Assignment - II

Submitted To: Dr. Mahendra P. Shrestha (Course Facilitator) Business Environmental Analysis

Submitted By: Nischal K.C. Term- VI, MBA Ace Institute of Management

Consider the new political and economic development between the members of SAARC. Critically examine the future of SAFTA. Do you think Nepal will be able to take advantages? Interest in economic analysis of preferential trade liberalisation has increased with the rise of regionalism after the formation of World Trade Organization (WTO). It is argued that trade liberalisation and regional economic integration can help a region increase intra-regional trade by exploring the size of the market. This may in turn yield efficiency and bring benefits not only by exploration of economies of scale but also by dynamic and upward shifts in production function. By exposure to a regional market, previously shattered domestic firms become more competitive and gain the confidence to enter into global competition. Driven towards integration by the pressure of economic interest of the region, seven South Asian countries- Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka- formed the South Asian Association for Regional Cooperation (SAARC) in 1985. They formed the SAARC Preferential Trading Agreement (SAPTA) in 1993 and transformed it into South Asian Free Trade Area (SAFTA) in 2004 with a view to enhancing their productive capacity and the regions trading interests. However, since the emergence of SAARC, the achievement has been considered very insignificant and the level of intra-regional trade among SAARC countries is still very low. With the present low level of intra-regional trade and the perceived competitiveness among the SAARC countries, a question has arisen whether regionalism would benefit countries of this region. Considering the size of land area, population and economy, India is by far the largest country in South Asian region; while Pakistan and Bangladesh are the second and third largest country respectively. It is argued that, because of their size, these three economies are of crucial importance for successful regional integration and cooperation; and more importantly, India and Pakistan would be the dominant states of any formal regional integration agreements (Das, 2007, Behera, 2008). Bhutan, Maldives and Nepal are very small economies in the region. The important fact is that Bhutan and Nepal are land-locked while Maldives is an island. Under the World Bank designated category, amongst the seven countries, four economies namely Bangladesh, Bhutan, Maldives and Nepal, are least developed countries (LDCs); and India, Pakistan Sri Lanka are considered developing countries. On the basis of income Bhutan,

Maldives and Sri Lanka are lower-middle-income countries; and Bangladesh, India, Nepal and Pakistan are low-income countries (Das, 2007; World Bank, 2007). Initially SAARC was established to retreat and up hold the peace in the South Asia region and create the opportunities of interaction between member countries. Later on strategies were made consisting of five prime objectives i.e. better communication, smooth the progress of trade and investment, expand tourism, assistance in power and energy sector, and endorse private sector. But social, technological, economic sector, poverty eradication and trade were major issues faced by SAARC. To overcome the economic and poverty problems in 1993, its member countries signed an agreement, South Asian Free Trade Agreement (SAFTA), for reducing tariff within the region. This agreement was implemented in 2006, the member countries agreed to bring tariff duties down by 20% up to 2009. However, SAARC is not that much successful in resolving economic problems or addressing political conflicts in South Asia. It is due to the reason that the prospect of united economy is greatly ignored among its member states. The prime causes are the lack of harmonize interest and the tragedy of intra-stat conflict among its member countries which stop this organization to become a rising and successful organization, as most of their possessions are used in screening of the power and pay less attention to the resolution of regional problems. Without considering other complementarities that can boost intra-regional trade, SAFTA would become an incomplete mission. If it fails to understand the deeper apprehensions of members on the potential of SAFTA, which are reflected by its inability to negotiate a manageable sensitive list, South Asian countries would be wasting time and energy on something that is not going to bear fruit. Unless the mandate of SAFTA is broadened to include measures to liberalise trade in services, increase intra-regional investments, improve trade facilitation and enhance cooperation in infrastructure such as energy and telecommunications as a single undertaking, it will not help to enhance economic cooperation in South Asia. If these issues are not addressed, SAFTA will remain an incomplete vehicle for regional cooperation and development. Though the formation of SAARC is a landmark step taken by the leaders of the region, the main rational behind its establishment is to develop a congenial environment through summit diplomacy where all nations may interact peacefully with each other, cultivate sustainable peace and promote mutual economic well being by harnessing available resources in the region through

