Introduction:
One of the
major objectives of formation of SAARC forum was to accelerate the process of
economic and social development in member States. Subsequently, trade promotion
was also actively pursued as an area of economic co-operation. The possibility
of Intra-SAARC trade expansion has been investigated using macroeconomic and
regional trade link models. It is generally found that inter-country
differences in production and consumption patterns, investment behavior, tax
and non-tax structures leave considerable scope for further regional trade
expansion. In order to examine what has happened to the overall SAARC trade, intra-SAARC
trade and product group wise comparative advantage in trade of individual
member countries. Before discussing these aspects, a brief account of macroeconomic
performance of all SAARC countries, overall trade performance, and its
comparison with other regional forums, trade policy of SAARC countries, trade
basket, comparative trade advantage of SAARC countries, trade related issues and
concluding observations are given below.
Macroeconomic
Overview of SAARC Economies:
The South
Asian region (as defined by SAARC) constitutes about 23 per cent of the world’s
population and has 15 per cent of the world’s arable land, but only 6.0 per
cent of Purchasing Power Parity (PPP) based global gross domestic product (GDP)
and account for around 2.0 per cent of world goods trade, and around 3.0
percent of world foreign direct investment. The South Asian region is
extraordinarily diverse in terms of country size, economic and social
development, geography, political systems, languages, and cultures. Three of
the eight countries under South Asian region, viz., Afghanistan, Nepal, and
Bhutan, are landlocked and mountainous; while Sri Lanka is an island and the
Maldives is an archipelago of low-lying coral islands in the central Indian
Ocean. The region translated itself from a position of slowest growing region
during the 1960s and the 1970s to one of the fastest growing regions in the
world since the 1980s. In terms of GDP growth, the South Asia has performed
robust growth over the years among the low income countries. As per the World
Bank database, during the 1960s, GDP growth in the region was placed at 4.2 per
cent as compared to 5.4 per cent at the global level. Except during the 1960s
and 1970s, the GDP growth in South Asia was higher than those of the world
output growth till 2008. The growth in South Asia had been sustained at an
average of 5.4 per cent during 1980-1999 followed by higher average growth of
6.8 per cent during 2000-08. Reflecting growing savings, the gross capital
formation of South Asian economies almost doubled from 15.1 per cent during the
1960s to 29.1 per cent during 2008 as against a decline from 23.1 per cent to
21.5 percent during the same period at the world level.
However, some economies of the region, viz.,
Afghanistan, Nepal, Bhutan and Bangladesh still depend on foreign savings/aid
for financing their resource gaps. As regards fiscal position of the South
Asian region, at present, all countries have fiscal deficit. Some of the
economies of the region are highly sensitive to external and natural shocks.
For instance, the deteriorating fiscal balance on account of reconstruction
projects undertaken in the aftermath of tsunami in recent years was a major
concern in Maldives. The fiscal deficit for Maldives was at 15.7 percent of GDP
in 2008. In Pakistan, despite overall improved revenue position, a sharp
increase in current expenditures led by interest payments and continued
expansion in development spending kept the fiscal deficit at 7.4 per cent of
GDP in 2008. Continued modernization of revenue administration broadened the
tax base in Sri Lanka, which along with lower than expected expenditure. In
Bangladesh, revenue collection slipped and total spending was contained by a
reduction in outlays for the annual development program, which kept the fiscal
deficit at 4.7 per cent of GDP in 2008. The budget deficit remained steady at
2.0 per cent of GDP in Nepal during 2008 despite increase in expenditures
during the year. The fiscal position in India, both at Centre and States, was
undergoing consolidation (till the outbreak of the recent financial crisis) in
terms of targeted reduction in fiscal deficit indicators under the Fiscal
Responsibility and Budget Management (FRBM) Act.
