The way to development of Saarc

The Logic to Regional Focus on Trade & Investment
When Paul Krugman won the Nobel Prize in economics on October 13th, the news was greeted with nostalgia. Since 1999 he had been writing a twice-weekly column for The New York Times and has regularly attacked the acts of the Bush Administration and talked about "Scale Economies". He primarily won the prize for his models of international trade and economic geography, whereby, he gave more clarity and practical meaning to the model of "monopolistic competition" published originally by Avinash Dixit and Joseph Stiglitz, when they introduced economies of scale into trade theory and beyond.
Economies of scale had long posed awkward problems for theorists. If bigger firms face lower costs, then in principle one firm should supply the entire market, thereby enjoying the lower costs of all. But in the Dixit-Stiglitz model, the monopolizing logic is offset by a countervailing force: consumers' taste for variety. People prefer to spread their custom over different versions of the same good. The market is therefore carved up among competing firms, each offering a product bearing its own distinctive stamp. Such a model gave Krugman, as he put it, "a tool to open cleanly what had previously been regarded as a can of worms". Thus, he literally saved economics or economic theories from an abiding empirical embarrassment.
Earlier we had reasoned that countries gain from specialisation and exchange, concentrating on what they do best and importing the rest. This theory explained why Portuguese might sell wine in exchange for English cloth but did not explain why similar countries, possessing similar ratios of capital, labour and land, should so vigorously trade similar goods back and forth. This phenomenon in itself, by any standard, did not represent a merely small blind spot According to the WTO, 52 percent of Germany's exports to France are things France also produces and exports to Germany. But the Dixit-Stiglitz model, with its subtly differentiated firms competing for variety-loving consumers, lent itself to basically explaining only why Germans might import Renaults, even as the French imported Volkswagens.
However, more importantly, what we learned 'new' from the Krugman model is that when trade barriers fall, firms gain access to bigger markets, allowing them to expand production and reap economies of scale, but at the same time, openness also exposes them to competition from rival foreign firms, paring their margins. Some firms may go out of business, but consumers have more to choose between domestic survivors and foreign entrants. Thus the gains from trade arise not from specialisation, but from 'scale economies', fiercer competition and cornucopia of choice that globalisation provides. The concept of scale economies for the first time gives economics a sense of space. For example, he himself argues that nighttimes satellite photos of Europe reveal the distinctive contours of economic activity: bright lights cluster around metropolitan centres, shinning particularly more brightly around the triangle of Brussels, Amsterdam and Dortmund. Earlier, economists struggled to explain these images as they did not fall in line with the crux of the theory itself; They were accustomed to assuming that firms face constant returns to scale and yet if this was to be true then every person could essentially create his own little backhouse production chain and there would be no need for an economy to divide into a farm belt and an industrial belt?
With this new model, by contrast, big factories benefit from lower costs of production. Manufacturing firms might therefore cluster near a large market, leaving behind a sparsely populated hinterland, in order to make the most of scale economies and minimise the cost of transporting goods to their customers. Earlier theorists reasoned that firms herd together to benefit from some kind of "spillover" i.e. perhaps firms pick up tricks of the trade and other know-how from their neighbours.
But this argument appeared somewhat unsatisfying, because largely spillovers could neither be measured nor could their scope be delimited. What we have learned from Mr. Krugman is that regional focus, proximity and neighbourhood cooperation instead yield new yet tangible benefits and strengths. The opportunity for firms to locate in regional strong areas is a gift to other firms in the areas, because in attracting new workers it also brings new customers. Unlike a technological spillover, the real physical proximity of firms and real production work taking place in common areas of interest leave a paper trail, showing up in firms' growth in general, thus benefiting the entire region by making it more competitive in a global environment.
Pakistan & India - Fact Sheet
Pakistan and India are the two most populous and largest economies of the South Asian region. However, official bilateral trade remains negligible and neither country falls in the category of top ten trading partners of each other, partly due to their history of being relatively closed economies. India's foreign trade openness remains low at 31 percent than the 38 percent of Pakistan and also when it is compared with the averages of South Asia at 65 percent and ASEAN at 144 percent in the 2000s.
India's share in Pakistan's total exports remains less than one percent, whereas in total imports, it fluctuates within a narrow range of 1.36 to 2.66 percent during the five years from 2002-2006.
Pakistan's share in India's total exports averages 0.45 percent whereas in imports it constitutes only 0.11 percent. Compared to the actual trade that has oscillated between $0.50 billion to $1.00 billion over the last four years (with July 2007 to June 08 being exceptional at close to $2 billion), the potential of annual bilateral trade based on studies by the State Bank of Pakistan and the Indian Central Bank has been worked out between $8 billion to $10 billion.
This can also be referenced with estimates of other recent studies, World Bank: $4 billion using fixed effects gravity model of bilateral trade based on 2006 data, $8 billion in an Indian Council for Research on International Economic Relations (ICRIER) study using the augmented gravity model specification, and an informal estimate at around $15 billion quoted in a Karachi Chamber of Commerce & Industry (KCCI) report.
