Prospects, Dushni Weerakoon* * 2010 * Promoting Economic Cooperation in South Asia: Beyond SAFTA, edited by Sadiq Ahmed,Ejaz Ghani,Saman Kelegam, 142

11 It is clear from the Table-5.5 that India and Pakistan have given each other relatively liberal reciprocal treatment bilaterally, in terms of the share of import trade that is restricted by their respective negative lists. India is the key to South Asian economic integration. Bhutan, Nepal and Sri Lanka have effective free trade entrance to the Indian market for their exports. India has restricted only a limited share of imports from Maldives (3.6 percent) and Bangladesh (11.2 percent) under SAFTA. While Bangladesh has restricted nearly 66 per cent of total imports from India under its sensitive list. Thus, there is a situation where significant bilateral imbalances pre-exist, the risks of potential revenue loss, more comprehensive import competition to domestic industries, can be higher for some countries and lower for the others. Table-5.5 Bilateral Trade Restriction under SAFTA (2006) % of imports under Negative List By From Bangladesh India Maldives Nepal Pakistan Sri Lanka Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Source: SAFTA Current Status and Prospects, Dushni Weerakoon* * Promoting Economic Cooperation in South Asia: Beyond SAFTA, edited by Sadiq Ahmed,Ejaz Ghani,Saman Kelegama, 143

12 Table-5.6 Tariff rates in the SAARC countries, 2006 (in percent) (simple average of ad-valorem duties) Country All Agricultural Non- goods goods Agricultural goods India Pakistan Bangladesh Nepal Sri Lanka Bhutan Maldives Source: WTO Trade database, April 2007 Although Bangladesh, India and Pakistan have been continuing trade liberalisation since the early 1990s, the progress is still very slow. Considering tariff levels, South Asia has still been considered one of the most highly protected regions in the world (Table-5.6). Amongst the seven economies, Sri Lanka has got the lowest protection level with 11.2 percent of average tariffs for all goods and Bhutan has persistently the highest average tariffs level with 22.1 percent. The tariff levels for three large economies-bangladesh, India and Pakistan are also very high with 15.2, 19.2 and 14.3 percent respectively. 144

13 5.1.6 Non-Tariff Barriers (NTB) Non-Tariff Measures include any measure, regulation, or practice, other than tariffs and para-tariffs. Para-Tariffs means border charges and fees, other than tariffs, on foreign trade transactions of a tariff- like effect which are levied solely on imports. The existence of high tariff and non-tariff barriers in the SAARC region is one of the greatest obstacles in the expansion of trade in the SAARC region. Thus, the high tariffs and widespread resort to NTB s in the SAARC countries discouraged the expansion of the intra-regional trade. The tariff cuts are not deep enough. Most traded goods are not given the tariff preferences. The negative lists agreed are too large. For example, India s negative list is larger than that in some of its bilateral free trade agreements, and almost four times as large as its latest offer in the negotiations for a free trade agreement with the Association of Southeast Asian Nations. The whole process may become irrelevant because of multilateral trade negotiations under WTO and under bilateral free trade agreements. There is no commitment to eliminate non-tariff barriers. Modalities of the removal of nontariff and para tariff barriers are not well expressed in the agreements. The rules of origin criteria also hampered trade among SAARC countries Low Economic Surplus for Exports All the countries of South Asia have large population and population growth rate is around two percent per annum in South Asia. This continues to grow at an alarming rate of around 2 percent per year. The huge population exerts tremendous pressure on demand for consumption of most of the basic items of production, and there is very little surplus for exports. The situation is not 145

14 improving, as the annual increase in population is excessive while the increase in production is unsatisfactory Problems in energy trade In South Asia, severe institutional barriers hinder regional cooperation in energy. Besides the SAARC, there is no institutional and legal framework for the promotion of regional energy trade. Although there is huge need and possibility of regional trade in energy, the existing regulatory and pricing policies do not encourage the possibilities of regional energy trade. Infrastructure and financial barriers are also hindering in the region at energy trade. Except India, which has resources as well as expertise and technology, no other countries of the region are well - equipped to face the emerging energy challenges except India. India has resources, expertise and technology. Energy cooperation in South Asia is victim of pure political mistrust. Moreover political instability in some countries in the region, reflected in the frequent changes in the governments, is contributing to the policy continuity with the impact on the promotion of regional cooperation High Trade Cost Lower intra South Asian trade is partly due to existence of high trade costs. Trade costs in South Asia is very high due to many factors like lack of infrastructure both physical (roads, rails, airports, etc.) and services related infrastructure (proxied by internet use by business and ministries), government regulations, port inefficiency due to higher shipping turnaround time, corruption in customs, etc. There is a great need to reduce these elements of trade costs for greater regional economic cooperation in South Asia. Higher trade costs is not only restricting trade but also discouraging political will for forming a greater regional cooperation in South Asia. 146

