The economic integration of SAARC

American Chronicle | 30 July 2007

The Economic Integration of SAARC

Professor Mahfuz R. Chowdhury

Economic growth today is a collective matter in a very significant way. Not even a nation, big or small, can think of going it alone anymore. In fact, the whole world has become so inter-linked that every event no matter how small or where it happens is having an instant worldwide effect. Earlier, the world had to deal with rising nationalism, and governments had to find ways to protect domestic industries from outside competition. Now, the world is increasingly dealing with globalization, and so governments have to promote the efficient management of domestic industries in order to withstand foreign competition.

The term ‘globalization’ may entail many things. From an economic point of view, globalization refers to the effects of extensive free trade among nations as well as the increase in the movement of capital and labor. Trade among nations is not a new phenomenon. However, because of the free trade policy being promoted by the United States and because of the emergence of new technologies, such as the internet, fast communication, and rapid transportation, market globalization has accelerated tremendously since the 1990s. Currently, things move from one place to another almost in a flash. Capital flows wherever there is profit, and people follow the money in search of a better life.

Accordingly, to meet the challenge of globalization, the world is frequently undergoing various economic realignments. One of the current major trends among the countries seems to be to bury their hatchets and create or join a free trade block, where goods and services can move freely from one country to another with no tariffs or duties. The primary idea is to establish a solid market structure for domestic industries to be able to withstand global competition. A free trade area helps a business firm grow, as it increases the size of the market. As mass production often leads to efficiency and lower production costs, business firms with a bigger market become more competitive. Moreover, competition from firms in other members of the free trade zone forces firms to try yet harder to be more efficient, and at the same time drives the weaker firms out. In this way, by becoming more efficient, the domestic firms could prepare themselves to avert the adverse effects of globalization.

Europe would be a good example for the beneficial effects of economic realignments. Europe is essentially an amalgamation of states with different languages, cultures and nationalities. Many of the world’s important events including the democratic movement and capitalism originated there. However, history is filled with tales of enmity and competition among European states. Without even going too far back in history, one could get an idea about the extent of hostilities that existed in Europe from the following examples: The Hundred Years’ War between France and England that lasted from 1337 to 1453; the many wars of Napoleon Bonaparte during his rule over France from 1804 to 1815; World War I (1914 to 1918), though classified as a global conflict, took place primarily in Europe; World War II (1939 to 1945) originated as a conflict among European nations; and then there was the savage war in Yugoslavia in the 1990s. In addition, one should consider traditional communal enmities between the English and the French, the French and the Germans, the Germans and the Poles, the Poles and the Russians, the English and the Irish, Serbs and Croats, Serbs and Kosovars, etc.

But it is hard to imagine those old enmities nowadays. Amazingly, economic interests are rapidly changing the situation in Europe and bringing the previously disgruntled countries together by eliminating all international barriers to an improved economic life. The European Union, which was officially launched in 1993 with only six member states, has since expanded to twenty seven, comprising a majority of states in Europe. In 2002, twelve member states also surrendered their national currencies and adopted the Euro as their common currency. Slovenia adopted the Euro this year, and more countries are likely to follow suit next year. All these moves are indeed intended to face one thing - the market globalization. The EU countries’ GDP of over $13 trillion in 2006 rivals that of the United States, and will surely go up when additional states join the union.

In order to maintain its superiority and to counter the move by the Europeans, the United States quickly created its North American Free Trade Agreement (NAFTA) with Canada and Mexico in 1994. Even in the absence of a congenial overall relationship, the United States found good reasons to form an economic alliance with Mexico. As a free trade block, NAFTA countries’ GDP exceeds $15 trillion, which is also poised to go up if and when Chile and other Central American countries are granted their memberships as expected. But unlike the European Union, NAFTA is limited in scope. For example, the United States would allow free movement of goods and services from Mexico, but disallows free movement of its people. In other words, this is a special kind of marriage limited to economic integration with no social assimilation, and it is designed simply to help domestic industries withstand global competition.

Capitalism, the present dominant economic system, clearly thrives on specialization and trade. So market control is the name of the game in capitalism. In this game of market dominance, what is good for the goose should be good for the gander! Put it another way, if the above tactic of market integration works well for the rich and industrialized countries, why shouldn’t it work for others? In fact, it should serve as a wake up call for the emerging economies to create their own free trade block as it may be the best and most practical defense for the maintenance of stability and growth.

Let’s look at the situation of the South Asian Association of Regional Cooperation (SAARC), a regional organization that has a potential to greatly benefit from an effective free trade block. SAARC was initially launched in 1985 with four states, but has now expanded to eight, comprising all of the states in the Indian sub-continent and Afghanistan, which joined this year as the newest member. The organization encompasses a region that houses almost one fourth of the world’s population. This region as a whole is known for its many diversities as well as major conflicts. Yet, under trying circumstances, it has emerged as one of the fastest growing regions on earth; this is especially true in the case of India.

From such a situation, one can logically deduce that if SAARC countries could somehow emerge to forge a workable economically integrated area, the region could evolve into one of the largest economic blocks with a huge market base. The formation of a free trade area will vastly increase the size of the market available to any particular firm in a SAARC nation. Through intra-SAARC competition, improved and efficient business firms will emerge, which will then be better able to compete globally. Additionally, the allowance of free movements of capital and labor among the member states will further enhance the competitiveness of business firms in SAARC nations.

