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ASEAN AND SAARC

Regional groupings are a part and parcel of the present global economic order.
Regional trade agreements (RTAs), called a ‘spaghetti bowl’ due to their overlapping
nature, are accepted as the ‘second best’ of free trade, or multilateralism. True, the
number of the RTAs (198) exceeds the number of members of WTO (144); those of
consequence are few and concern the major economies of the world, such as the
NAFTA in the ‘north;’ and the ASEAN, and Mercosur in the south. The emerging APEC
may broaden the base. Indeed, negotiating with a small number of countries is
considered easier and more expedient than negotiating with 144 countries.

The SAARC – though it includes the fourth largest economy of the world and six
other countries – has yet to really become an RTA-based group. The new millennium
should be seen as a fresh opportunity to estimate how far SAARC can progress, in
the face of the strides made by ASEAN next door and the recent ASEAN-China
Forum, which may herald a new era of regional cooperation and integration in the
‘south’, now that China’s entry into the WTO is formal and trade expansion is likely
to be faster. The world’s largest free trade area may indeed be created. A joint
expert group is currently working on a definite road map.

Geographically, the SAARC countries’ borders and shores are not very far from those
of the ASEAN countries and China’s, but economic distances remain significant. The
total population (2000) of the SAARC countries, at 1.33 bn (over one-fifths of world
population), may be compared with $ 516 million in the ASEAN countries (or $ 1.7
bn if we include China). The gross national income (GNI) based on purchasing power
(2000) of SAARC countries, at about $ 3 trillion, may be compared with $ 6.8 trillion
of ASEAN, and as high as $ 11.77 trillion including China. The distance, however, is
far more consequential due to ASEAN’s high ‘economic openness’ in terms of trade
and tariffs, larger FDI and other private capital flows, besides fundamentals like high
rate of savings and investment, productivity of labour and capital, and over 30 per
cent share of manufacturing in GDP.

The major SAARC countries’ growth performance during the 1990s improved slightly
to 5-6 per cent, but major ASEAN countries’ growth was in the range of 5-7 per cent
despite the 1997-98 crisis (except the Philippines, which recorded 3.2 per cent
growth). China recorded the highest growth at 10.3 per cent. The population growth
continued to be much higher in Pakistan and Nepal in the SAARC countries, as also in
Malaysia, the Philippines, Singapore and Cambodia among ASEAN countries. China
recorded only 1.1 per cent population growth. But they all seem to be racing to
better living standards.

ASEAN Perspective

The critical distance between SAARC and ASEAN remains in intra-regional trade flows
– the latter having about five times of the trade flows than the former in the 1990s,
mainly explained by 0-5 per cent tariffs for over 95 per cent of the regional trade in
goods, given the favourable conditions of infrastructure. The average share of intra-
regional flows in case of ASEAN was over 22 per cent in exports and 15 per cent in

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imports, while the corresponding share in case of SAARC was 4 per cent and 3.5 per
cent respectively.

The ASEAN Free Trade Area (AFTA) became a reality on January 1, 2002, with the
objective of having almost all the goods traded within the region at 0-5 per cent
tariffs (averaging 3.2 per cent), which goes up to 30 per cent in south Asia along
with non-price barriers. The original target date was 2008, but the date to launch
AFTA was advanced to 2003, and then further advanced (in December 1998) to
January 2002. Freeing up the trade in services is also in the process, especially in
business services, the financial sector, transport and tourism. Recognising
that investors prefer large and integrated economies, the ASEAN countries aim to
closely integrate their economies, which have half the population of China but with a
combined GDP nearly equal to China’s.

Non-tariff barriers have also to be done away with. ASEAN has adopted a
harmonised set of tariff nomenclatures effective in 2002 to make trade more
expedient and efficient. Customs procedures are being simplified. Major product lines
are being aligned to international standards. There are master plans for a highway
network, a railway link from Singapore to Kunming in China, through Malaysia,
Thailand, Cambodia and Vietnam, with spur lines to Myanmar and Laos, and a gas
pipeline network making through the whole region. ASEAN is also working hard for IT
development in the region.

