SOUTH ASIA IN THE ASIAN AGE An Analysis of the Potential of Regional Integration in South Asia.

Trade 07 Feb 2012

SOUTH ASIA IN THE ASIAN AGE An Analysis of the Potential of Regional Integration in South Asia.

One can easily observe that the economic weight of Asia is rapidly increasing. Of the six largest economies of the world, three are in Asia, and of these two, China and India, are the fastest growing economies of the world. During the last few years, the world economy has been moving forward driven by the growth rate of these two most populous emerging markets. Performance in terms of growth rate, GDP size, trade share, industrialization, FDI inflow, corporate competence, vibrant currencies indicates that China and India can carry forward and sustain the growth path set by Japan and the Newly Industrialised Economies. Definitely, from the point of view of economic growth and development, we have entered the Asian Age.

At present, most of the developed and emerging economies of the world belong to the triad region of EU, North America and Asia Pacific. This indeed shows that economic growth acquired a regional dimension during the last 50 years. Significantly, Asia’s economic transformation during the last two- three decades is evidently marked by regional integration of East Asia. Hence regional economic integration / co-operation efforts became one of the most dynamic strategy instruments for emerging market economies to achieve faster economic growth.

Since India is a big national market, we need different trade and integration strategies compared to small demand constraint economies elsewhere. During the last few years, the government formulated Free Trade Agreements (FTAs) with SriLanka and Thailand. Simultaneously, the government is looking for FTA with ASEAN and the SAFTA is in its embryonic stage. Regarding regional economic co-operation, the government has two clear options –one with East Asia and the other in the SAFTA.

The Indo- ASEAN Free Trade Area

There is considerable difficulty in assessing the potential impact of the Indo- ASEAN Free Trade Agreement. This is because the entire East Asia is emerging as a single geo-economic space through Free Trade Agreements. The FTA between the ASEAN and the big three--Japan, China and South Korea is making East Asia a complex investment and production network. Or in other words, a significant amount of value addition, in the form of components and intermediaries from the big three, will enter the Indian market through the ASEAN doors, once the Indo- ASEAN Free Trade Area is formed. Hence, an FTA with the ASEAN will be similar to an FTA with the ASEAN plus three in effect.

In the ASEAN Plus three regional space (ASEAN, China, South Korea and Japan), substantial scale of intra-regional investment especially from Japan and the NIEs has taken place. The Korean and Japanese MNCs now have production networks in the ASEAN region through subsidiaries, strategic partnerships, component supply agreements with local producers etc. Historically Japanese MNCs are known for building production networks in East Asian countries to make exports to the US and the EU because of the cheap labor existing in the region. As of now they are using these East Asian networks for making export production to the Emerging markets elsewhere.

All this shows that there are established and excess production capacities in East Asia, which is outward oriented and dependent on foreign demand. Given this, most of the MNCs would like to avoid the waste of competitive FDI formation or to create fresh supply/production networks if some other country like India is absorbed into the region. Precisely, if we are going for trade and investment liberalization with ASEAN, the MNCs would prefer to serve the Indian market by using their existing production network in East Asia rather than creating fresh production bases in our country. Hence India will function as a demand absorber for goods from the ASEAN plus three rather than an investment destination.

The same is applicable to most of the American and European MNCs who have strategic presence in the region. Generally, the strategy of the MNCs is to give a slice of the value chain to each national market so as to satisfy the local sentiments, to get the benefit of national policies etc. Given this, while joining the ASEAN, India can also get a share in the production value chain of the MNCs. But this share will most probably be limited to value addition in the form of assembling etc. In essence, given the economic requirements of our country, and the investment/production climate of East Asia, it is less desirable for us to go in for greater integration with the already matured East Asia.

This does not mean that greater economic interaction with ASEAN is a completely undesirable option. Trade interaction with the region will always add to the competitiveness of our economy. What matters here is the way in which we interact with them. Here, we shall not go for wholesale trade liberalization. It is better for us to go for bilateral free trade agreements. Adoption of different tariff structure for different commodities with each economy is decisive for the development of sectoral comparative advantage in our economy. Hence both degree and direction of trade integration efforts are relevant for India, given our geo-economic environment.

The South Asian Free Trade Area.