15 Quality Control, Delivery Schedules and After Sales Services Quality control, adherence to delivery schedules and after sales services plays an important role in image building and in expansion of trade. But there are instances of trading of sub-standard goods in the region. Many complaints were noted that exporters are not adhering to the delivery schedules and commitments to provide after sales services. Setting up of branches or agencies by exporters in the region to provide prompt after sales service in SAARC countries equipped with trained personnel is often not found viable. With such a small volume of trade this situation impedes trade especially in consumer and capital goods Trade through Illegal channels Despite trade barriers, informal trade has flourished across the South Asian frontiers. According to the India- Pakistan Chamber of Commerce and Industry, trade through illegal channels has flourished and is now estimated to be six times more than that of trade through formal channels. Experts believe that official trade between the two neighbors could go up to 16 to 20 times if trade relations are normalized. There are many problems in Indo-Nepal Duty Free Border Trade. Nepal has a special trade relation with India, which is due to an open border. Free movement of capital, labour and payment arrangement is giving rise to smuggling. Indo-Bangladesh Border Trade also has many problems The volume of unauthorized border trade between India and Bangladesh is substantial, it is as large as that of authorized trade through legal trade channels. Unauthorized Trade along India-Sri Lanka Border is also very high. The unauthorized trade between India and Sri Lanka is greater than the official trade between the two countries. Even unofficial capital transfers to and from India is 147

16 far greater than the official capital transfers between the two countries. Sri Lanka s official trade deficit is almost ten times higher than the unofficial trade deficit. 5.2 Inefficient Local Business Environment and Economic Conditions in South Asia Any business should get success in its own country of origin before it can succeed in doing business abroad. The South Asian countries suffer from an unfriendly and inefficient business environment. As a result of the risk and cost in establishing and operating a business, it is comparatively less attractive. There are many problems in domestic economic conditions in South Asia that have affected economic integration. Some of the problems are: disparity in the state of economic development in different South Asian countries, macroeconomic instability in many of the South Asian nations like Afghanistan, Pakistan etc. Other problems are low efficiency and effectiveness of policy implementation and project management, low capability of the public sector, low level of infrastructure development Under Developed Capital Market The state of development of the capital market is another area of concern. One of the important reasons for industrial backwardness in the region is that the local capital market in the SAARC less developed countries is very small. Most of the less developed member states have a long way to go for appropriate development and modernization of capital market institutions. There is availability of little finance within the region and its utilization is hampered by poor banking and commercial links and other ancillary services. The access to international capital markets is constrained by the poor sovereign credit ratings and currency risk problems. 148

17 5.3 Infrastructural Constraints No specific provisions are made since the inception of SAARC for the adoption of measures of deeper integration, such as cooperation for development of transport and other forms of infrastructure, granting of transit facilities, liberalization of investment and trade in services, cooperation in the financial and monetary fields, and coordination of macro-economic policies. Even after 25 years of inception, member countries have not agreed to accord transit facilities through their territories for goods coming from neighboring countries. They have not agreed to any scheme of cooperation to restore the common transport infrastructure. Bangladesh is not allowing transit facilities through its territory for the movement of Indian goods to other parts of India. Afghanistan has not yet granted transit facilities by Pakistan for Afghan goods to reach the markets of India and Bangladesh. Cooperation under the association has little meaning for it if infrastructure has reached at different levels in member countries, reflecting the different stages of development. Some of the infrastructural problems are: Major Transport Problems Due to lack of integration of the transport system in South Asia, the logistic costs are very high and ranges between percent of GDP compared to 8 percent in USA. 24 Integration of the transport network of South Asia is especially important to countries such as Nepal and Bhutan and regions such as north-east India. Such integration could serve to end their landlocked or semiisolated status and provide shorter transport and transit links to their desired destinations including access to the sea. Although India has second largest rail 24 SAARC Regional Multimodal Transport Study (SRMTS) 2006, SAARC Regional Multimodal Transport Study Report, Kathmandu: SAARC Secretariat. 149

