South Asian Economic Cooperation

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SOUTH ASIAN ECONOMIC COOPERATION India, Pakistan, Sri Lanka, Bangladesh, Bhutan, Maldives, and Nepal agreed in 1980 to form the South Asian Association for Regional Cooperation (SAARC), which mandated cooperation in a number of areas, including trade and investment, economic development, environmental management and resource sharing, educational enrichment, and poverty alleviation. However, SAARC has yet to achieve its goals of enhancing regional economic cooperation and delivering prosperity to and wellbeing to its people. Geopolitical analysts may attribute the slow progress to the political tensions between India and Pakistan, but the reality is that South Asia needs to become more actively engaged in the global economy in order to optimize its resources, instead of being left behind in the race for better incomes and jobs.

The new economy has opened up several opportunities for South Asia to move beyond the focus of its traditional commodity trade items, harnessing the economic benefits of business cooperation in high value–adding areas such as natural gas, electricity and power sharing, telecommunications infrastructure, training and manpower development, information technology, and joint projects for foreign investment. The continuing boom in India's economy—especially in high-tech areas like business process outsourcing, information technology (IT) services, computer solutions, biotechnology, consumer call centers, and knowledge-based industries—has added new pressures for enhancing business relations among all South Asian countries.

Traditional Economic Relations: Limited Formats

Traditional trade relations in South Asia have been characterized by the following features:

  1. South Asia accounts for less than 1 percent of world income, and its share in total global trade is negligible.
  2. All South Asian countries show low volumes of foreign trade as a percentage of their respective gross domestic product (GDP), although South Asia is a major supplier of textiles and garments, raw cotton, rubber, jute, rice, tea, pearls, and precious and semi-precious stones to the rest of the world.
  3. Regional trade among the SAARC countries has been a dismal 3 percent for the past decade. This compares poorly with European Union (EU) regional trade, which stands at nearly 65 percent, and trade among the Association of Southeast Asian Nations (ASEAN), which stands at about 35 percent.
  4. India is central to South Asian trade, as it accounts for about 80 percent of the combined GDP and population of South Asia. It is also the largest trading partner for Bangladesh, Nepal, and Bhutan, and significant for Sri Lanka. However, India has shown the lowest amount of intraregional trade (5.1%), as compared to its smaller neighbors Maldives and Nepal (29%), and Sri Lanka (21%), who are trading more intensively within the South Asia region.
  5. While intra-SAARC regional trade is low, the South Asian countries do not hesitate to import large quantities of items from the rest of the world, many of which could be imported from within the South Asian region. For example, Pakistan imports tea from China and Kenya, instead of India, despite the availability of better quality, lower price, and geographical proximity of India.
  6. The traditional export basket of most South Asian countries is dominated by semimanufactured products, and appears to be quite similar for all the countries, making it difficult for any one country to have a comparative trade advantage over the others. Primary commodities, however, still account for a significant proportion of their trade, which includes jute in the case of Bangladesh, rubber and tea for Sri Lanka and India, rice and raw cotton for India and Pakistan, and iron ore for India. Among manufactured exports, textiles and garments dominate the export basket.
  7. All South Asian countries show a high dependence on a few commodities for their export basket. In fact, the top ten export commodities (mainly textile and garment items) account for nearly 82 percent of the total exports of Bangladesh, Maldives, and Nepal; 74 percent for Pakistan, 66 percent for Sri Lanka, and about 42 percent for India. As for imports, all South Asian countries show "industrial intermediates" and crude and processed fuel as major imports. Food deficit countries, such as Bangladesh, Nepal, Bhutan, Pakistan, and Sri Lanka, continued to import food throughout the 1990s.
  8. Most South Asian exports are directed toward developed countries. In the case of Pakistan, more than 60 percent of exports are accounted for by the United States, the United Kingdom, Germany, and Japan, while the Middle East constitutes 11 percent of total exports. East Asian countries are providing a growing market for South Asian exports, particularly for India, Pakistan, and Maldives. Bangladesh mainly exports to China; Pakistan to South Korea, Indonesia, and China; and Maldives to Thailand.

Areas of Recent Business Cooperation

SAFTA: South Asian Free Trade Area

The South Asian nations launched a regional economic trade agreement in 1995 that would aim at providing "preferential trade concessions" to each other, under the South Asian Preferential Trade Agreement (SAPTA). After three successive rounds of SAPTA negotiations, a total of 5,550 commodities have been listed for trade under SAPTA.

Although SAPTA showed a high potential for success, its progress has been slow, due mainly to: the bureaucracy's lack of commitment to put aside narrow political interests and support each member state's economic interest; the continuing refusal of Pakistan to grant the most favored nation status to India, which is granted to all other trading partners in South Asia; technical limitations to the implementation of SAPTA, under which negotiating trade concessions on a "product-by-product" basis becomes very tedious.

At the twelfth SAARC Summit meeting in Islamabad in January 2004, it was agreed to initiate the South Asian Free Trade Area (SAFTA), beginning in 2006, to be completed in phases by 2008. However, for the success of any free trade area in South Asia, it will be critical to actively involve the business community in the negotiations as a primary stakeholder, not just as a beneficiary of governmental decisions.

The information technology (IT) sector

The South Asian region has been made aware of the high potential of the information technology and software industry through the recent success of Indian "high-tech" firms in the global market. The Indian software industry has grown consistently at a phenomenal rate of over 50 percent during the 1990s, rising from a modest revenue base of U.S.$195 million in 1989–1990 to an $8.3 billion industry by 2000–2001. India's software industry revenue growth is projected to reach U.S.$85 billion by 2008, of which $50 billion is to come from exports alone.