Now, the second option i.e., greater economic co-operation in South Asia. Economic history tells that though economically motivated, regional integration efforts all over the world have their root in cultural, social and linguistic homogeneity, and geographical proximity. In the EU, there is a common religion, tradition, history etc., whereas in East Asia there is the Pan Mongoloid identity. Looking back to South Asia, the region has a unique socio-cultural and linguistic identity and a common history. But political animosity and religious extremism thwart almost all-economic interaction efforts in the region.

When referring to integration in South Asia, we cannot be casual about the extent /degree of integration. It is unrealistic to expect for the extent of regional integration of the EU or ASEAN in South Asia. The trade environment of south Asia depends on the political relationship between India and Pakistan. Even a normalcy in trade relationship between India and Pakistan is an achievement given the political environment of the region. Besides, a redefinition of the national priorities in Pakistan and Bangladesh in favour of faster economic growth is a pre requisite for more trade interaction.

Hopefully, during the recent times, few factors worked in favour of greater co-operation between India and Pakistan. Firstly, a significant development in the region over the last decade is that the process of globalization gave birth to a consumerist middle class in both countries, whose interests will weigh heavily on government decision-making. Among this powerful group in both countries, there is rapidly developing consensus for blaming the hard-liners as the culprits behind political tension in the region. These middle classes of the two countries are obsessed with each other and are willing for more interactions now than ever. But, generally, political initiatives in South Asia lag behind popular sentiments. Therefore, it may take time to reflect the aspirations of this middle class to reflect on trade contacts between the two countries.

Secondly, and perhaps most importantly, intense cultural contact through media- viz., cinema, music etc. and academic and intellectual interactions between the two countries brought the in-built common cultural identity stronger than ever in recent years. It is only a matter of time that enhanced trade ties will succeed the cultural interaction. Thirdly, there is the compelling influence of the rising global status of the Indian economy on the people and governments in the region.

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Hence at present, the popular sentiments are in favor of more forms of interaction between India and Pakistan. Given, public mood exerts its own pressure on governments; political environment in South Asia is graduating to accommodate the initial traces of regionalism. It is in this respect that the Muzafferabad-Srinagar bus service is different from all previous CBMs. Besides, not less important is that it touched the root political problem of Kashmir.

Also, the recent engagements between the two countries indicate gradual prioritisation to economic issues in the relationship between the two. The political leadership in Pakistan and Bangladesh is awakening to the reality of the rising global status of the Indian economy and are thinking in favour of more regional economic co-operation so that they can also benefit. The recent Indo- Myanmar- Bangladesh and Indo –Iran – Pakistan gas pipeline efforts are supportive of this positive trend.

Building an altogether different regional platform in South Asia is more advantageous to our economic interests than being an extension of the already saturated East Asian investment location. Though India and China have the advantage of being very large, this advantage is less pronounced in India. China’s depth of industrialization and manufacturing orientation make the difference here. At a time when Europe, America and Japan are aeging, the youth biased population structure in South Asia is conducive to faster economic growth. Besides the proximity of resource rich, but land locked Central Asian republics and Iran provides greater scope for regional co-operation for the entire South Asia.

When we take South Asia as SAARC plus Afghanistan, India’s GDP at PPP terms amounts to almost 75- 80 % of the region’s GDP. In the terminology of regional trade blocs this means our economy has the centrality in South Asia. An essential component of this centrality is our graduation from a low wage economy to one of demand absorber and a centre for the development of comparative advantage in fresh areas like IT and emerging competence in pharmaceuticals, automobile sector etc. If greater economic co-operation, the demand absorption capacity will enable us to absorb the raw material exports from our neighbours which indeed will be an incentive for them to enhance trade ties.

Given the centrality of the Indian economy in the region, it is our responsibility to continue the regional trade liberalisation measures. But no single government can impose regional co-operation efforts, however large it is. Hence, only collective efforts and coherent policies by all national governments in the region can make South Asia a vibrant economic region in the Asian age.

Certainly, how to engage in economic integration efforts, is one of the leading issues in globalization strategy for India in the present phase of global integration. For this, the prioritisation of both degree and direction of these integration efforts shall be made a critical element of our globalization strategy. Our integration efforts with the extended neighborhood in the East, sidelining the immediate neighbours, are difficult to pay off in the long run.