ASEAN is also working with Japan, Australia and New Zealand on ‘closer economic
partnership’. The ASEAN + 3 process has been initiated, to pursue cooperation with
China, Japan and South Korea. Much remains to be done but moves are in progress.
According to the ASEAN secretary general, member-countries of the regional forum
do not look at China – and the rise of other competitors like Mercosur – simply as a
challenge to be feared, but as an opportunity to be seized. This is because “China is
not just an exporting machine; it also absorbs a growing amount of imports from the
rest of the world, bringing more than $ 225 billion worth of merchandise from
abroad. China’s entry into WTO will open China’s market further to products from
ASEAN and other parts of the world under agreed rules. Since China’s tariffs are
generally much higher than ASEAN’s average most-favoured-nation (MFN) tariff level
of less than 10 per cent (for the ASEAN – 6), ASEAN starts to gain from the lowering
of tariffs and other barriers to trade that WTO membership will require of China”

South Asia is not ready yet for the SAFTA or any economic integration beyond virtual
symbolism, though a historical base exists. Even if Pakistan drops (like Indonesia
and other members in case of ASEAN) major territorial claims, there is a long road of
reforms to travel, the wherewithal for trade and traffic is to be created, and above
all, growth is to be raised to overcome abject poverty spread over the whole region,
constraining domestic demand en masse. The digital distance may not be reduced
insofar as wider participation is concerned, though IT exports from the region may
remain a bright spot.

What if growth rises to 7-8 per cent? It will help in catching up but such prospects
are a function of reforms to induce greater investment, both domestic and foreign.

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Regional integration is, however, not guaranteed unless borders are opened not only
for member-countries but for others too, not only in terms of lower tariffs and
removal of quantitative restrictions (QRs) but also in terms of transportation and
tourism. The people’s anger in the face of the cancellation of the Samjhauta Express
in India as well as Pakistan recently speaks volumes for the need for mutual
cooperation in these fields. Harmonisation of standards and simplification of
procedures will have to go beyond the known economic reforms.

What if $ 10-15 bn FDI (annually) and new technologies really begin to flow into the
region? Again, it would make a difference, but would be sustainable only if the
region’s exports to the rest of the world become competitive and a 2-3 per cent
share in world trade is achieved (compared with around 1 per cent now) in a short
period. This can be done if merchandise and services together are considered, as the
manufacturing level in the region has not grown significantly in relation to GDP for
more than a decade. Anyway, a modelling exercise shows that foreign inflows can
sustain high growth, only if there is simultaneous growth in productivity in the
domestic sectors.

Indeed, substantial additional investments are required to push through 8-10 large
infrastructure projects providing the wherewithal for growth as well as expanded
trade and joint ventures within the region. There is a need to develop a shelf of
projects and for fresh thinking on resource mobilisation and financial integration.
Detailed suggestions on the issue can be found in the paper, ‘SAARC In the New
Millennium: Need Financial Vision’ in South Asian Survey, January-June 2001, earlier
published as RGICS Working Paper No 6 (2000).

Comprehending Changes

As for the ‘Gujral doctrine’, firstly, it touches a marginal area insofar as unilateral
trade concessions by India are suggested. Secondly, trade expansion is mainly
dependent on changing consumption function by way of dynamics of prices and
improved living standards. Anyway, as Bhagwati argues (The Economist, June 22,
2002), there is no substitute for the MFN reduction of trade barriers. The doctrine
fails to comprehend major policy and planning changes required for regional
cooperation and integration. Select cases are:

(1) Can Sri Lankan tea gain any major share in the Indian market – where low-
priced black tea remains popular among people accustomed to almost ‘cooking’ with
lot of sugar and milk – even if duty is reduced to zero along with removal of all
restrictions?
(2) Can Nepal’e power generated from Karnali be affordable in north India if the
imputed and thus expected price per unit is Rs 6-7, while the farmers as well as
industrial units are accustomed to free or pilferage supplies?
(3) Can natural gas from Bangladesh be put to prudent industrial and infrastructural
use for mutual benefit unless a well-prepared project profile is on the shelf making
large-scale resource mobilisation feasible in the global capital market? Is not the idea
of overcoming trade deficit by export of gas to India only an empty vision?

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Research and analysis, diplomatic and visionary efforts, need reconsideration in the
light of the issues brought out here. There has been enough wishful thinking. Could
there be more utopian ideas than regional cooperation in human development and
security, expecting a community/social cluster to materialise, and hoping the private
sector to be a stakeholder? There is a lot to study on the initial conditions of the
ASEAN and derive realistic conclusions on prerequisites for regional cooperation and
integration which have their own dynamics, as observed in the case of the European
Union and NAFTA.

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