All South
Asian countries, except Nepal, Bangladesh have largely incurred current account
deficit (CAD). CAD as a ratio to GDP is highest in Maldives despite a net surplus
in services trade, most of which comes from tourism that had financed the trade
deficit until 2004. Even though tourism earnings recovered to exceed the pre tsunami
level in 2007, larger services payments and the expansion in imports meant that
net services covered only about 40 per cent of the trade deficit. The CAD in
Maldives, therefore, widened further to 51.4 per cent of GDP in 2008. In Afghanistan,
the current account deficit was at 1.6 per cent of GDP in 2008. The current
account surplus in Bangladesh increased to 1.9 per cent of GDP in 2008
resulting from narrowing trade deficit and higher remittance inflows. In Nepal,
the current account turned into surplus at 2.7 per cent of GDP in 2008 on account
of narrowing trade deficit and higher remittance inflows.
Recent Trade
Performance of SAARC Region:
The
importance of trade as growth facilitator has been recognized in SAARC
countries as well. It is evident from the growing trade openness of SAARC
economies over the years. However, there are wide disparities within the SAARC
region. For instance, Maldives is highly dependent on external sector with 161
per cent trade openness ratio (Trade-GDP ratio) while Pakistan is least open
country in the SAARC region Saxena (2005) elaborates that India has a huge
domestic market, hence trade forms a substantially smaller percentage of GDP, especially when compared with East Asian economies, that are small and essentially require trade for growth. The rest of the countries are fairly open to trade. Despite growing trade-GDP ratio, the South Asian economies continued to remain least open relative to other groups of emerging and developing economies. The proportion of trade in GDP of SAARC region increased markedly from 15.1 per cent during the 1970s to
51.8 per cent in 2008.
For East Asia and Pacific, however, it soared from 20.9 per cent during the 1970s to as much as 88.6 per cent in 2007 but declined to 64 per cent in 2008 on account of the recent global financial crisis leading to deceleration in trade.
Trade Policy
in SAARC Countries:
The
importance of international trade as an important engine for growth has been
widely debated among the economists. However, the trade as one of the essential
ingredients in economic growth is overwhelmingly supported in the literature.
Even the multilateral institutions such as the World Bank, International
Monetary Fund (IMF), and the Organization of Economic Co-operation and
Development (OECD) propagate policy advice based on the presumption that openness
generates predictable and positive consequences for growth. It has been found
that more open and outward-oriented economies consistently outperform countries
with restrictive trade and foreign investment policies. Thus, policies toward
foreign trade are among the more important factors promoting economic growth
and convergence in developing countries. As far as the trade policy of SAARC
countries is concerned, there is a lot of change in the approach. South Asia
has made good progress in liberalizing trade regimes and slashing tariffs since
the early 1990s when most of the countries started with reforms. The countries
have also undertaken considerable industrial deregulation and other structural
reforms. The governments and the private sector recognize that strong exports
are critical for overall economic growth and poverty reduction, and export-led
growth has become a key thrust in each country. Each country has been
integrating with the global economy, as evidenced by the significant increases in
the merchandise trade [(exports plus imports)/GDP] ratios. The following
discussion in this section provides an overview of trade policy measures
initiated in SAARC countries.
Trade is
considered as a component of overall development policy of Bangladesh. Bangladesh has pursued prudent structural reforms in priority
areas and trade liberalization with positive results on growth and foreign
direct investment inflows. In recent years, Bangladesh has adopted an
outward-oriented growth strategy which aims at reducing the anti-export bias
prevalent in the economy and improving competitiveness while keeping in view
medium-term imperatives and long-term development agenda. Annual sector-specific
export targets (envisaging more than 10 per cent annual increase) are set for, highest priority and
special development sectors which include readymade garments (RMGs), knitwear,
frozen food, leather, jute products, raw jute, chemicals, tea, agro-products,
handicrafts, electronic goods, engineering products, petroleum products,
computer software, specialized fabrics, textile fabrics, ceramic tableware,
bicycles, and shoes.
Sri Lanka began economic liberalization in 1997 with a move away from
socialism. Sri Lanka’s export-oriented policies have seen a shift from a
reliance on agricultural exports to an increasing emphasis on the services and
manufacturing sectors. The service sector accounts for over 55 per cent of GDP.