But from its inception, SAARC has remained mostly ineffective and has achieved very little due to serious political squabbling among its member states. There are a number of acute problems that the organization faces, and religion may be at the center of it all. As a matter of fact, it was religion that caused the division of the sub-continent to begin with. The main issues, which have plagued the region for years, are: Kashmir in the northwest, water distribution in the east, and internal power sharing in the north (Nepal) and south (Sri Lanka).

The dispute over Kashmir has brought India and Pakistan to the battle field on a number of occasions in the past, and it has even advanced the race for nuclear weapons between them. The costs of such a race are enormous since every dollar invested in advanced weapon systems means a dollar less is invested in education, healthcare, social welfare and development. The fallout of Kashmir persists as neither country is prepared to give in.

For Bangladesh in the east, a country of over 145 million people, the lifeline for the country is the water that flows through India. Because of India’s unilateral diversion of that water in the upstream during the dry season, great havoc has been created in Bangladesh. Obviously, this is affecting badly needed cooperation between the two countries. Now China is threatening to dam the Brahmaputra River. India will be in a much better moral position to complain against China’s action if its own attitude towards the water needs of Bangladesh is reasonable.

In the north and south, both Nepal and Sri Lanka have been bogged down for years by their infighting over internal power sharing, which is having a serious impact on their attitude to and cooperation with others. The current internal situation of Bangladesh and Pakistan is not helping things either. Even the newest member state Afghanistan has its own baggage of problems.

The various conflicts in the region have already extracted a heavy price. Earlier, close to fifty per cent of SAARC countries’ economic resources went for the destruction of each other and this has continued even today though may be at a lesser scale. For example, out of the annual budget of $190 billion in 2006, the SAARC countries spent about $28 billion, roughly 15%, for defense related purposes. This amount represents about 2.7% of their total GDP, a huge amount compared to their per capita income. The region’s overall per capita GDP is about $3,350 based on purchasing power parity. Even for India this amount is a mere $3,800, as noted in the CIA World Factbook. Nearly 50% of the people in the region live on less than $2 a day, and about 400 million or 27% of the population live on less than $1 a day. The people in the lower income group are deprived of even clean drinking water let alone other necessities of life. So, to overcome such a depressed condition, the best course of action for SAARC countries would be to end political squabbling and forge economic integration.

India has the largest and fastest growing economy in the region, and it also holds a big trump card for resolving the major issues that have afflicted the region. As a big brother, India has a great responsibility to steer SAARC countries in the direction of economic integration. By doing so, India will expedite its own growth and ensure its stability as well. If India needs a convincing argument for this, it should only examine the circumstances that led to the creation of the EU and NAFTA.

At the moment, India suffers from a serious credibility problem. Its image is tarnished by some of its past actions including the alleged meddling in the internal affairs of others. So, India would need to take some confidence building measures before it could convince others to join the economic integration. While India has a pivotal role to play in turning SAARC into a successful trade block, full cooperation by others is also important.

By observing the overall mood at the 14th SAARC summit that was held in New Delhi in April of 2007, one might sense that a change in the perception about SAARC may be occurring. This position may have been influenced by the increases in economic growth that has happened in many member states and by the realization that, in the current wave of globalization, economic integration rather than political separation is the best way to achieve and sustain economic prosperity.

The position that India took at the summit pretty much set the tone, and it appears to be positive. The summit had begun with a big fanfare and with an impassioned plea for greater cooperation to improve trade relations, combat terrorism, and above all alleviate poverty. There was even a call from one member state, namely Sri Lanka, to adopt a single currency for the SAARC countries. India’s offer to allow duty free entry of goods from the least developed members and to ease visa requirements for students, teachers, medical patients and specialists in various fields is encouraging.

Although the immediate expansion in the exchange of students, teachers and journalists as well as in tourism would have been a great plus, the summit ended in a somewhat positive mood. It adopted a 30-point declaration that included the establishment of SAARC Development Fund, South Asian University, Food Bank, and Arbitration Council. All these are welcome changes. But the future of SAARC will be determined not by the adoption of such programs, but by the proper implementation of these programs and by the resolution of all major conflicts. India as a leading power in the region has an enormous obligation to lead by setting a good example for other member states.

The general expectation is that the SAARC countries will eventually come around to face reality and establish an effective free trade agreement. But the question is how soon will it happen. In this fast moving world, timing is very important. A big delay in reaching an agreement will not help. If, however, they do find a common ground to work towards a common economic goal, the result will be great and everyone will benefit from such an effort. It might be useful to remember that it was the disunity among SAARC countries that put them in the precarious situation that they are in, and now their unity is crucial if they are to face the challenge of globalization.

The potential of SAARC as an economic union was not missed by the world community. That’s why, the United States, European Union, Japan, South Korea, China as well as Iran rushed to send their observers to the SAARC summit and pledged their full cooperation. In the case of Iran, it even expressed its strong desire to join the union. Iran’s offer to join the union should be welcomed for good reasons. However, SAARC countries must proceed with caution and resist the temptation of a much larger expansion for fear that it might actually hinder their own growth. Every inclusion in the union must be weighed in terms of cost and benefit.

The challenge is now squarely before the SAARC countries, and if they fail to seize the opportunity and meet the challenge with courage, they will have no one to blame but themselves. Let’s hope sound judgment will prevail, and soon.

Professor Chowdhury teaches Economics at C.W. Post Campus of Long Island University, USA. He has wide ranging experience in international business and commerce, and has written on failure of communism and problem with developing countries. He was born in Chittagong, Bangladesh and has written extensively on his home country. His book, "Economic Exploitation of Bangladesh", addresses the economics of developing countries, using Bangladesh as a case study.

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