Intra-regional trade in South Asia is currently at a third of its potential with a gap estimated at $23 billion. Enabling economic connectivity between countries of the region have been an important focus area to develop intraregional trade.

A new World Bank report highlights the importance of seamless connectivity of transport as an important factor to develop trade between countries of South Asia. The report estimates that seamless connectivity with Bangladesh by bringing about full transport integration would increase India’s real national income 7.6 percent and real national income in Bangladesh would rise by 16.6 percent.  

Weak transport integration 

Weak transport integration makes the border between Bangladesh and India more difficult. Crossing the India-Bangladesh border at Petrapole-Benapole, the most important border post in western Bangladesh between the two countries, takes days. In contrast, the time to cross borders handling similar volumes of traffic in other regions of the world, including East Africa, is less than six hours, the report highlights.

The trade openness of countries of South Asia as measured by total trade as a share of GDP shows that Bhutan has the highest share (129.2) followed by The Maldives (52.8), Nepal (45.5), Sri Lanka (38.8) Bangladesh (30.2) and India (28.1).  Exporting holds the potential to improve labor market outcomes, but South Asia has a relatively low engagement with global markets: its merchandise exports account for less than 10 percent of gross domestic product (GDP), compared to over 20 percent in East Asia and Pacific, and 30 percent in Europe and Central Asia

How have the regional trading blocks would get started in South Asia. It all began with the setting up of the South Asian Association of Regional Cooperation (SAARC), which was created in 1985. The SAARC Preferential Trading Arrangement (SAPTA) was thereafter signed in 1994, followed by the South Asian Free Trade Area (SAFTA) agreement a decade later in 2004 which came into force in 2006.  Additionally, India and Sri Lanka signed the Indo-Sri Lanka Free Trade Agreement (ISFTA) in 1998. The agreement came into force in 2000. Despite these agreements, trade in the neighbourhood has remained far below its potential. This is exemplary of the fact that agreements by themselves are not enough to facilitate trade unless the barriers to trade are removed.

Bangladesh, Bhutan, India, and Nepal also established South Asia Subregional Economic Cooperation (SASEC) SASEC in 2001 to strengthen subregional economic cooperation and address development challenges - such as persistent poverty and expanding demographics. The Maldives and Sri Lanka joined in 2014, followed by Myanmar in 2017. By the end of 2019, 60 ADB-financed projects ($13.77 billion) had been committed, with an additional $128.15 million in 97 technical assistance grants. Investments in infrastructure connectivity accounted for the largest share (39 projects, $10.64 billion), with power generation, transmission, and cross-border electricity trade second (13 projects, $2.33 billion). Investments in economic corridor development, trade facilitation, and ICT development amounted to $798.46 million.

Small and medium-sized enterprises 

Trade and aid have been the centre of development paradigms discussed for quite some in the literature. In the current context of pandemic economic revival, there is a growing consensus that Official Development Assistance (ODA) alone won’t be sufficient to help least developed countries (LDCs) recover from COVID-19. The COVID pandemic is straining ODA and raising the transaction costs of international trade for LDCs due to supply chain disruptions and troubles in accessing trade finance.

Small and medium-sized enterprises in LDCs that have had to rely on small amounts of funding from their savings, credit, or loans from friends and family for their day-to-day operations are among the hardest hit by these global challenges. Aid for Trade started in 2006, a funding mechanism that has helped LDCs develop trade strategies, negotiate trade agreements and implement their outcomes; build infrastructure - roads, ports, and telecommunications networks that better connect domestic firms to the regional and global economy;  diversify trade by supporting the private sector to be more competitive and diversify their products;  and improve access to finance and other business services. In 2018, LDCs received US$13.5 billion from Aid for Trade, representing 30 percent of total Aid for Trade. 

Over 40 percent of total Aid for Trade received by LDCs has gone to only five LDC countries - two from South Asia - Afghanistan, Bangladesh, and three from Africa - Ethiopia, Tanzania, and the Democratic Republic of the Congo. Despite many crises in the past, from the oil crisis in the 1970s to the global financial crisis in 2008, ODA has remained the most resilient development finance flow. The reason has been that ODA has been mainly driven by global leadership and international commitments; more so than fluctuations in a country’s gross national income. OECD surveys of ODA donor countries conducted in March and October 2020 found that donors had committed US$12 billion for the COVID-19 response in 2020. Donors have also considered rescheduling loan repayments for recipients that have requested it. The World Trade Organization (WTO) estimates that COVID-19 will depress global trade by 13- 32 percent in 2020. The International Monetary Fund (IMF) projects that the global economy will contract by -3 percent this year - a larger contraction than during 2008–09 financial crisis.

Analysts have argued that initiatives on intra-regional trade in South Asia have generally failed to provide momentum due to many reasons, including lack of trade complementarity, limited product coverage and tariff preferences for regional trade, and limited connectivity being the important ones. It has also been observed that South Asian nations tend to impose more stringent barriers on their intra-regional trade flows than their imports coming from the rest of the world. An important argument has been that larger South Asian countries have to take a more liberal approach to global trade for their export and GDP growth.  This line of argument, however, does not capture the importance of proximity for trading between countries. There is a growing literature on economic geography and trade that seems to suggest that countries sharing borders and in regional proximity should trade more between them given the lower costs of trading between such countries.

Prioritizing green stimulus 

While traditional revenue sources such as tourism and remittances may be hard to recover in full during COVID times. The pandemic has exposed the fragility of long-distance, international, single-source supply chains, particularly from the developed world to the LDCs. As a result, global supply chains are undergoing significant reorganization and businesses are increasingly attempting to diversify their supply chain risks. Asia can emerge as the preferred supply chain hub by investing in manufacturing capacity including land, labour, skill development, and logistics, improve ease of doing business and enhance the quality of infrastructure. Stronger supply chains will help the region develop its intra trade possibilities. Any recovery process must also invest in green technology committing to greater climate ambition which would also unlock employment and economic opportunities along with enhancing local health and global climate benefits.

By prioritizing green stimulus through clean-energy investment and sustainability-oriented policies in its pandemic response, South Asia can play an important role in making the development process more sustainable, both for the region and for the world. This crisis can also bring in a new era of collaboration in South Asia. Enhanced regional cooperation can strengthen the region’s capabilities to fight the pandemic and its economic losses. Simultaneously such a regional cooperation can also bring about long-run benefits of more inclusive growth through increased intra regional trade, acceleration in shared growth, poverty reduction and cooperation in priority areas such as energy, food security, and infrastructure.

Countries must strengthen regional institutions and frameworks for regional cooperation, improve regional infrastructure and connectivity, and develop cross-border solutions to shared problems.

(The writer is a retired Indian Economic Service officer who worked in the labour ministry. The views expressed are personal. He can be contacted at ppmitra56@gmail.com)  

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Approach to South Asia Regional Integration, Cooperation and Engagement (SA RICE) http://documents1.worldbank.org/curated/en/377981601447389283/pdf/Brief.pdf,sep2020

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