The case for regional trade among SAARC countries

THE WORLD Bank-Escap regional technical workshop on transport and trade facilitation held last year has highlighted among other things the possibility of open border trade among Myanmar, Tibet, North-East India, Bangladesh, Bhutan and Nepal, under the aegis of (South Asian Association for Regional Cooperation) SAARC. This is significant not only because it will minimise illegal cross- border trade that offers favourable dispensations to private agents only, thereby channellising gains to their nations instead, but also because it will open the floodgates for a quantum jump in the volume of production, employment, standard of living and growth in these areas.

To that extent, this idea, when realised, will allow trade to act as an `engine of growth' in a new context and under new compulsions - an outcome which was rebutted by Nobel Laureate Arthur Lewis at his Nobel Lecture in the late twentieth century context. The reasons for the dysfunctioning of the trade engine on the demand side have been reduction in demand by developed countries for goods of less developed countries - especially primary products, due either to less growth in them or growth of protectionist lobbies therein.

On the `supply side' there took place a compositional change in the exports of less developed countries, with manufacturing becoming important items in their exports - items which have been challenged tooth and nail by bringing in Issues of ``social clause'' and ``minimum labour standards' by developed-country- protection-hawks.

In the process, less trade took place between the two parties, and even less of growth for the less developed nations. The proposed sub-regional trade block will facilitate trade among countries in the region and hence will produce growth, a reality which may not be far off.

The case for such trade stems from the limited impact of conventional trade practices. With transport cost and tariff becoming realities coupled with poor or low mobility of factors of production among the participant countries, less developed countries could not use trade to their advantage. Successive rounds of GATT did achieve significant success in reducing tariff barriers, - but were not available to deal with growing number of non-tariff barriers (NTBs).

Quite a large number of UNCTAD (United Nations Conference on Trade and Development) sessions held since 1964, could not alleviate the condition of the poor nations in the Third World, in terms of trade and development. All these provide a backdrop for working on an alternative. From both theoretical and practical points of view, such trade formation can be argued for. Theoretically, WTO rules permit such trade so long as diversionary practices in trade are not resorted to; so long the maximum number of goods is included, and also that no new tariff barriers are raised.

The only shortcoming is that it does not have a Most Favoured Nation Clause. Otherwise, regional trade can prepare the ground and even support multilateral trade which in many cases, is not doing well.

Given sufficient information on transparency and symmetry in transaction-oriented behaviour, this trade may also sustain greater and stronger integration among the member countries. This, by no means, suggests that the region is self-sufficient and has what it needs or may need in future.

The region has its international outreach and has to consider it seriously. Hence the integration they secure here must be used for further integration world over leading to multilateralism based on MFN.

Second, in an increasingly globalised situation, decisions regarding production, trade, and investment are such that they cannot be made independently of other. Such an understanding of interrelatedness and of interdependence is basic to the formation of regional trade blocs. And the experience and expertise born of understanding and mutuality at the regional level, can be extended on a larger scale.

The issues of interdependence and mutuality may relate to the use of natural corridors, of environment, of laws of crime specific to particular nation-states. etc. and assume the character of public goods whose services or otherwise cannot be apportioned in individual country-specific requirements and doses. It is the knowledge and related application of the public good character of certain inter-regional entities that is no mean achievement of regional trading blocs.

Third, on a more prosaic ground of reality, regional trade when preceded or accompanied by removal of tariff, transport cost, and organisation of better and newer systems of infrastructure like communication, transport, power, and port facilities, will facilitate quicker and cheaper movement of goods and services between and among the participating countries.

And geography will assist the process as these nations are so close and contiguous regions. And further more, as most of them share even a common or understandable language, history, and ethnic origin, or common suffering under a common ruler or exploiter, they are more inclined to shed their differences for a common cause - which eluded them so long and so much.

Fourth, organisation of production becomes better when it is done on a regional basis - away from purely domestic. This is because present-day production process is not only multi-stage, but also multi-space, with so many middle levels abounding in-between. This will be more so when production and its components are more complementary than substitutes.

When one item of production or a part thereof can be produced in one region, offering another region the opportunity to produce the other, on the basis of their respective comparative edges, there is not only greater volume produced but also better things. This will facilitate production to be organised on the basis of regional comparative advantage and not competitive advantage by each national unit taken singularly. Intra-regional cooperation rather than confrontation will be encouraged.

Fifth, perhaps the strongest case for such trade stems from the fact that Third World countries are unable to earn their required foreign exchange from their trade engagements with `hard currency' countries. On the contrary, it is hard currency which propelled these countries to have trade with their developed counterparts. We quote a celebrity - J. H. Power: ``Less developed countries trade proportionally more with the developed countries and proportionally less with each other than is optimal from their standpoint.''

This is corroborated by the fact that in 1981 - North-South trade (Trade between developed and less developed countries) formed 34.3 per cent, while that between and among less developed (South-South Trade) it was 7.1 per cent. However, this high volume of North-South Trade did not produce foreign exchange earnings of the comparable amount, nor reflected improvement in the terms of trade for the less developed. In fact both recorded a continuous downward journey over the years.

Further, shrinkage in earnings and terms of trade was aggravated by transfer of resources, both real and monetary, consequent upon the conditionality of international debt. It has been observed by the Bank for International Settlements (BIS) that in contravention to IMF aid rules, international banks have taken more in real resources from indebted countries in Asia, Africa and Latin America.

