SAARC Promises and Performance


Written by S.G. Jilanee • Cover Stories • December 2011

Launched in 1985 with the ambition to replicate the European Union, SAARC still gropes for ways to fulfill its dream. Pakistan obsessively views every aspect of Indo-Pakistan relations through the prism of Kashmir that has been the greatest hurdle in the way of bilateral trade.

The 17th SAARC summit was held this November in the Maldives. The declaration talked about many things including empowering women, erasing fender inequality, combating terrorism and so forth.

But, more important is the apparent realization among the members, of the vital importance of intra-SAARC trade. The South Asian Free Trade Agreement (SAFTA) was signed in 2004 and became operational two years later. The dream was to make it the South Asian counterpart of the NAFTA (North American Free Trade Agreement). However, the organization remained hostage to the acrimony among member states, foremost being the abiding bitterness between Pakistan and India, the two members with the highest potential for bilateral trade.

The question to ask is if the EU can conduct hassle-free trade with its member countries and if Indo-China border trade can be a huge success, why can’t the same be true of SAARC countries? Inter-EU trade is 55%, and Inter-NAFTA trade is 61%, but Inter-SAARC trade stands at a meager 5%. Why can’t it be improved?

South Asia’s middle class population numbers more than 500 million. This is more than that of EU and North America. This pressing fact points to the enormous untapped potential that Intra SAARC trade could benefit from.

It was a hopeful sign then, that SAARC member countries agreed to direct the SAFTA Ministerial Council to intensify efforts to reduce the sensitive list and non-tariff barriers to trade, as well as asked their respective finance ministers to draft a proposal to allow larger financial inflows and investments.

However, for trade to succeed within SAARC, communication is an essential ingredient. The SAARC secretary general has recently been instructed to ensure that the final preparations for the Indian Ocean Cargo and Passenger Ferry Service are completed this year. Besides, member countries have agreed to conclude the Regional Railways Agreement, convene the Expert Group Meeting on Motor Vehicles Agreement and establish a South Asian Postal Union. Among these, the railway agreement holds the most promise, due to the immense benefits accruing from it for the mainland member states: Nepal, Bangladesh, India, Pakistan and Afghanistan.

The importance of the above decisions can be judged by the fact that “nearly three-fourths of intra-regional trade potential in South Asia remains unutilized because of tariff and non-tariff barriers, poor transport infrastructure and connectivity, lack of trade facilitation, poor banking links and so forth.” However, the first step towards boosting trade in the region requires relaxation of visa norms, because, trade cannot prosper unless people can visit each other in the region without impediments.

Keeping this in mind, some relaxation has taken place. India recently granted visas to 100 prominent Pakistani businessmen and has set up a customs-free warehouse at the Wagah border. In the banking sphere, two Pakistani banks will soon be setting up offices in India and vice-versa. But, while these steps are welcome they are less than enough.

The World Bank estimates that annual trade between India and Pakistan is around $1 billion and could grow to as much as $9 billion if barriers are lifted. However, Pakistan obsessively views every aspect of Indo-Pakistan relations through the prism of Kashmir that has been the greatest hurdle in the way of bilateral trade.

India accorded Pakistan the ’most favored nation (MFN)’ status in 1996. Pakistan has delayed reciprocal action for fear that Indian companies would overwhelm local industries. It is imperative to dispel the fear and convince relevant quarters that Intra-SAARC trade is about ‘complementing’ each other and not competing with each other. Moreover, a fact that is yet to be fully appreciated is that because Intra-SAARC trade can run on rupee payment instead of convertible foreign exchange, it offers the biggest trading opportunity.

Nonetheless, mutual trust is the key to mutual growth. SAARC members need to speak in one voice on such issues to achieve mutual prosperity. Confidence between buyer and seller is another key ingredient for trade to prosper. Therefore, in addition to putting in more effort on implementing policies, a common code of conduct for registration of products across all SAARC countries needs to be followed.

To exploit the full potential of regional economic integration in South Asia, SAARC countries need to expedite their implementation schedule and expand their scope by reducing the sensitive lists and removing non-tariff barriers.

Interestingly, while the SAFTA has remained bogged down, India and Sri Lanka drew up a separate Free Trade Agreement. The results are spectacular, which SAARC members should heed. In the first six or seven years of the implementation, “bilateral trade has expanded rapidly, with India’s exports to Sri Lanka growing at an average annual rate of 34.5 per cent and those of Sri Lanka growing at 132 per cent. Sri Lanka’s imports-to-exports ratio fell from 10.3:1 to 3.3:1. Sri Lankan export items to India increased from 505 to 1,062 with a visible shift in favor of high-value added manufactures.”

Political leaders especially in Pakistan need to realize that from primordial times trade has been the key to bringing different people together. It has promoted mutual understanding and helped remove the barriers of color, religion, race and language. In fact, if there were freer trade and open mutual contact between the Indians and Pakistanis they would have ceased to perceive each other as monsters. Maybe, Pakistan’s core issue regarding Kashmir could have been successfully addressed as well.

Recent exchange of friendly overtures between the leaders of Pakistan and India therefore augur well. Pakistan has, in principle, decided to give India the long overdue MFN status. Prime Minister Manmohan Singh has accepted his counterpart’s invitation for an official visit to Pakistan, while Pakistan foreign minister has said that Indo-Pakistan trust deficit has been reduced to zero. If true, it is a most welcome piece of news.

There is no question about SAARC’s bright future but it would need the will of the political leaders of the member countries to settle on an even keel.