Manufacturing, the fastest growing sector, is dominated by the garment
industry. The agriculture sector, though decreasing in importance to the
economy, nevertheless accounts for around 18 per cent of national output and employs
more than one third of the workforce. The public sector remains large, with the
state continuing to dominate in the financial, utilities, health and education
sectors.
In Pakistan, during the past four years,
various initiatives have been announced as a part of the Trade Policy. These
measures aimed at reducing cost of doing business and included long-term financing
of export oriented projects, relocation of industries, freight subsidy, sales
tax facilitation for export sectors, incentives for priority export sectors,
research and development (R&D), marketing and business facilitation,
special export zones, garment skill development board, creation of Trade Development
Authority of Pakistan(TDAP), revamping of the trade bodies law and framing of
rules, tariff rationalization initiative, Trade Competitiveness Institute of
Pakistan, etc. A
Rapid Export Growth Strategy (REGS) was also announced in 2005. The strategy
aimed at (i) trade diplomacy to increase market access; (ii) diversification of
export markets; (iii) strengthening of trade promotion infrastructure;(iv) skill development; and (v) early provision of modern infrastructure.
In India, the external sector has exhibited a marked transformation since the
balance of payments crisis in 1991. The crisis was overcome by a series of stringent measures with an overriding objective to honor all external obligations without resorting to rescheduling of any external payment
obligation. While successfully dealing with the crisis through an adjustment program, it was decided to launch simultaneously a comprehensive program of structural reforms in which the external sector was accorded a special emphasis. The policy measures undertaken aimed at making domestic industry cost efficient by enhancing efficiency in resource use under
international competition,
which was expected to derive a better export performance in the long-run. The major trade policy changes in the post-1991 period included simplification of procedures, removal
of quantitative
restrictions, and substantial reduction in the tariff rates. Furthermore, the
reach of the export incentives was broadened, extending the benefits of various
export-promotion schemes to a large number of non-traditional and
non-manufactured exports.
Compared to
other SAARC countries, Nepal was relatively
late to join the WTO in April 2004. The most notable ingredients of Nepal’s
accession package are: (i) agreement to bind other duties and charges at zero
and phase them out within 10 years; (ii) agreement to bind average tariff at 42
per cent for the agricultural products and 24 per cent for all other products,
and; (iii) agreement to allow up to 80 per cent foreign equity participation in
70 services sub-sectors spanning distribution, retail and wholesale services
and audio-visual. Second, the rescinding of Multi-Fiber Agreement quotas at the
end of 2004 has dramatically changed prospects for Nepal’s garment industry
that accounted for a significant portion of total exports.
In Afghanistan, improving trade policy
and customs administration has consistently been a high priority for policy
agenda. In late 2001, Afghanistan inherited a highly differentiated import tariff
regime (including 25 tariff bands with a maximum rate of 150 per cent and a
simple average rate of 43 per cent. However, there has been a major rationalization
of the tariff structure, introducing use of the market exchange rate in calculating
import duties and reducing the number of different tariff rates to six (Maximum
16 per cent) with a relatively low level of dispersion. The simple average
tariff rate correspondingly declined to 5.3 per cent, making for one of the
lowest and least differentiated tariff structures in the region. Afghanistan
has embarked on a major program to strengthen and reform the customs administration,
with support from the World Bank and other external partners. Afghanistan
maintains import bans on only a few products (largely for religious reasons)
and imposes no seasonal restrictions, quotas, or other non-tariff barriers.