18 and road network in the world and some impressive gains have been made over the last decade in the area of reducing transaction costs, a lot of work needs to be done to bring India up to the global standards. India still has several problems in the area of international trade and substantive transaction costs are involved in trading with the rest of the world. In Bangladesh, poor transport facilities and infrastructure is great problem in the area of trade facilitation Bangladesh s infrastructure also suffers from deterioration caused by periodic flooding and soil erosion. The great impediments in Afghanistan s effective trade facilitation are the lack of connectivity, lack of trained human resources, and lack of proper equipment. The key problem is connectivity with India, due to Pakistani opposition to the development of an overland route between India and Afghanistan via Pakistan. Pakistan is Afghanistan s only outlet to maritime trade Afghanistan s access to the seaports of Karachi and Gwadar in Pakistan is hampered by the poor quality of roads, security issues, and logistical hurdles. The key issue for Nepal s trade facilitation is mountainous terrain and associated complexities. There is lack of a direct rail link between Nepal and Kolkata. Congestion and inefficiency at the Birgunj border with India is also one of the difficulty in trade facilitation for Nepal. The existing route for most Nepalese exports through Kolkata involves transshipment via Singapore or Colombo which increases the costs of trading. Pakistan also suffers from the lack of an integrated transport network. There is lack of institutional union between the various ministries of Pakistan and departments that regulate plan and control its road, rail, air, and maritime transport systems. 150

19 The main problems for Sri Lanka s trade facilitation are behind-the-border problems. Sri Lankan roads are of extremely poor quality, which makes transport from the hinterland to the ports difficult. The concept of multimodality (using a combination of rail and road) does not exist. There are security challenges due to the ongoing political tensions, transaction costs in the movement of goods and services increases. A container takes 35 days to move from New Delhi to Dhaka, because the maritime route is via Bombay and Singapore/Colombo to Chittagong Port and then by rail to Dhaka. However, the same container can reach Dhaka within 5 days, if there is direct rail connectivity between New Delhi and Dhaka. Likewise, a container is required to travel 7,162 km by sea instead of 2,300 km to move from Dhaka to Lahore, because overland movement across India is not allowed. Transport cooperation among Bangladesh, India and Pakistan is needed to have much shorter routes. 25 The surface transport networks in South Asia is suffering and continue to remain fragmented because of many historical, political, and economic reasons as well as lack of cooperation among the member countries. As a result, their potential as engines of economic growth at the regional level remains largely unutilized and under-utilized. The absence of cooperation in transport is having unfavorable impact on economic competitiveness of the countries India has common border with other SAARC countries and no other SAARC country has a common border. Intraregional transportation and communication links are very much weak in South Asia. Improvements in these sectors are critical to derive the full benefits of geographic proximity. In the absence of road connectivity between Nepal India Bangladesh, Nepal cannot access ports in Bangladesh and India cannot use Bangladeshi roads to enter its north-eastern 25 SAARC Regional Multimodal Transport Study (SRMTS) 2006, SAARC Regional Multimodal Transport Study Report, Kathmandu: SAARC Secretariat. 151

20 states, and as a result, transportation costs are very high. No container trains are running between India and Pakistan and similarly between India and Bangladesh, although passenger trains are running among these countries. There is a need to upgrade and develop the infrastructure. Some of the major problems faced by different transport systems are: Road Transport Movement of trucks across the international frontier is restricted by lack of cross-border agreements between Bangladesh and India, as well as India and Pakistan. As a result, transshipment of cargo takes place at the border, which increases transport costs. The roads are of poor quality, having either narrow lane and having poor surface conditions located mostly in all South Asian countries including India. Some important physical barriers are absence of parking, immigration and customs offices, baggage scanning equipments, telephone and warehousing at several border posts and there is use of cumbersome and complicated customs procedures and lack of transparency in inspection. Rail Transport Railway has great potential as a mode of surface transport for long distance freight traffic in South Asia. However, its use is constrained by many physical and non-physical barriers. The major physical barriers identified in regional rail transport are lack of standardization of technologies, braking systems, incompatibility of rolling stock, operation and maintenance practices and use of different gauges, inadequate loop lengths, missing links of shorter lengths in the borders areas, lack of physical infrastructure at interchange points, load restrictions on bridges, lack of coordination in gauge conversion programs. Regarding non-physical barriers, the most important one is the absence of a 152

