SOUTH ASIA TRADE AND INVESTMENT INTEGRATION: INDIA S ROLE RAJIV KUMAR

Transcription

1 SOUTH ASIA TRADE AND INVESTMENT INTEGRATION: INDIA S ROLE RAJIV KUMAR Presentation at ADB Seminar, Manila February 20, 2009 ICRIER Country Watch 1

2 STRUCTURE OF PRESENTATION Case for Trade and Investment Trends in Trade and Investment Integration Regional Integration Initiatives Recommendations ICRIER Country Watch 2

3 INTRA REGIONAL TRADE: A COMPARISON EU percent ASEAN NAFTA MERCOSUR SAARC ICRIER Country Watch 3

4 Intra Regional Trade- Trends Intra Regional Exports Intra Regional Imports Country Region Share in Own Total Exports to World Region Share in Own Total Imports to World Afghanistan Bangladesh India Maldives Nepal Pakistan Sri Lanka ICRIER Country Watch 4

5 Benefits from Regional Integration : Mixed Evidence Quantitative estimates do not unambiguously support the case for greater regional integration T.N. Srinivasan (1994). Using a gravity model, his simulation exercises showed that an FTA in South Asia, would lead to an increase in trade by 8.9 times for Bangladesh and for Pakistan by 9.5 times. The corresponding figures for India, Sri Lanka and Nepal are 12.8, 10.3, and 17.2 times, respectively. Jayasuriya and Weekrakoon (2002) explored the evidence on the tradeinvestment links in South Asia by focusing on the textile and garment sectors of the region as well as on some firm level evidence from Sri Lanka. Preliminary analysis shows that though the extent of these trade-investment links in the SAARC region were still rather limited, they do indicate the potential. UNCTAD and ADB (2008) which has used general equilibrium analysis to estimate the impact of SAFTA on the welfare of the member nations. The study concludes that SAFTA will be trade creating with India serving as the growth pole for the region. It also finds that all the participating countries will gain. The gain will be higher for smaller LDCs. ICRIER Country Watch 5

6 contd. Panagarya (2003), found that trade diversion will probably swamp the beneficial trade creation effects. Kumar and Saini (2007) look at the Pareto optimality of SAFTA as well as the welfare optimality of alternative sets of coordinated trade policies that go beyond SAFTA using the standard static GTAP model. Their analysis shows that the welfare basis for establishing SAFTA or for deeper trade policy coordination in South Asia was not very strong. Nor was it obvious that cooperation among the South Asia would be forthcoming given the rather meagre anticipated welfare impacts. ADB-UNCTAD study (2008) has shown that lowering of tariffs following SAFTA will attract FDI from outside the region into South Asia. SAFTA may not only increase intra regional trade but may also attract more vertically integrated FDI into the region. ICRIER Country Watch 6

7 MOTIVATIONS FOR REGIONAL INTEGRATION PURE ECONOMIC EFFICIENCY GAINS NON-TRADITIONAL GAINS STRATEGIC GAINS DEVELOPMENT AND ENVIRONMENT EFFICIENCY GAINS ICRIER Country Watch 7

8 Value Added as Percentage of GDP Country Agriculture Industry Manufacturing Services Bangladesh Afghanistan n. a 42.9 n. a 22.6 n. a 15.2 n. a 34.5 Bhutan India Nepal Pakistan Sri Lanka Source: WDI ICRIER Country Watch 8

9 SITC Share in Total Exports to the World Share of South Asia (minus India) in Total Exports to the World % SITC Share of South Asia( with India) in Exports to World % 84 Apparel/clothing/access Apparel/clothing/access Textile yarn/fabric/art Petroleum and products Cereals/cereal preparation Textile yarn/fabric/art Coffee/tea/cocoa/spices Non-metal mineral manuf Petroleum and products Misc manufactures nes Fish/shellfish/etc Iron and steel Misc manufactures nes Organic chemicals Leather manufactures Metal ores/metal scrap Vegetables and fruit Pharmaceutical products 2.4 Share of this region in the global exports negligible at 1.3 percent. Export concentration in low technology products. ICRIER Country Watch 9

10 IMPLICATIONS OF LOW MANUFACTURING SHARES Manufacturing sector in the region suffers from under funding of technology, inappropriate scales and, poor infrastructure. Growth not sufficiently employment intensive or inclusive. With the downturn demographic dividend becomes doubtful Marked dualism all across South Asia: SMEs generally neglected Greater regional cooperation will benefits the manufacturing sector through -Trade expansion and economies of scale. - South Asian Supply Chain Networks. - Setting region wide regulatory norms and standards ICRIER Country Watch 10

