Pulling South Asia together

South Asia and specifically India, can learn much from the European Union (EU).

Similar despite the income gap

This is despite the income dissimilarities. South Asia with a per capita GDP of current $1960 is low-middle income, at best. The EU with a per capita GDP of current $34,843 is high income. Also, Europe is rather blandly homogenous in religion and race, unlike diverse South Asia.

But the EU is not a gift of nature. Europe has worked hard to bind itself together. Squabbling over borders and leveraging external interventions to destabilize each other, in the classic Mir Jaffar style, is no longer their dominant leitmotif, as in South Asia

What is common to both regions is their rootedness in a shared history and culture, though language, food and customs differ. This is something we have not built upon sufficiently. Not surprising then that trade within South Asia is just 5% of its total global trade versus 22% in Sub Saharan Africa and 50% in East Asia (World Bank. 2018)

The twenty-seven members of the EU trade more with each other (average 60%) than globally – the only exception being Ireland. (Eurostat 2019).

In our “trade barrier” threatened world of today, the self-contained coziness of the EU is reassuring – not just for the smaller members, three fourths of whom account for just one fourth of EU GDP, whilst the biggest seven account for three fourths of economic power. In comparison East Asia, despite the trade links, remains fraught with geo-political tensions, boundary disputes and lacks the “comfortably settled” feel of European integration – despite the traumas of Brexit.

Pulling together is not impossible

Political economy constraints are fingered for keeping South Asia economically fragmented. India’s long-term border dispute with Pakistan is complicated by geo-political incentives to avoid peace and reconciliation. The continuing domestic religious cleavage between Indian Hindus and Muslims does not help matters in our near abroad, with Muslim dominant neighbors to the East and the West.

This seems an impossible backdrop for peaceful trade relations. But too much should not be read into our new strategy of “domestic religious equity” versus the politically motivated “minority appeasement” of the past. India with nearly 200 million Muslim citizens jostles Indonesia for being the country with the most Muslims.

Our relationship with Bangladesh, under the existing regime of Sheikh Hasina, the daughter of Bangabandhu Sheikh Mujibur Rahman, are productively, cordial. We simultaneously have cultural and economic links with the Islamic states of the Gulf, Iran and Afghanistan. India has an open border with Nepal. We share a special relationship with Bhutan, Sri Lanka and Maldives.

The gains from trade, despite all this political capital are paltry. Why? “Gravity modelling” of trade – jargon for the assumption that countries situated closer together, trade more with each other, along with other factors like differences (or similarities) in income, resource and technological advantage – suggests that regional trade could triple from the existing 1% of regional GDP to 3%. (Kathuria, Sanjay 2018. “A glass half full”).

“Himalayan” barriers to trade

Despite the 2007 South Asian Free Trade Agreement, too many artificial constraints have been positioned to throttle trade. A long list of products categorized as “sensitive” effectively bars their import. Special (para) tariffs are added to normal tariffs for intra-South Asian trade but not for global trade. This incentivizes value diminishing external “third party” imports. Non-tariff barriers are formidable due to non-harmonized standards and protocols and poor infrastructure. The transaction and logistics cost are 20% higher than in East Asian regional trade. It is cheaper to trade with Brazil than with each other!

Joyeeta Bhattacharjee, of the Observer Research Foundation, who tracks the new Integrated ChecK Post facilities on India’s border with Nepal and Bangladesh, notes that these are far from the seamless, 24X7, digi-savvy, modern, low transaction cost facilities they were meant to be.

The downside of dominance

One problem is India’s economic dominance. It comprises just under 80% of South Asian GDP. In comparison, Germany, the powerhouse, is one fourth of EU GDP and combined with France 42%. The “frugal five” – Netherlands, Denmark, Sweden, Finland and Austria – whose austere fiscal policies resonate with Germany but are the bane of the big spenders in Southern Europe, together have 15% of economic power.

The more even distribution of economic power in Europe, together with high income levels, lends itself to more give and take. Nevertheless, the burden of making a success of the Union falls disproportionately on the more fiscally disciplined northern economies. The consumption oriented southern economies provide the markets for northern exports – a mirror image of industrious China and big spender US, till President Trump violated the delicate rules of economic integration by fingering China as an existential threat.

India’s relative regional economic dominance resembles China’s over East Asia, excluding the high-income economies of Japan, Korea and Singapore. The difference lies in the symbiotic relationships, China has diligently forged, by integrating the developing East Asian economies into its supply chains.

India is yet to grapple with its own economic insecurities before it can play the role of the benign South Asian hegemon like France-Germany in Europe or threateningly dominant China, in East Asia.

Product and functional differentiation can replace competition with regional collaboration

Nevertheless, comprehensive collaboration with neighbors is a key ingredient for regional development. Letting others profit from you is a powerful binder. Boosting cross border trade and investment, facilitation of trade between physically separated members like Nepal and Bangladesh or Sri Lanka and Maldives and the region, even at a fiscal cost to India, should be factored-in as the cost of pulling South Asia together. Indian business should get special incentives to develop regional supply chains and invest in the region.

A new, multilateral South Asia Development Bank can sweeten the deal

Setting up a multilateral South Asia Development Bank (SADB) to finance green development could send a powerful signal of India’s commitment towards collaborative regional integration. An authorized capital of $50 billion and one half of that as subscribed capital, is substantial versus the regional economy of around $750 billion (excluding India).

India can provide 15% of the funds and leverage multilateral relationships for the residual from Japan, Korea, Australia, the UK, France, Germany, the Nordics and the US. The bulk of the incremental development financing would go to South Asian economies, other than India, including Afghanistan and Myanmar, under the open tender, human habitat and environmentally sensitive rules, followed by other multilateral banks.

Financial, cyber, space, industrial engineering and construction services and design are our comparative advantages. We must build on these core strengths whilst relying on regional partners for the downstream supply chains. Product and functional differentiation, rather than immiserating all-out regional competition, is a good way of incentivizing smaller economies for voluntary, regional integration. The Europeans know this. We should learn from them.

Also available at TOI Blogs July 28, 2020 https://timesofindia.indiatimes.com/blogs/opinion-india/pulling-south-asia-together/

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