They put $2.3 billion and took away $4 billion in resources in 1981 - when they were supposed to put $15 billion in new loans. This transfer rose to $74 billion in 1985 - and is rising continuously since then. This one-way transfer of resources reminiscent of 19th century `Drain' from India, has enriched the developed countries at the cost of their less developed counterparts in the name of lending under the approval of world- financial institutions.

It is the understanding of the enormity of this issue that must drive countries of the SAARC region to organise themselves in regional trade and for a different reason and reality. Implementation of such an arrangement will produce a quantum leap in output, employment, income and other macro categories - in terms of volume - which will more than compensate the `trickle- down' of foreign-exchange earnings made by these countries together. This is the reason why Ragnar Nurkse, a celebrity in development economics once commented: ``Manufacturing (read production) for home markets in the less developed countries must include also production in these countries for export to each other's markets.''

This will not only dilute the excessive anxiety of these countries with regard to export-pessimism but will also create a regionally balanced growth made possible by vertical balance within each combined with some horizontal balance for the group.

Sixth, excessive preoccupation with export-oriented growth has been found in recent times to be catastrophic. We may refer to the Asian crisis. Countries after countries all of them labelled as HPAES (Highly Performing Asian Economics) by World Bank in its publication titled The East Asian Miracle, fell like nine pins losing billions in foreign exchange, capital-flight, and with regard to macro economic devastation and national prestige.

One reason frequently cited and emphasised along with others (a high ratio of short-term debt to total debt obligations - to mention one) was the excessive engagement of these economies with their exports. With bulk of economic activity related to exports at a time when export markets were plummeting, there was very little domestic space or cushioning available to these economies to fall back upon. With export and exchange calculations going haywire, other macro-economic categories followed suit, driving them to the edges of a disaster.

Countries in the SAARC region may learn a lesson from this excessive external orientation of economies, and may pause and ponder with discretion, when and how and with what speed to go for capital account convertibility, a condition too often insisted upon by IMF for liberalisation.

The other more, positive aspect of this learning process - is to have trade among neighbours - who are known for a long time in terms of resources, production conditions, and demand opportunities. And with some amount of love's labour spent in permitting factors to move freely within this area, better and more effective avenues to solving issues of unemployment, underemployment and poverty could be found out along with unprecedented augmentation of production and productivity.

In the seventh place, these areas have a lucrative growth of illicit cross-border trade. And most of the gains from such trade are shared by private agents and organisations. If organised trade through officially recognised institutions takes place, the participating countries can not only have perceptible increase in their revenues, but can also seal off such illegality. Add to this the element of using prevailing investment, technology and production techniques, you have a rounded picture of the utility and benefits of regionalism. When we say this we recount the conditionality attached to overseas investment and technology transfer, which by systematically institutionalising the `internalisation' procedure related to the above transactions create a one-way corridor of gains for the investors alone to the positive detriment of the recipient countries.

Trade among similars may not entail such unilateral transfers. In fact, it may invigorate them through the use of major `indegenised' technologies which are more true and close to their resource endowments and requirements. Last but not the least, one has to look out at the world outside.

Developed countries of all hues - be they at the Americas or Europe, have been and are organising themselves into new trade blocs, along with their conventional multilateral assignments. U.S. has growing interests in NAFTA - The Free Trade Area of the Americas (FTAA) mooted after Miami Summit of the Americas is heading for affirmative action after 2010; APEC or Asia Pacific Economic Cooperation is going to exploit the Asian rim; EU has acquired new strength after Euro was officially launched on January 1, 1999.

The enlarged European Community - MERCOSUR and ASEAN are moving ahead for recognition and responsibility. Hence regionalism has come of age. SAARC nations cannot afford to lose this historic opportunity to organise themselves for their own benefit. May be it is strategy - but trade of late, has become an issue of strategy at the hands of the developed nations. Poor nations can no longer curse their lot. They have to make it here and now. But certain conditions are in order for a successful take off of regionalism among them.

The countries in the region need to harmonise their laws pertaining to industry, commerce, property - trade and communication, and also weed out those that frown upon regional integration. In the second place, they must see to it that their new agreements in the above areas do not produce new areas of discrimination and differences in trade rules against others not belonging to the bloc. Such actions will not only harm the insiders, as the rest of the world might take retaliatory measures, but may also harm multilateralism.

The member countries have to remember that many decisions on trade and investment are inseparable and cannot be taken on regional basis - independently of others. We may quote from Jagdish Bhagwati: ``Free trade areas are two-faced. They involve free trade for members - but discrimination against non- members.'' A third important prerequisite is the willingness and ability of member countries to rise above the sectarian interests of special-interest groups in their own countries. Much of love's labour will be lost if the respective interests of such groups or lobbies are not effectively controlled.

This has to be coupled with some amount of cooperation and consensus objectively revealed by participating countries in the tailoring of their normal macro-economic policies and practices. Nationalism and the nation-state seem to be the greatest disintegrator of the world politically and otherwise, and hence the breaker of peace and cohesion. Last but not the least, regionalism in trade does by no means imply that the bloc and the members forming it are beyond the pale of world institutions.

It is important for such world bodies, particularly WTO, to organise systematic and frequent review and monitoring of the activities of regional trading blocs to prevent abuse. It is not enough for WTO to understand that such blocs are behaving themselves. WTO has to organise an external review of bad behaviour to ascertain whether it was revealed, and well- intended, and `implemented good behaviour' and give its seal of approval accordingly.

In the ultimate analysis, when all trading activity would conform to the ideal of Most Favoured Nation Clause, little would remain to be critical. WTO can direct this aspect of regional trade to that goal.

Dr. Srimanta K. Bhaumik

Department of Economics,

Presidency College, Calcutta.

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