Deepening South Asian Economic Integration in an era of crisis. A Presentation Feb-09 2

Transcription

1 10-Feb-09 1

2 Deepening South Asian Economic Integration in an era of crisis A Presentation Feb-09 2

3 Scheme of Presentation 1. Principal features of SAARC as compared to other regional organizations. 2. Views on South Asian Economic Integration, and era of crisis. 3. Current global crisis; role of regionalism in mitigating its adverse effects. 4. Progress in and Elements of South Asian Economic Integration. 5. Infrastructure Building and Intra-Regional Connectivity; and 6. Conclusion. 10-Feb-09 3

4 What is so special about SAARC: Compared to other regional cooperative efforts it is: Relatively new (came into existence in December 1985 with the adoption of the Charter at the First Summit in Dhaka); Characterized by low and asymmetric levels of development (not only among Member States but also within a Member State); 5 are LDCs and remaining 3 are Developing Countries; Different size economies; In most areas, regional cooperation is bilateral minus; In the initial years, cooperation was principally directed towards non-economic areas and not on hard-core economic areas such as trade, industry, money and finance;. Process vs Instrumentality. 10-Feb-09 4

5 South Asian Economic Cooperation and Integration-- -main goals Has an inexorable logic of its own and should be approached with first principles and in absolute context. Seeks to contribute in achievement of overarching regional goals of poverty alleviation and regional economic stability. Regional trade links create across the board synergies in other areas including investment flows and improvement in trade related infrastructures. Current global crisis may provide an additional justification for strengthened regional cooperation. 10-Feb-09 5

6 Era of Crisis Clear appreciation is important; Cause and effect should not be lumped together; South Asian economies were neither responsible for crises creation nor have been involved in crises management; Focus in South Asia is on mitigating the negative effect on individual economies (Regionalism can play a role) 10-Feb-09 6

7 Current Global Crisis Early 2008: Key Impact on South Asian countries (Broad and Deep) High Commodity prices and resultant inflationary pressures. Adverse terms of trade for developing countries. [That we could remain insulated has been left behind] Later half of 2008: Financial crisis morphed into economic recession; Financial and economic stresses were transferred to the developing countries; Liquidity dried up; cost of external commercial borrowings and capital increased; Capital flows, portfolio and FDI reduced, even reversed; Current account balances began turning adverse; Trade shock on account of falling import demand from the developed countries; Drop in remittances; and Job losses Some impact is quantifiable in terms of reduced GDP growth, the quantifiable extent of other negative effects is still to fully register. Initial trends are disturbing 10-Feb-09 7

8 Mitigating effect of Regionalism on the negative impact of global crisis Only select aspects of negative impact of Crisis can be mitigated through regionalism Current crisis also signal necessity preparing SAARC s Regional mechanisms to be better prepared for such crisis in future Creation of regional trade demand to offset loss of export markets Intra-SAARC travel could generate sustain regional tourism and compensate fall of foreign tourists Regional cooperation on infrastructure and social areas could provide Keynesian stimulus for 10-Feb-09 8

9 The Principal elements of South Asian Economic Cooperation and Integration Trade Integration; Trade in Services; Investment Cooperation; Financial Cooperation; Cross cutting integration areas: Infrastructure building and intra-regional connectivity. 10-Feb-09 9

10 Elements of Trade Integration to tap the Regional Trade potential Trade Integration Removal of Tariff Barriers through SAFTA Removal of Non-Tariff and Para-Tariff Measures Trade Facilitation: Customs Cooperation and Standards 10-Feb-09 10

11 Constraints to accelerating intra-saarc trade Series of important Constraints such as: o Lack of diversity in the product basket (Member States are competing with one another; but this is changing) o Supply side constraints o Lack of Standardization/Quality Control o Complexity of Procedures and Documentation Requirements o Infra-structural Problems. 10-Feb-09 11

12 Potential for Intra-SAARC Trade Low existing levels of intra-saarc trade under SAFTA (close to 5%); but they could be misleading as bilateral intra-saarc trade figures are not factored. Huge growth potential in spite of low levels of intra-saarc trade----- gap between potential and actual trade is estimated at 120% (ADB Study). Potential for Trade, estimated by some studies, at US$ 85 billion; Complementarity indices of major trading partners in South Asia have improved substantially over the years; and In the medium and long term, setting up of regional supply chains could be considered depending upon the sub-sectoral specialization of each Member State within an overall sector. 10-Feb-09 12

13 SAFTA Implementation of SAFTA will create a Free Trade Area in South Asia by 2016 through a Tariff Liberalization Programme; Basic aim is removal of tariff barriers which alone could help tap at least 80% of potential growth of intra-saarc trade; Full implementation and administration of the Agreement is by the SAFTA Ministerial Council. But removal of tariff barriers alone is not enough! (More about this later) 10-Feb-09 13

14 A FTA cannot be a standalone exercise for boosting regional trade and based on removal of tariff barriers It must be simultaneously accompanied by removal of non-tariff barriers and Trade Facilitation Measures Or else it would not cover products which are actively traded or likely to be actively traded In other words 10-Feb-09 14

15 Schedule of Trade Liberalization Programme TLP TLP began in July From 1 January 2009, Pakistan and Sri Lanka have reduced tariff for goods from LDCs Member States to 0-5%. India has unilaterally reduced its tariff on products of LDCs to 0% from 1 January 2008, one year ahead of schedule. Non-LDCs will reduce tariff to 0-5% for imports from each other by January LDCs would bring down their tariff to 0-5% by January Feb-09 15

16 Critique of SAFTA Imperfect: Yes, but regional political and economic context of SAFTA is as important as theoretical underpinnings. Large Sensitive Lists. Does not seriously address removal of non-tariff and para-tariff measures; Is weak on implementation of trade facilitation measures 10-Feb-09 16