Software engineers and professionals of Indian origin currently constitute about 10 percent of the employees in the top four global IT companies (Microsoft, IBM, Intel, and Oracle). The Indian industry trains over 1 million people in the country every year in IT, and provides IT-enabled services at one-tenth of the global cost. Thus India has today become a major outsourcing base for businesses all over the world, offering a huge pool of highly qualified, English speaking, analytically strong, and talented professionals.

The South Asian region has the potential for being developed as a regional hub for offshore software development for clients within SAARC and in other countries, with India as its core. The larger challenge will be to attract Indian corporations into doing business with South Asian nations, given that the main markets for their products lie in the United States, Europe, Southeast Asia, and China.

Harnessing the power sector

South Asia is one of the richest sources of hydropower in the world. The estimated hydropower potentials of the countries in the region are: Bangladesh, 52,000 megawatts (MW); Bhutan, 21,000 MW; Nepal, 83,290 MW; India, 75,400 MW; Pakistan, 38,000 MW; and Sri Lanka, 2,000 MW. However, less than 11 percent of this vast regional potential is being exploited so far. Because power generation and supply in South Asia has been a state monopoly over a long period, it has been highly dependent on state subsidies and therefore deprived of a competitive and efficient working environment. A large number of reforms for private sector participation and restructuring in the power sector have been introduced in all the South Asian countries in recent years, which has opened up a valuable potential for private sector collaboration in harnessing the hydropower of South Asia.

India and Bangladesh have an arrangement under which surplus power from the eastern states of India is exported to the deficit western region of Bangladesh. India and Nepal have signed the Treaty for the Integrated Development of the Mahakali Rivers for mutual cooperation in the power sector. Nepal has set up four hydroelectric projects with Indian assistance. India purchases 50 megawatts of power from Nepal, with reliable transmission assured, and provides 70 million units of energy annually free of charge to Nepal from the Tanakpur power plant.

In Bhutan, the 336-megawatt Chukha hydroelectric project was set up with technical and financial assistance from India, and India also constructed a number of micro-hydropower projects in Bhutan. This is a classic case of gains from cross-border trade, built on the basis of common interest and sovereign equality. Bhutan has earned considerable profits from export of this surplus power to India, which is primarily distributed to the Indian power-deficit states of West Bengal, Orissa, and the North-East region.

Conservative estimates made by the government of Pakistan indicate that Pakistan is likely to have surplus power over the next few years. If Pakistan were to export its surplus 200 megawatts of power to India, it could earn U.S.$1.2 billion annually over a period of twenty years. This would be a major nontraditional export item in Pakistan's export basket, and would optimize the use of power plants in Pakistan at 80 percent of their capacity, rather than the current 60 percent levels.

The case for natural gas pipelines

The prospect for the emergence of natural gas pipelines as a key area for South Asian economic cooperation is based on the increasing demand in Indian markets for energy, India becoming one of the fastest-growing energy markets in the world. The prospect for supplying natural gas from neighboring countries like Bangladesh and Pakistan—either through their own resource endowments or as transit points for supply to India—has come up for discussion in recent years. Interest by "third" countries like Iran, Oman, Myanmar, and Turkmenistan to supply their surplus natural gas to India and the region, and the willingness of multilateral funding institutions and foreign multinational corporations to provide insurance guarantees, has generated further expectations for earning revenues from natural gas.

The initiative for an Iran-India gas pipeline began as early as July 1993. Both nations have decided to undertake an offshore feasibility study for laying a pipeline from Iran to India "outside the Exclusive Economic Zone (EEZ) of Pakistan."

Pakistan, on the other hand, has confirmed its willingness for the construction of an onshore gas pipeline from Iran to India, which has the potential for raising a huge revenue from "transit fees," estimated in the range of $500 million annually for Pakistan. However, no decision for an onshore pipeline has yet been made, given the institutional, political, and long-term supply security risks involved in this option for India. A large number of Indian corporates (such as Reliance Industries), foreign multinational companies (such as British Gas, Royal Dutch Shell Group, BHP Australia, and UNOCAL), and multilateral lending institutions (such as the Asian Development Bank), would be key players in supporting active discussions for the construction of a natural gas pipeline in South Asia.

In recent years, major gas reserves have been found in Bangladesh at the Bibiyana Natural Gas Fields. Market studies by UNOCAL and others have confirmed that the Bangladesh market will not be able to utilize such volumes for over fifteen years. An opportunity thus exists for exporting more gas to serve customers along the Hazira-Bijaipur-Jagdhishpur (HBJ) pipeline, on the proposed route between Bangladesh and India. The estimated benefits to Bangladesh are in the range of U.S.$3.5 billion in revenues and tax receipts over a twenty-year period. It would also develop approximately 1,900 jobs for Bangladeshi citizens, and could generate $55 million to $75 million for local procurement during the construction phase. Despite these major benefits, however, Bangladesh has not shown any inclination to export natural gas to the Indian market.

It is clear that the emerging global economy—based on communications, technologies, innovation, and new formats for doing business—will open up several new sectors for economic cooperation in South Asia. It is the responsibility of all the nations of South Asia to find the political will to place high priority on regional economic cooperation, development, and poverty reduction.

Poonam Barua

See alsoSouth Asian Association for Regional Cooperation (SAARC)


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