Already the informal trade between Pakistan and India is being estimated in excess of $2.50 billion, which is being carried out through exchange of goods at the Indo-Pakistan border, the misuse of the personal baggage scheme through the "green channel" and Afghanistan. Trade through third countries or circular trade is mainly conducted through agents operating in free ports like Dubai, Singapore and the Central Asian Republic (CAR) countries. The size of the circular trade underlines the potential of a flourishing bilateral trade.
With Pakistan recently announcing liberalisation of another 800 items (total now close to 2000 items) for imports from India and with trading routes opening between the two Kashmirs and more entry points likely to open at other common posts between the two countries, it is being envisaged that the official trade figures will grow as the unofficial figures will decline.
However, more active and sincere efforts are required from both sides, especially in removing a plethora of non-tariff barriers on the Indian side to create a level playing field to promote the bilateral trade.
Crossborder investment, however, at the moment looks a distant reality because apart from the trust deficit between the two governments, there also remains a lot of mistrust between their private sectors. The real need is to make laws, rules and regulations on property rights to facilitate and safeguard crossborder investments in order to boost the entrepreneurs' confidence.
Conclusion & Recommendations
This paper not only looks at the broad positive effects emanating from enhanced mutual trade and investment, but goes on to look as a model at the regional importance on development of trade and investment, which can then be used as a launching pad for international competitiveness and thereby enhanced globalisation based on the WTO principles of free and fair trade. In doing so, the paper has sought to judge the extent to which, with the advent of the new global economy and increasingly widespread acceptance of more liberal economic policies, the developing Asian countries particularly the SAARC countries have been successful in maintaining relative openness in their economies, mainly with respect to foreign trade in goods and services and FDI.
The paper envisages that non-Asian emerging-market countries have made appreciable progress in closing the "trade policy gap" with leading East Asian countries and SAARC as a region still lacks any significant progress in this direction. Moreover, the emerging-market countries outside Asia and then the ones in East Asia are, arguably, more liberal today in their policies toward FDI than any of the SAARC countries.
These successful models of enhancing trade and investment show us that during the last decade the countries that have made progress in this direction have actually gone on to widely reduce their average levels of tariff protection and, very importantly, their average level of NTB (non-tariff barriers) protection.
The South Asian economies remain among the world's most highly tariff-protected and ironically, India and China come across as economies that continue to heavily rely on NTB protection.
Pakistan and India, two main economies of SAARC, are at present not living up to their potential in mutual trade and investment. The growth in bilateral trade over the years has been dismal and quite volatile and ironically more at the unofficial than official level. These low volumes of trade and low trade integration have their roots in their trade systems, as their trade regulations are relatively restrictive.
Some estimates put the potential for bilateral trade between these two largest South Asian economies at $15 billion, but for any significant levels of crossborder investments to take place bold and broad level legislative initiatives are required, which at least for the moment look to be a distant reality.
Recommendations
With the underlying assumptions that,
i) Enhanced trade and investment is what is desired amongst the SAARC countries, And that
ii) Regional focus in the long term will help SAARC nations' competitiveness and also such a focus will compliment the overall WTO objectives,
The following measures are being recommended:
* A change is required in the mindset of SAARC governments, the Indian and Pakistani governments in particular, to bring about an urgency towards recognizing and taking concrete steps for promoting trade and investment between the member countries. A sense of urgency focuses on urgency as the first and most important determinant of successful change. When we refer to real urgency, in essence we refer to a strategy and tactics that ensure that,
a) The desired change is continuous and not merely episodic.
b) Complacency does not set in.
c) We avoid the insidious nature of "false" urgency.
d) We effectively manage how to create and sustain true urgency.
e) Implementation process accounts for the essential "heart-head" strategy.
Remember, that speed and urgency in the modern day world are no longer considered luxuries, but a must have. Also when promoting trade and investment, great care has to be taken that in doing so the thinking reflects both on national and global welfare aspects and encompasses essentials like climate change, terrorism, ethical issues on surrounding bioscience, and need for regional social security reforms. As such an approach would make the regional activity complement any later day global initiatives by the member countries.
* Improve Mobility of People: This includes access to crossborder skills and knowledge, formation of relationships and visa obtainment - In short, facilitate freedom of movement and people-to-people contact.
* Strengthen Communications and Transport Links: Communication linkages and infrastructure should be strengthened as much as possible, i.e. air links, road links, unhindered paper flow, etc.
* Quickly Finalize an Agreement in the Services Sector.
* Foster Crossborder Energy Investments and Regional Energy Trade.
* Implement Measures of Trade Facilitation: Collaborative measures are required to improve trade facilitation by improving customs management and swift movement of goods through ports and airports.
Mutual certification and standards must be accepted throughout the region. Non-tariff barriers are restrictive to trade and not only add costs but also increase the lead-time for deliveries.
* To kick-start the activity in the region as a whole, it is important to get the two main economies, Pakistan and India, to quickly build significant level of Crossborder trade.
* Post Mumbai, the blame game between Pakistan and India has to stop and the trust deficit overcome putting into place resilient underlying cooperation mechanisms that can maintain sanity during unfortunate tragedies on either side.