21 multilateral agreement for direct intraregional movement has also been a main constraint and as a result, the full potential of railways as a mode of transport has not been fully utilized. Manual handling of documentation, duplication of customs checks, limited working hours, restrictions on movement of containers, open wagons and oil tankers, unidirectional traffic and the suspension of railcum-ferry services between Sri Lanka and India are some of the important identified non-physical barriers. Air Transport The cost of travel in SAARC is relatively very high as compared to other regions of the world. Connectivity between the regional centers, especially the capital cities in terms of direct flights is still very low and many capitals are not directly connected. The major physical barriers in air transport are capacity constraints at several airports for both passengers and cargo, in terms of runways, parking areas for aircrafts, as well as security and luggage handling facilities, passenger handling areas, cargo processing facilities (green channel, cold storage, etc.). Regarding non-physical barriers in regional air transport in South Asia, major constraints are the limited number of direct flights between the capitals, high air fare and airport charges compared to other regions of the world, visa restrictions and low use of air travel due to weak economic conditions. Water Transport Some of the major physical barriers in the regional inland waterways in South Asia are capacity constraints at many of the ports, high rates of siltation, bank erosion, inadequate navigational aids and draft restriction, lack of sufficient storage, poor condition of cargo handling equipments and there is no container handling facilities in inland water transport system. Cargo carrying vessels are 153

22 also very much old, repair facilities are inadequate and hinterland connectivity of the inland ports as well as cargo transfer facilities is also very poor. The non-physical barriers in regional inland water transport are poor port performances, which included lack of professional management and computerization Lack of adequate and relevant information One of the crucial problems faced by the SAARC countries for the regional economic cooperation is the lack of information. There is information gap in SAARC countries regarding the export potentials of regional group, import requirements of different countries, domestic economic policies and business opportunities in the region, tariff and non-tariff barriers in the region, infrastructural facilities, potential sources of supply of goods and technology, investment opportunities in different countries of the region. Lack of proper interaction among these countries has restricted the scope for product identifications for exploring the export potential of the SAARC countries, and provided a basis for the resistance to exporting the goods from the region. There is negligible interaction among the business and industry circles of the region, which prohibits the formation of business contacts and joint ventures. The relevant parties do not get timely information on tenders/bids. There is lack of exchange of information in South Asia, which resulted in little awareness of the potential for and possibilities of bilateral and multilateral trade among these countries. Lack of knowledge about a country s trade and economic policies has slowed down trade in the SAARC region. For instance, custom officials have no full awareness of FTAs, which results in delay in clearances. 154

23 5.3.4 Poor Banking Relations There are poor banking relations among the banks of the member countries of SAARC, which have adverse impact on the scope of promoting trade among SAARC countries. There are huge non-performing assets. The Performa and procedures for Letter of Credits (LC s) differ from one country to another in the SAARC region and sometimes it raises the question of honoring the instrument in due course. There is an acute need of adequate financial infrastructure to facilitate trade and investment. Banking sector is not completely developed in this region and the existing network is both insufficient and weak. This indicate that there is need for exhaustive cooperation in commercial banking field such as opening of branches by member countries banks in other regional countries. This would facilitate trade by financing it Poor Education and Human Resource Development There is high population growth in South Asia and majority of population in the region is dependent upon agriculture for their income and employment. Due to rapid population growth there is explosion in labor force which leads to lower private savings and lower domestic resource mobilization. The level and standard of education, especially technical and professional education and expertise of human resources is miserably low in South Asian countries. Consequently, these countries are not able to produce and trade high-tech and high-value products and services. As a result, the total value of products produced and traded remains low. South Asian countries are required to prioritize technical education and the development of human resources by increasing its percentage in their federal budget. The governments in South Asian countries have failed to provide universal education or improve the standard of education offered. the essential condition for the survival and growth of nations and corporate entities is possession of internationally superior 155

24 technical knowledge and human resources. Poorly developed human resources in the region have led to the scarcity of managerial, entrepreneurial, and technical skills. 5.4 Problems in Investment Integration in South Asia There are large number of regulatory problems that continue to pose obstacles to investment and the ability to conduct business. The Indo-Pakistan conflict over Kashmir, conflicts between Sri Lankan government and Liberation Tigers of Tamil Eelam (LTTE), Maoist rebels in Nepal, the rise of global terrorism in Afghanistan have threatened peace in South Asian region and as a result investors from abroad are not interested to invest in this region. FDI from the developed countries have been discouraged due to political disputes, mistrust, and tensions among South Asian Countries. There are controls on banking and movement of capital, corruption, governance, poor quality of available infrastructure, inadequate power supply, lack of transport and communication facilities, finance and land services Competitiveness of exporter is affected by complex customs rules and long (customs) delays by increasing the costs of product and which is hampering not only trade but also efficiency seeking investment. There are exhaustive restrictions on the movement of capital between countries. These controls on the repatriation and surrender of trade receipts are discouraging direct and portfolio investment. In South Asian countries, there is existence of weak and slow legal systems due to which enforceability of contracts is uncertain. Basic legal 156

