On the economics of regional cooperation in South Asia
Paper presented at the 15th European Conference on Modern South Asian Studies, Prague, Sep 8-12, 1998
Panel 4: Regional cooperation in South Asia / Politic and economic (Kovár, Zingel, van der Geest)
 

There is a strange discrepancy in South Asia between regional cooperation on the one hand and open hostilities on the other. The states, which once comprised British India (more or less, given the sophisticated organizational set up of British supremacy), i.e. India, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan, Maldives, joined hands in 1985 to establish the South Asian Association for Regional Cooperation (SAARC). With the exception of the smallest member, they all have been experiencing strained relations with the largest one. In the case of India and Pakistan, we have been observing open hostilities over decades, an undeclared war along the line of control in Kashmir and an escalating arms race, becoming most terrifying with the Indian and Pakistani missile and nuclear tests of 1998.

Thus, SAARC is a marriage of convenience rather than love. All the South Asian states have tried other alignments, if oly in the case of India, with the other non aligned countries. Pakistan joined various defence alliances as a partner of the West in the early days of the cold war and later turned to the Islamic, South West and Central Asian states. None of the South Asian states has been welcome to South East Asian or Pacific Rim associations. India has made it very clear that it would not tolerate closer relations between its Himalayan neighbours and China, which in turn has been Pakistan's most reliable partner.

Economics always have been emphasized as a golden opportunity of regional cooperation. So far, however, this has been not more than wishful thinking. Intra-regional trade of the South Asian states has been in the range of 3 per cent of all foreign trade of the member countries; in the face of the numerous quantitative and administrative measures which restrict trade between India and Pakistan Sajal Lahiri speaks of "inverse regionalism". Talks of intensifying regional trade, at present exports of electric energy from Pakistan and of natural gas from Bangladesh are being discussed, thus, are hardly more than wishful thinking.

The paper is set out to have a look at the economics of regional cooperation. Given the fact, that present boundaries, especially between Pakistan, India and Bangladesh, run across areas, which constituted a single economic unit until 1947, one could well imagine, that these boundaries may be open at some time in future again. There seem to be, however, few studies dealing with this aspect. Studies on South Asian regional economic cooperation mainly focus on the economic situaton in the member states, which usually are dealt with separately, and on intra-regional trade prospects. Other aspects have to be looked at, too: transnational natural resource utilization (e.g. water), migration and capital movements.
 

Inverse regionalism

In his short introduction into the current debate on regionalism versus multilateralism Sajal Lahiri coined the term "inverse regionalism":

"In spite of the formation of the South Asian Association for Regional Cooperation (SAARC) in the mid-eighties, intra-regional trade between the member countires remain negligible even in absolute terms. Trade between India and Pakistan are restricted by numerous quantitative and administrative measures. This can be called inverse regionalism. The political process in the two countries have a lot to do with this inverse regionalism. Clearly such restrictions to trade can be reduced by regional agreements without necessarily imposing trade restrictions against countries outside Asia. Such reversals of inverse regionalism could only reinforce the multilateral trading system."

After twelve years of SAARC we witness - contrary to expectations [Zingel 1983] - hardly an improvement in intra-regional trade. The volume of trade, i.e. exports (table 1), in 1996 amounted to only 1.76 bn US$, 3 per cent of the 51.63 bn US$ of all exports from South Asia. Intra-regional trade almost triplicated in the twelve years, but total exports almost quadrupled; accordingly, the three per cent share of intra-regional in total trade were even less than the 4 per cent of 1985.

As for imports (table 2), we have an almost similar picture: intra-regional imports of SAARC countries quintupled to 2.58 bn US$, wheras total imports of the SAARC countries rose to the two-and-a-half-fold. Imports from SAARC members rose from 2 per cent in 1985 to 4 per cent in 1996.

Even if we consider, that South Asian data are often subject to later revisions (e.g. Indian exports reported for 1998 might have been more than hardly a tenth of 1997 as reported by the IMF), intra-regional trade developed just in step with exports from South Asia to third countries.