17 Sensitive Lists of SAFTA Yes it is large (about 25% of the total number of items at 6 digit HS level). However, SAFTA provides for first revision of the Sensitive Lists after fours years or earlier. Discussions on modalities to reduce the Sensitive Lists have already begun. Effort is not only to reduce the size of Sensitive Lists, but also on ensuring that products taken out of the Sensitive Lists have a certain percentage of tradability. No point in taking out those products that are not tradable. India has already unilaterally reduced its Sensitive Lists for LDCs from 744 items to 480 items. Early decision on reducing Sensitive Lists is hoped. 10-Feb-09 17

18 Non-Tariff and Para-Tariff Measures Often said to be one of the main reason for low intensity and levels of intra-saarc trade---but, actual survey work of businesses needs to be done to quantify trade losses on their account. An ADB study point that NTMs and PTMs are perhaps clogging about 40% of regional trade potential; SAARC processes are seized of the matter and have completed the processes of detailed identification of Non-Tariff and Para-Tariff measures faced by each country in relation to its exports to other SAARC countries; and Member States now need to decide on removal of those NTMs and PTMs that are identified as barriers. 10-Feb-09 18

19 Trade Facilitation Harmonization of Standards: SAARC processes have been attending to this even before entry into Force of SAFTA. Extremely important and hence at 15 th Summit signed an Agreement on the establishment of South Asian Regional Standards Organization (SARSO). To begin with, twelve products of high trade potential have been identified for harmonization of standards. and Private sector stakeholder are involved in the process. Customs Cooperation, being pursued since Focus is on harmonization of customs clearing procedures. Standardizing the list of documents required. Speedy clearance modalities to ensure that trade consignments under SAFTA are cleared in a fixed time frame are under way. Effort is also ongoing to inter-face the different IT systems used by national customs authorities. Customs Cooperation Agreement is a major trade facilitation agreement aimed at stopping trade diversion in the region and also to prevent revenue loss for national customs authorities. 10-Feb-09 19

20 Trade Facilitation: continued Establishment of SAARC Arbitration Council is now completed; This would facilitate regional handling of commercial disputes; Effort would be to encourage the regional businesses to incorporate the SAARC Arbitration and SAARC Conciliation rules in the commercial agreements 10-Feb-09 20

21 Free Trade Areas in Goods: Is it Good enough? No: It is only a crucial first step in building a stronger regional cooperation. 10-Feb-09 21

22 Regional Integration needs to incorporate: Trade in Services and Investment and Financial Cooperation Trade in Services: About 54% of regional GDP is contributed by Services. There is vibrant intra-saarc services trade, including a substantial amount in informal sector; Leaders at the 13 th Summit directed for a Study to be completed on this issue; RIS completed the study. It showed enormous potential for regional Trade in Services with each country having complementarity in select Services sectors and sub-sectors; Smaller number of countries involved may make it easier to come to a regional agreement in this area. Smaller countries may register significant gains; RIS also prepared a draft for a Regional Agreement on Trade in Services, which is currently under negotiations which we expect to be concluded by the end of this year. The Agreement will be finalized along with specific schedule of commitments; Principal guidelines is of increased market access and respect for the level of development and size of national economies. It would include a request-andoffer approach. 10-Feb-09 22

23 Trade in Services: Contd A separate ADB study has identified the following as some of important sectors: Construction and related Engineering Services; Tourism and Travel Related Services; Higher Education Services; Health and Related Services; and Telecommunication Services. 10-Feb-09 23

24 Investment Cooperation Important to ensure greater efficiency of capital and resource use; Could assist in setting up regional supply chains; Requires substantial policy harmonization, in pre-establishment and post establishment phase; and Good examples of bilateral investment cooperation projects. 10-Feb-09 24

25 Financial Cooperation: Finance Ministers and SAARCFINANCE Finance Ministers mechanism is relatively new; Discussions taking place on Banking, Capital Markets, Insurance, Taxation, intra-regional capital movement etc. Road map for South Asian Economic Union being drawn up. This is to include: Trade Integration under SAFTA; Investment Facilitation; Framework for Integration of the Financial Sector; SAARC Customs Union; SAARC Monetary Union; and South Asian Economic Union. 10-Feb-09 25

26 Infrastructure Building and Regional Connectivity Lack of transport connectivity and poor infrastructure is one of the key reasons for high regional trade costs. Reduction in transports costs have the same benefit as tariff liberalization (every 1% reduction in cost could bring a stimulus of 5%). An area of High priority in Regional Cooperation. 10-Feb-09 26

27 Infrastructure Building and Connectivity Regional Multimodal Study has identified: 10 Road Corridors. 5 Rail Corridors. 2 inland waterways. 10 maritime corridors; and 3 aviation gateways. Implementing these projects is complicated and requires several pre-requisites are to be completed. But, process to prioritize the corridors for implementation is underway. SAARC is also working to develop transport and transit agreements, including comprehensive motor vehicles agreement. 10-Feb-09 27

28 South Asian Economic Integration: Future continuous Success only if it responds to needs of the region and does not cross with national objectives and priorities. Politico-Economic complexities of the region have to be kept in mind. Take doable and quantifiable steps Work of think tanks and private sector stake holders extremely important. Their valuable suggestions should, however, accompanied by the modalities for implementation rather than be based on abstract theoretical concepts. 10-Feb-09 28

29 Last Post Create instrumentalities and depth in area based cooperation; shed skepticism, embrace optimism; Regionalism in SAARC may be imperfect but it is progressive and inclusive. 10-Feb-09 29

30 Thank You 10-Feb-09 30