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Regional trade blocs reduce conflicts, promote growth

Pakistan is the largest importer of bulk drugs and buys from all over the world except India, the largest exporter, writes Saikat Neogi.

india Updated: Jan 22, 2007 02:47 IST

A strip of Zinetac tablets in Karachi costs Rs 90 in local currency. But the same when smuggled from India is sold at Rs 10. Pakistan is the largest importer of bulk drugs and buys from all over the world except India, the largest exporter.

Similarly Pakistan buys about 70 per cent of its tea from UK and Kenya, although its neighbours India and Sri Lanka are the leading exporters of the product. It is estimated that Pakistan incurs an extra cost of $50 million every year because of this long distance import.

These two examples indicate the untapped potential of intra-SAARC regional trade, provided right measures are put in place. Trade relationship among the SAARC nations has not flourished because of troubled bilateral ties and most of them have their largest trading partners outside the region.

Regional trade in South Asia accounts for just 6 per cent of total global trade, compared to 22 per cent in the ASEAN and 65 per cent within the EU. But SAFTA, a free trade agreement among the SAARC countries, has aroused some hope now. A recent World Bank report says removal of trade barriers would result in a win-win situation for all and could bring economic development and peace to the region.

The most critical need is to promote legal trade in the region. High tariffs and restrictions have led to informal channels of trade, which according to a UNCTAD 2002 report exceeds $3 billion. India’s informal trade with Pakistan is almost double the formal trade and with Nepal and Bangladesh it is almost as large as the formal trade. If informal trade is  brought within the ambit of official trade, it  would substantially benefit the economy of the  entire region.

A State Bank of Pakistan study says that legal trade with India has multiple benefits. It will increase government’s revenue, reduce cost of goods for consumers and end trade mafias involved in circular trade through Dubai, Singapore and Afghanistan. The study estimated that potential of Pakistan-India trade could be as much as $5.2 billion a year. Instead, in 2005-06 it was only about $870 million.

Technology collaboration in the region can complement strengths. For example, India, Bangladesh and Pakistan have big potential for textile and garment export to rest of the world. An integrated approach to develop technology would help to reduce cost and propel the region as a major textile export hub.

Through regional cooperation, a World Bank report says Sri Lanka may emerge as the region’s hub for rubber-based industries, Bangladesh for energy-based industries, Bhutan for forest-based industries and Maldives for fisheries.

Regional energy cooperation enhances power supply and fuels economic growth. In a study SAFTA—Benefits to Business Community, Mahendra P Lama, Professor of South Asian Economies at JNU, says cross border energy trade will benefit all nations in the region. "It could lead to effective utilisation of natural resources, increase the reliability of power supply, promote market integration in energy related goods and services and act as single most effective confidence building measure."

For example, revenue generated by Nepal through sale of power to India has recorded almost six-fold increase from Rs 75 million in 1993 to Rs 440 million in 2001. Similarly, Bhutan earned $52 million in 2003 mainly from its power export to India. This constitutes 11 per cent of the kingdom’s GDP.

Countries in the region like Nepal and Bhutan have considerable untapped potential for generating hydro-power and Pakistan and Bangladesh have gas reserves that could be supplied to neighbouring countries. Through proper policy change and resource development, the region can harness the vast untapped energy potential.

Globally,  studies have shown regional trade blocs can reduce cross-border conflict, promote peace, and achieve substantial social and economic gains. For example, Argentina and Brazil have used the Southern Common Market to end their historic rivalry, which had taken on nuclear overtones. It is now time for nations in  South Asia to consolidate as a regional bloc through appropriate foreign policy measures and become partners in development.