25 procedures are neither quick nor routine and there is no penalty for delaying proceedings. Foreign investors face difficult legal structures and this creates hurdles in the way of investment in SAARC Countries. 5.5 Political Problems Political relations are not cordial among SAARC countries. Because of political differences, the member countries have simply refused to play even the positive-sum games, because of the fear that the other party would be benefited. Countries do not grow strong when cheap and quality products are denied to millions of consumers, when profitable opportunities are refused to thousands of producers and when the scope for revenue generation are left unveiled. Besides high tariff and non-tariff barriers, the intra regional trade expansion as constrained by the practice of discriminating against the regional sources of supply. Political differences also exist between India and Sri Lanka (prolonged civil war between Indian-backed Tamil Tigers and the Lankan government). The Afghanistan Pakistan relations are constrained by allegations of support for the Taliban from Pakistan. One of the reasons of dispute between India and Bangladesh is securing the immigration and security issues in the India Bangladesh border area. Some political issues that are creating problems in the way of economic integration in South Asia are: Indo-Pak relations India and Pakistan, the two major countries of South Asia do not have cordial relations between them. Long-standing conflict between India and Pakistan over Kashmir has continued to spoil relations between these two large neighbors. Pakistan buys wheat from Canada and America and sugar from Kenya, in spite of its easy availability to India. It is increasing freight charges on every tonne of 157

26 imported wheat. Large number of items imported by Pakistan from distance places and which can be supplied by India like automobile tyres and tubes, textile machinery, several engineering goods, dyes etc. As a result Pakistani businesspersons through Singapore, Dubai and other such countries, import a number of Indian products such as textile machinery, and other engineering goods, dyes, and spices. The benefits of geographical proximity are not derived in such transactions. In addition, a number of items such as cardamom, goat meat, zari for thread work embroidery in Karachi, stainless steel etc. are smuggled across the border because of trade restrictions. Thus, India and Pakistan, which are the major countries of the South Asian region, continue to nurture their long-standing hostility over the Kashmir dispute and have not been able to realize the full potential of their bilateral trade owing to political differences. Given the lack of trust between India and Pakistan that has persisted over the decades, with no prospect of resolution in the near future, it is difficult for SAFTA to emerge as a dynamic institution for regional integration India s central position in South Asia and Fear of Indian Dominance The disparity in size (that is, area) among nations of South Asia has led to mistrust and tension with India a towering neighbor seen as a constant hegemonic threat. Fear of dominance by the neighboring country acts as a trade diversion force from this region. This issue is more prominent in case of India. India is, by far, the largest country in the South Asian region, accounting for more than 80 percent of South Asia s combined GDP, population and trade. South Asia region is basically Indo-centric in nature. India s central location in the subcontinent and India s military strength has generated an invisible apprehension of India Hegeony Because of its comparative size and historically dominating economic orientation in the region; other countries in 158

27 the region are hesitant to allow a free bilateral trading arrangement. All regional countries consider trading with India as a last resort. Regional countries feel that if greater regional integration were allowed, India would soon dominate and control their economies. Efforts to create a new belief structure of mutually beneficial relationship in the region should be made. For all this to be achieved the major responsibility devolves upon India, the biggest country in the region Lack of assurance of equal benefits to relatively smaller countries In a successful regional grouping, all the members must feel they are sharing the costs and benefits of the cooperation equally. India s economic supremacy and comparative advantage in a wide range of products has resulted in asymmetric trade relations with her neighbors, further discouraging regional integration. There is a fear among lesser developed countries that India being a large nation, will eat up their share. As the largest economic force, India must respond through active leadership and demonstrate goodwill to encourage the smaller partners in the group and drive out historic fears. The wave of regionalism among South Asian countries distorted mainly because of the non-cooperation by economically stronger member countries for the adoption of special measures in favour of the lesser developed countries. Regional integration among developing countries can succeed only if the economically stronger member states adopt measures for enabling the weaker member states to obtain equitable benefits from the integration process. European Union has adopted such measures and this is one of the principal factors accounting for the success of regional integration among these countries. Under the EU, a fund was created to assist the lesser developed members like Spain, Portugal, and Ireland for their development. The size of resource allocation under this fund for modernization and diversification of its economy 159