As can be easily seen from a comparison of tables 1 and 2, export and import figures do not match in many instances: Since import figures usually include the cost of freight and insurance (and other charges), the value of world imports is roughly ten per cent higher than that of world exports. The IMF figures, which I used, show, however, more severe discrepancies: To give only one example: According to the IMF, India exported to Nepal in 1989 goods valued 215 mn US$ whereas imports of Nepal from India are given as 36 mn US$. 1989 was a difficult year in Indian-Nepalese relations and the border was almost closed for a number of months for political but also for economic reasons; the IMF uses national figures, and the fact that Indian and Nepalese figures do not tally, may be explained by the fact, that legal exports to Nepal re-entered India illegally, i.e. as smuggel, and thus, remained unreported.

Given the poor quality of statistics, it is not possible to say, whether the share of intra-regional trade has remained the same, has declined or has grown since the foundation in 1985. But in any case, the share is not substantial. Of course, one must not expect such high shares of intra-regional trade as we experienced in the European Union: given the fact that India's economy is roughly three times as big as that of the other six taken together, the volume of intra-regional trade is restricted by the much smaller production and absorption capacities of India's regional trading partners, but one easily could expect a more intensive intra-regional trade. This is evident if we look at the smaller members: Just 3 per cent of Pakistan's exports of 9.39 bn US$ (1996) were shipped to the SAARC countries and it received only slightly more. Bangladesh's exports to SAARC countries amounted even to only 2 per cent of total exports of Bangladesh (although it received much more). Only the smallest of the SAARC countries have to rely more on their SAARC partners: Nepal, however, has been successful in reducing its dependency on India; Bhutan might try the same (no separate IMF figures for Bhutan), and the Maldives, which hardly have any agriculture or industry, have to rely on neighbouring Sri Lanka.

Besides India's sheer size, geography is responsible for the smaller countries trying to distant themselves from India: as is well known, all the smaller states neighbour India but none of the others. Nepal and Bhutan are land locked and have only one other neighbour, i.e. China. Most of their population live on the slopes and in the plains south of the Great Himalaya; there are no natural boundaries between the two Himalayan states and India; the border areas to the north in China (Tibet), however, are forbidding mountains and high plains and are thinly populated. Politically, India has been treating the Himalayan states as its sphere of influence; it only recently agreed to transit trade from Nepal to Bangladesh; until now it does not permit any direct flights between Nepal and Pakistan.

To Bangladesh, India is the only neighbour except Myanmar. The long border to India runs for most of its length across open plains and has been fenced (partly) only recently. Illegal trade and migration have become sensitive political issues in Bangladesh and India. Furthermore, India, lying upstream, controls the main waters flowing into Bangladesh; any withdrawals of water (for irrigation and - in the case of the Hoogly River - for shipping) affect Bangladesh's agriculture, fishery, shipping and ecology. Historically and politically, Bangladesh owes India its very existence; Muslim Bengalis, however, played an important role in the Pakistan movement and in Partition.

The delicate relations between India and Pakistan are too well known to be described here [Zingel 1998]. Pakistani feel fundamentally threatened by India; common belief is that India is out to destroy Pakistan and to undo Partition. This even more after India's nuclear tests of May 1998. Like Bangladesh, India controls the upper portions of almost all Pakistani rivers. In a country which relies more on irrigation than any other and which has buit the largest irrigation system of the world, water surely could become casus belli. As a rare example of political farsightedness, India and Pakistan agreed in 1960 on the Indus Water Treaty, allocating the waters of the three western rivers (Indus, Jhelum, Chenab) to Pakistand those of the three Eastern rivers (Ravi, Sutlej, Beas) to India. India and Pakistan also agreed to the decision of the International Court after the short and futile war of 1965 over the Run of Kutch. As is too well known, both the neighbours cannot agree on Kashmir, where an undeclared war is going on since years. Both the countries accuse each other of funding, training and arming separatist movements and terrorist groups; hostilities did not loose their momentum after the nuclear tests, proving them to be not deterring and to be not improving national security. Fortunately, there is no talk of massive retaliation, a threat, which is said to have worked during the cold war.

Sri Lanka and India are divided by the waters of the Palk Street. Ceylon, as it was called then, was no part of Britsh India and always had been under separate administration. This made things easier after Independence. In the beginning, the fate of the migrants from Souther India working in the tea gardens, the so called Indian Tamils, constituted the main bilateral problem; under the bilateral agreements many of them returned to India, the others, finally, were accepted as Sri Lankan citizens. India's intervention in the civil war was neither helpful nor successful. The Tamil Tigers' alleged involvement in the assassination of the fromer Indian prime minister Rajiv Gandhi marked the end of clandestine (?) Indian (Tamil) support of the Tamil Tigers.