Trade Basket of SAARC Countries:
In comparison to other regions, South Asia’s
exports include an unusually large share of labor-intensive manufactures. India
enjoys the best position in the region in terms of a relatively diversified
export structure with its top 20 commodity groups accounting for only 43 per
cent of exports. However, the composition of exports in different SAARC member
countries has undergone significant changes in the recent past. An encouraging
feature is that their manufacturing output has been steadily increasing. Using
United Nation’s COMTRADE (Commodity Trade) data for the year 2004 for Bangladesh, India, Maldives,
Pakistan and Sri Lanka among the SAARC countries, export basket is highly
diversified for India followed by Pakistan. This also reflects their relatively
more diversified industrial structure. Looking at the top 20 export items (6
digit level) of each country, it can be observed that top 20 commodities (from
16 different 2-digit industry groups) account for 43.1 per cent of total value
of export from India, while concentration is highest in Bangladesh where top 20
items (from 5 different 2-digit industry groups) account for about 67 per cent
of total exports. Likewise, top 20 items (from 11 different 2-digit industry
groups) in the import basket of India account for 58 per cent of total value of
Indian imports followed by Pakistan.
Trade
Comparative Advantage of SAARC Countries:
The large scale trade liberalization and
domestic reform in most of the SAARC countries in recent years have led to an
increasingly competitive international environment. Thus, it is timely to
examine the extent to which SAARC countries have become more specialized in
various sectors. Specifically, through analyzing trade data for six SAARC
countries, viz., Bangladesh, India, Maldives,
Pakistan, Nepal and Sri Lanka and the rest of the world by commodity type, it is
possible to reveal in which sectors and products their comparative advantage
lies. Several indicators can be used to analyze competitive and comparative
advantage. In the present paper, revealed Comparative Advantage (RCA) index and
the Relative Trade Advantage (RTA) Index have been used to describe the tendency
for countries to specialize and export those goods and services that they produce
at a lower relative cost compared with other countries. None of the countries
has comparative advantage in capital intensive and high value added products.
For instance, no SAARC country has RCA greater than one in machinery and
transport equipment. In contrast, all SAARC countries, except Maldives, have
strong comparative advantage in the industry group of textile fibers, yarn,
fabrics and clothing.
Some Trade
Related Issues:
It is
generally perceived that trade integration plays an important role in
transmitting disturbances and influencing business cycle movements. However, in
the case of SAARC region, it is found that despite a negligible share of
intra-SAARC trade in total SAARC trade, the major economies of the region are
significantly synchronized with each other. Using real GDP data of SAARC countries
for the period 1960-2006, it is found that cyclical real GDP behavior in India,
Pakistan, Bangladesh and Sri Lanka exhibits significant convergence. Since the
bilateral trade intensity between these countries is still low, the real GDP
cyclical convergence could be perhaps on account of common external shocks and
largely similar output structure.
Summing Up:
To sum
up, the growth of intra-regional trade has remained subdued due to considerations
other than economic issues. In ensuring stability and growth in intra-regional
trade, the Indo-Pak bilateral relationship plays a very crucial role. Apart
from this, SAARC countries need to put in place adequate physical
infrastructure in place which hampers their global competitiveness even in
those sectors where they have revealed comparative advantages. Although major
SAARC countries are better synchronized in terms of their GDP cycles, trade
integration continues to be low due to high level of protectionism existing
among the SAARC countries than the rest of world. In this context, successful
outcome of SAFTA could play an important role in strengthening trade ties
within the region. It is, however, to be expected that with further dismantling
of tariff barriers under the SAFTA, a large part of the informal trade may come
under purview of formal trade. This along with favorable Rules of Origin could
raise intra-regional trade in the SARRC region. SAARC countries will need to take
concrete steps for harmonization of customs and other procedures, mutual
recognition of certificates and standards and trade facilitation measures.
Trade policy of SAARC countries, therefore, needs to ensure that SAFTA ensures trade
creation rather than trade diversion from the region as many researchers
apprehend.
Notes:
1. SAARC includes Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal,
Pakistan and Sri Lanka.
2. Commodity-wise 6-digit comparable data were available for majority of
the SAARC countries only till 2004. It is quite possible that commodity ranking
may have undergone some change in post 2004 period for SAARC countries.
3. For the present exercise, instead of item-wise export to third market, we
have used item-wise total exports due to paucity of country-wise and item-wise
export data for SAARC. Furthermore, since the trade between SAARC countries is
significantly low, this may not have affected the results significantly.
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