28 was quite substantial amounting to 3 to 5 per cent of the gross national product of the lesser developed country concerned Lack of a Common Policies, Uniform Rules and Practices In South Asian countries, complex and nontransparent rules and regulations, procedures and documentations exist. Regulatory and enforcement mechanisms are also very weak and ineffective. The taxation systems, customs rules and practices are not uniform. There exists administrative inefficiencies, and ineffective application of incentive regimes. A political structure is unstable in South Asian nations as a result there are short-term and unpredictable policies and regulatory frameworks. South Asian countries require clear, consistent, long-term applicable policies on trade and investments There is lack of a set regional position of South Asian nations in international forums like World Trade Organization leading to an ineffective bargaining capacity of these nations in these forums. There are protective barriers, both tariff and nontariff barriers, established by politically powerful network business groups that affects cross-border trade and investments. Despite SAFTA initiatives and other bilateral trade agreements, there are protectionist-based inflexible tariff regimes and nontariff barriers prevailing among member nations. 5.6 Challenges faced by Tourism Industry The South Asian region has the key ingredients to delight its visitors. Poverty, health, child, and gender-related issues are destructing the region s image. In 2007, the South Asian region received less than 1.1 percent (9.7 million) of the 898 million visitors from around the world 26. On the other hand, Europe received 53.5 percent of the global arrivals, and the Asian region, including East 26 UN World Tourism Organization

29 and Southeast Asia, received 19.3 percent. The volume of arrivals to the Asia Pacific region more than doubled between 2000 and 2007, from 85 million to 198 million (UNESCAP 2008). In this growth scenario, unfortunately most of South Asian countries saw only marginal growth, with the exceptions of some significant growth to India and Maldives. For several decades now, the region has promoted tourism. As far back as the early 1980s, the World Tourism Organization (now UNWTO) set up a Secretariat in Colombo for South Asian Tourism Promotion and attempted to promote the region. This initiative failed because of inadequate support and interest from the individual nations state tourism organizations. It is critical that air, sea, and road access be expanded and enhanced if regional tourism development is to take off, but it is equally critical to ensure that most artificial barriers in terms of visa facilitation are made as easy as possible for visitors to the region and for each of the countries in the SAARC alliance. Currently, except for Maldives, Nepal, and Sri Lanka visa formalities are cumbersome for the rest of the countries of SAARC. Almost all countries in the ASEAN region 27 allow visa free or visa-upon-entry facilitation for intraregional travel. The ASEAN group goes one step further to offer an ASEAN Air Pass, 28 whereby traveling to one ASEAN country qualifies a traveler to visit other countries at a concessionary airfare. An ASEAN Hotel Pass (Hip-Hop Pass) 29 with similar incentives is also in effect. In the European Union, most member countries may be visited with a common EU visa, obtained from one of the member countries. ASEAN is aiming to have a common ASEAN visa by Promoting Tourism in South Asia Renton de Alwis Chapter-11 of book Promoting Economic Cooperation in South Asia: Beyond SAFTA, edited by Sadiq Ahmed,Ejaz Ghani,Saman Kelegama Renton de Alwis

30 The South Asian region is far from achieving such levels of freeing formalities among the SAARC member countries and for visitors to the region. Scheme recommended that there was a need to expand the Scheme by nearly doubling the number of categories entitled to be included for visa exemption. At present, some 21 categories of persons are exempted from requiring visas for travel within the SAARC region. 30 The Expert Group deliberated on improving the existing guidelines and procedures of the Scheme. A 2007 review of the decisions on trade and access facilitation 31 indicated that a gap existed between the decisions taken at the various stages to ease visa facilitation and its implementation. To achieve results, the region s officials need to shift from a control mindset to one that is customer oriented and pragmatic. Lack of a practical approach of political and bureaucratic leadership toward identifying and exploiting economic opportunities and there is environment of mistrust between India and Pakistan, which is discouraging tourism. Due to an introvert attitude, self-imposed limitation of access to and within the South Asian region is prevailing. Political instability, low economic growth rate and failure to distribute the growth achieved to reduce poverty due to unequal distribution of income and wealth are some of the factors discouraging tourism in the region