For the Maldives the situation is markedly different from that of the other South Asian states. The Maldives are neighbours to Sri Lanka rather than to India, and to that extent the common phrase, that the smaller countries of South Asia all border India bur none of the others, is not exactly true. Thanks to tourism the Maldives are economically much better off than the other SAARC members. Colombo is the nearest larger city and used to be the natural port of call for all those coming and going to the Maldives. But after Male's airport has been upgraded (and Colombo became too unsafe) directs flights from Europe reach the Maldives and make the country less reliant on Sri Lanka. As for shipping, Singapore is the regional hub, having replaced Colombo.

As a consequence of politics and geography, the four South Asian intra-regional land boundaries have their very own characteristics:

1. The boundary between India and Pakistan is the longest and most dificult: most of the boundary runs over open, in the southern part, thinly populated areas with no natural dividing features, there is only one official crossing: between Lahore and Amritsar, by road and rail.

2. The boundary between India and Bangladesh also mostly runs over open plains, although most of the boundary areas are densly populated. There is a number of crossings; rail service - to the author's knowledge - is possible in principle, but discontinued, more or less, since decades. After India agreed to transit between Nepal and Bangladesh, it now hopes for Bangladesh's permission of transit between West Bengal and the North Eastern states and territories.

3. Most of the boundary between Nepal and India is in the Terai, once impenetrable plains, which have been cleared and today have a population of around three millions of Indian origin. The border is known to be easily to cross and subject to massive re-exports, i.e. smuggel to India. In 1989 India closed almost all of the small border crossings, officially to stop smuggling, but inofficially to impress on the government of Nepal and to ensure India's "special interests".

4. A similar situation exists for the border of Bhutan and India. The main problem here is the influx of migrants of Nepali origin via India (the two Himalayan kingdoms have no common border).

Nepal and Bhutan, in principle, could trade with Pakistan via China: road transports to and from Pakistan, for example, would be possible technically, although costly. India, however, uses all its influence to deter the Himalayan states from closer relations with China.

Only India has direct flights to the other members and controls all flights from and to Nepal and Bhutan; flying to Maldives is a matter of economics rather than politics. A similar situation exists for sea trade: the Himalayan states have to rely on transit through India; lack of direct shipping otherwise is again a matter of economics; using far away hubs (Singapore, Dubai) for transshipment is not uncommon also in other world regions.

To sum up this small chapter: There are no natural unsurmountable hindrances to intra-regional trade in South Asia. One could imagine that once the borders are open again - with many of the centres of economic activity of India and Pakistan located in the plains of Indus und Ganges - goods traded would be transported mainly overland by road and rail rather than by sea, resulting in a restructuring of regional development patterns.
 

Obstacles to trade: the energy market

The literature is full of "potential" of South Asian trade. I shall take up a recent issue, i.e. that of the energy market. Electric power has been mentioned again and again as an ideal example for regional exchange. None of the South Asian countries produces enough natural oil for its own consumption; actually only India and Pakistan produce some of it, but also have to import. India, Pakistan and Bangladesh have substantial proven reserves of natural gas, no gas it is imported or exported, but Pakistan and Bangladesh may be in the position to export and India is believed to be interested in imports. All SAARC members except the Maldives produce hydroelectric power; in Bangladesh the potential has been almost fully utilised, but the others still could mobilize enormous reserves; already, Nepal and Bhutan are exporting electricity to India; there are plans for more export oriented hydel projects in Nepal and Bhutan. India is one of the largest coal producers with enourmous reserves, although partly of poor quality; Pakistan also has coal and produces some; there is coal in Bangladesh, but it has been found to be too expensive to produce. Finally, India and Pakistan have developed their nuclear industries, there are plans to build more nuclear power stations.

All South Asian states have been investing heavily in building their national electricity grids; Nepal and Bhutan power plants have been connected to the Indian grid. At Independence only isolated grids existed, until the early 1950s India and Pakistan traded electricity; there has been no exchange of electricity afterwards. A connection of the national grids of India and Pakistan would be easy with both Punjabs well connected to the rest of their respective countries.