the peaceful process of economic integration. Nevertheless, after 27 years of establishment, neither South Asian nations have been able to push the process of integration into full swing nor the organization itself has become viable enough to promote peace, harmony and economic integration or prevent conflicts in the region. The political tensions and conflicts surrounding the countries of a South Asia pose a question of uncertainty and challenge to the formation of South Asian Union at par with European Union that would allow free movement of people; common currency and common foreign and economic policies which ultimately will sow the seeds of peace. In order to achieve the objectives the SAARC would have to evolve into a full-fledged regional entity that can cultivate peace in the region. The realization of durable peace and the future of economic integration through SAARC depend upon the ability and interest of South Asian leaders to resolve domestic as well as long-standing differences through peaceful deliberations. Nepal and SAFTA Recently the Ministry of Commerce and Supplies released a report, Nepal Trade Integration Strategy (NTIS) 2010, which identified products with export potential and market destinations for them. The report identifies 19 key commodities and services with export potentials that could potentially revitalize Nepals export sector. The identified products are cardamom, ginger, honey, lentils, tea, noodles, and medicinal herbs/essential oils in agro-product category; handmade paper, silver jewellery, iron and steel, pashmina, and wool products in craft and industrial goods category; and tourism, labour services, IT and BPO services, health services, education, engineering, and hydro-electricity in services category. Furthermore, five more potential export products/sectors pointed out in the report are transit trade services, sugar, cement, dairy products and transformers. NTIS 2010 is probably one of the most clear-cut reports so far that delves into product level analysis to identify promising exportable products and market destinations for them. But, it does not say much about the potential to export the products with comparative advantage. Just identifying markets and products does not mean much if we cannot export them with comparative advantage.

Furthermore, landlocked Nepal's exports face a logistical problem, especially when it comes to exporting to a third country via India. Transit and transportation time inflates the price of goods that are usually available in South Asian countries at a much cheaper price. There are problems with transit and transportation. These add up the cost of our exports and minimise our comparative advantage. On the other hand Nepal already has free access to the vast Indian market without having to reciprocate, thanks to bilateral Nepal-India treaty. When SAFTA comes into force, Indian goods will start flowing across the border without any tariff walls. That will have two serious ramifications: First, Nepal will lose customs revenue. Though, SAFTA Framework has a provision for a revenue compensation mechanism for the least developing countries in the region that is subject to tough bargain and is not going to be there forever. It has to be phased out after some years. Second, the unrestricted and untaxed inflow of Indian goods means a debilitating impact on domestic industries. Very few industrialists think that they can survive the onslaught from the free import of Indian products to the domestic market. The optimists argument in favour of SAFTA is that Nepals export to countries other than India in the region will also grow after the full realisation of SAFTA in 2016. Maybe. However, that gain is likely to be too small to compensate what Nepal might have to forgo. For a long time Nepals trade either export or import has been concentrated to India resulting to a staggering above 98%. Therefore Nepal must have a strategy if it is to benefit from SAFTA. If not, we'll lose out regionally and in the domestic market too. Lowered tariffs for imported products will mean regional foreign goods will flood the market. If those products are better quality and cheaper, they will wipe out domestic production. In such a scenario, the country will face a lose-lose situation. Local producers will suffer loss because of a decline in export and sales. The government will also start losing revenue. We should also understand the fact that majority of the member countries of SAFTA have regional trade agreements with other countries as well as with WTO. Nepal having no trade route

either land or water to compete with other goods in the international market is a difficult task however, benefits could be achieved if we can either use economies of scale or take the comparative advantage. But this is not likely to happen because with SAFTA in place, regional economic giants could cut into Nepal's comparative advantage. Thus, for Nepal it is difficult to take advantages from SAFTA.