11 Trends in Intra Regional Trade ( contd.) Most of the trade of the countries in the region is extra regional. In recent times, the South Asian market has become important especially for the smaller countries like Afghanistan and Nepal. Though dominating the region s trade, India sources less than one percent of its imports from the region. Unilateral liberalisation by India has effectively eroded the advantage the SAARC members can have in the Indian market. There have been changes in the direction of the region s trade. India-Sri Lanka bilateral trade has increased significantly. There has also been an increase in India s trade with Pakistan. ICRIER Country Watch 11

12 Regional Shares in Global FDI Inflow EU USA China ASEAN S. Asia EU USA China ASEA N S. Asia Year US $ million Share in World FDI (%) FDI Inflow into South Asia has increased by 8 times over 1995 and 2006, it is less than 2 percent of world FDI ICRIER Country Watch 12

13 Country-wise FDI Inflows in South Asia Year Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Cumula tive Very low FDI in general. India again predominates. ICRIER Country Watch 13

14 Intra Regional FDI in South Asia While extra regional FDI more important than intra regional FDI, intra regional investments seem to be increasing. Most of intra regional FDI is from India.In Nepal and Bhutan and Sri Lanka India is the predominant source of FDI. Though small, other members of the region are also finding bilateral investment opportunities. Bangladesh has increased its investment in Pakistan since the last two years. Sri Lanka is the largest investor in India from the region. Political considerations seem to be an important factor that is holding back investment flows % of Country 's Total FDI Intra-Regional FDI in South Asia India Bangladesh Pakistan Note: Intra regional FDI flows over following periods: India and Bangladesh and Pakistan and ICRIER Country Watch 14

15 SAFTA SAFTA came into force in January Aims to strengthen intra-saarc economic cooperation to maximise the realization of the region's potential for trade and development for the benefit of their people, in a spirit of mutual accommodation, with full respect for the principles of sovereign equality, independence and territorial integrity of all States Believes that preferential trading arrangements among SAARC Member States will act as a stimulus to the strengthening of national and SAARC economic resilience, and the development of the national economies of the Contracting States by expanding investment and production opportunities, trade, and foreign exchange earnings as well as the development of economic and technological cooperation ICRIER Country Watch 15

16 SAFTA SAFTA is governed by WTO principals of reciprocity and special and differential treatment of LDCs. Focuses on elimination of tariffs, para-tariffs and non-tariff. Entails adoption of trade facilitation and other measures, and the progressive harmonization of legislations by the member States in the relevant areas. Implementation of SAFTA through, -The highest decision making body and responsible for the administration and implementation of this Agreement : SAFTA Ministerial Council -Supported by Committee of Experts (comprising of Senior Economic Official from each member State). The COE to also act as Dispute Settlement Body. Tariffs phase-out schedule (Phase out by 2016): Non LDCs for LDCs - Tariff to be reduced to 0-5% by Non-LDCs for Non-LDCs : To reduce tariffs to a maximum of 20 per cent ( ) and to 0-5 percent in the next five years. Schedule for LDCs: To reduce tariffs to a maximum of 30 per cent ( ) and further to 0-5 percent during Products that qualify for SAFTA preferences also subject to rules of origin, sensitive lists, balance of payments, and safeguard measures. ICRIER Country Watch 16

17 Weaknesses in SAFTA Pakistan has ratified SAFTA but has not accorded MFN Status to India and continues to use a positive list. The time frame (by the year 2016) to reduce the tariffs to zero percent is too long. The sensitive lists are too large and no binding commitment to reduce or remove the lists. Members are free to have bilateral agreements that include deeper tariff cuts and cover larger number of sectors including sometimes service sectors. Technical assistance in SAFTA, designed to assist LDCs in building their negotiating and trading capacities, is in the nature of best endeavour clause without any binding commitments. No timeframe under SAFTA for removing NTBs. ICRIER Country Watch 17

18 Lessons to be learnt from ASEAN To give primacy to economic issues. Adopt the open regional approach as followed in East Asia. As dominant power provides a focal point around which policy coordination can take place, India should take the lead. South Asian Finance Ministers (FMs ) process should be formalised under the SAARC framework and further strengthened. A regional liquidity arrangement to guard against any future liquidity crisis can be established with India taking the lead with its large foreign exchange reserves. Desist from establishing alternative and overlapping and competing regional formations ICRIER Country Watch 18

19 Recommendations India should further reaffirm its commitment to SAARC and take a more proactive role in ensuring its progress. India must play a role of a dominant partner in South Asian regional integration and be prepared to shoulder the efforts and costs of achieving an integrated economic space in South Asia. SAARC secretariat should be professionalized. ICRIER Country Watch 19

20 Recommendations (contd.) Member countries must focus attention on improving trade facilitation at the borders. Infrastructure development, both within individual countries and in projects that improve regional connectivity imperative. Investment climate should be made more attractive ICRIER Country Watch 20

21 Recommendations (contd.) Exaggerated perceptions of security threats. Coordinated action on part of the stake holders who either expect to gain from regional integration necessary. More resources and powers to be given to border states. ICRIER Country Watch 21

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