From the economic point of view, the question, however is, how much South Asia would benefit from intra-regional trade of power. The reason for not more power being traded at the moment simply is the lack of availability. All South Asian states suffer from power famines, as every visitor to South Asia is well aware of. Load sheddings and power cuts are the rules of the day almost everywhere. Liquid gas is rationed in India and petrol pumps at times are to be found without any fuel; voltage fluctuations are even more annoying than power cuts.

The lack of availability is not so much a question of lack of potential than inefficiencies, technically and even more economically. Making the systems more efficient would help indeed, but on the longer run additional capacities are needed given the low levels of consumption in all South Asian states. Whether a regional cooperation is needed for this purpose, is doubtful, especially, since the major sources of primary power are located outside SAARC and since the SAARC countries will be needing their own resources for themselves. The major exceptions are hydroelectric power exports from Nepal and Bhutan to India (leaving aside the ecological aspects), and - maybe - natural gas exports from Bangladesh to India.
 

The political environment for trade

The end of the cold war raised hopes for a peace dividend, i.e. public funds which no longer had to be spent on defence and could be spent otherwise, e.g. for education, health and infrastucture, or could be returned to the tax payer. This clearly happened in the West (e.g. Germany) and in the East (although at the price of the collapse of the industrial-mlitary complex and much of the state). Some politicians expected a similar development in South Asia, only to learn, that the Indo-Pakistan conflict is a genuine one with the two combattants having associating themselves with the - then - warringsuper powers. The collapse of the old world order, however, had different effects on India and Pakistan as far as defence expenditure is concerned. Pakistan had associated themselves much more with the USA than India did with the Soviet Union. The end of the US engagement in Afghanistan had a dramatic effect on the amount of US aid going to and through Pakistan, officially and inofficially. Furthermore, with Pakistan no longer needed as "front state", the USA returned to their old legal position, i.e. that Pakistan because of its nuclear programme comes under the restrictions of the various amendments (Symington et al.) to the US Foreign Assistance Act of 1961 [Zingel 1995 : n69] and - lacking a Presidential waiver - were cut off from most US aid; Pakistan had been subject to such sanctions already in 1979 but was "rescued" by the Soviets invading Afghanistan. Since 1990 Pakistan has (again) to rely mor on the international arms bazaar, at higher prices and less concessional conditions. India obviously was less generously treated by the Soviets and had built up substantial defence research and productions facilities. Speculations are that India managed to hire - low cost - defence and nuclear productions specialists from the former Soviet Union. Accordingly, India must have received a much higher peace dividend from the end of the cold war than Pakistan.

The present situation seems to be that both countries use substantial resources for national security with the share of defence related expenditures in GNP higher in Pakistan (ca 6.5 per cent) than in India (ca. 3.5 per cent). With a much larger economic basis than Pakistan India might see the chance to "bleed [Pakistan] white", as President Reagan is said to have aspired in the case of the Soviet Union. The last months have shown, that India is suffering from the various economic sanctions after the nuclear tests less than Pakistan, which presently seems to be on the brink of economic collapse.

As has been pointed out at the beginning of the paper, the undeclared war in Kashmir is going on despite the nuclear threats, it even seems to have intensified during the last months. It is here, where SAARC is to play its role, providing a forum for a continuous dialogue between India and Pakistan on the levels of heads of state down to the technical committees. SAARC provides a multilateral forum which allows a continued dialogue even when bilateral talks break down. It also allows to work on technical details in the various groups and work to out "innocent" programmes, in which India and Pakistan could participate despite all bilateral tensions. The hope is, that as long as this dialogue goes on a major war can be avoided, this being the real peace dividend of SAARC.
 

Outlook

I have tried to show in my short paper, that intra-regional trade of the SAARC countries has been growing, more or less, just in line with overall South Asian trade; the share of intra-regional trade has been stagnant, as fas as this can be concluded from the weak statistical information. It is difficult to see, how a South Asian Preferential Trading Area (SAPTA) or even a South Asian Free Trade Area (SAFTA) can be realized given the highly discriminatory trade legislations in South Asia. In this connection Bhagwati et al. have been emphasizing, "that politicians, and much of the media, often do not understand the distinction between Free Trade and Free Trade Areas", and advocate to "push for worldwide freeing of trade [...] so that the preferences implied by the PTAs [Prefential Trade Areas] are rendered void because preferences relative to zero are zero." [1998 : 1146].
 

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