The 24t h Session of t he SAARC Council of Minist ers held in I slam abad during January 2- 3, 2004 recom m ended SAARC FI NANCE t o exam ine t he concept of a Sout h Asian Developm ent Bank ( SADB) and t o st udy and m ake recom m endat ions on early and event ual realizat ion of a Sout h Asian Econom ic Union ( SAEU) .153
1 1 .4 M e a su r e Econ om ic Be n e fit s fr om SAFTA:
“ A consensus has em erged am ong researchers t hat RTAs are t rade creat ing”154. For inst ance, t he share of NAFTA t rade am ong t he signat ories’ t ot al t rade increased from less t han 35 percent in t he lat e 1980s t o alm ost 50 percent in 1999. Over t he sam e period, t he share of t rade bet ween m em bers of MERCOSUR, com pared t o t he part ies’ t ot al t rade, doubled from 10 t o 20 percent . I n Sout h Asia, if t ariffs rem ain high on im port s from out side t he region t han SAFTA would divert t ot al t rade. FDI has played a very im port ant role in successful RTAs. Sout h Asia needs m ore resources for invest m ent t han it can m obilize dom est ically. The corporat e sect or in Sout h Asia has rem ained unaffect ed by developm ent s in t he global product ion syst em . According t o a review of t he changes in indust rial processes by Alan Wint ers155, product ion chains and finer division of t he product ion processes across count ries, including developing count ries, allows producers t o exploit pot ent ial gains from ( 1) local increasing ret urns t o scale in t he product ion of int erm ediat e input s, ( 2) regional differences in fact or cost s for different com ponent s of t he product ion process, ( 3) increasing com pet it ion arising from widening m arket , and ( 4) t echnology t ransfer from developed count ries em bedded in
154 Ghosh, S. and S. Yam raik. Are Regional Trading Arrangem ent s Trade Creat ing? An Analysis of Ext rem e Bounds Analysis: Journal of I nt ernat ional Econom ics, 63, 369- 95.
155 Winters, L. Alan. 2004. Trade Liberalization and Econom ic Perform ance: An Overview. The Econom ic Journal, 114 ( February) , pp. F4- F.
int erm ediat e input s and backward linkages t hrough export s.156 I n m ost cases t rade int egrat ion has allowed developing count ries t o specialize in t heir product ion syst em s.
1 1 .5 SAFTA’s Fu t u r e :
RTAs oft en follow rat her t han det erm ine changes in regional t rading pat t erns. This does not augur well for Sout h Asia since relat ively lit t le t rade exist s am ong t he count ries of t he region. One can argue, however, t hat t he region’s focus on developed m arket s result ed from polit ical problem s t hat m arred relat ions bet ween I ndia and Pakist an. I f t he recent easing of t ensions bet ween t he t wo count ries gains m om ent um , som e t rading pat t erns m ay change in favor of int raregional t rade. The conclusion of free t rade arrangem ent s bet ween Sri Lanka and I ndia and Sri Lanka and Pakist an m ight have creat ed a sense of dynam ism t hat would m ove t he ent ire region t owards an RTA.
When im plem ent ed in highly rest rict ive econom ic and t rading environm ent , RTAs are usually inconsequent ial. SAPTA did not succeed because t he Sout h Asian count ries had highly prot ect ive t rade regim es. This has changed; ext ernal t ariffs on t rade and ot her t rade-
rest rict ing pract ices have been reduced considerably in all count ries of t he region157.
Minim ize excluded product s expand t he scope for posit ive net benefit s t hrough com pet it ion and t rade creat ion. The t em pt at ion t o use list s of sensit ive it em s is not as great when overall t ariffs are low. According t o one review of Sout h Asia’s experience wit h regional arrangem ent s, t he 1993 SAPTA “ was st illborn, given high levels of prot ect ion, a lack of m eaningful concessions, dom est ic polit ical problem s, host ilit y bet ween I ndia and Pakist an, I ndia’s ban on im port s of all consum er goods and I ndia’s cont rol over m aj or prim ary goods”158.
Services bring m ore benefit s t o regional econom ies. I ndia now has a highly developed inform at ion t echnology sect or t hat could benefit ot her populous count ries, such as Bangladesh an d Pakist an, which also have a large num ber of well- educat ed and well- t rained people. At t he sam e t im e, Pakist an has m ade advances in com m ercial banking from which t he regional banking indust ry could benefit . I ndia, wit h a m uch larger pool of savings t han ot her count ries in t he region and wit h a m ore developed capital m arket , could help fill t he region’s savings and invest m ent gap.
157 World Bank. 2004c. Sout h Asia Free Trade Area: Prom ise and Pit falls of Preferent ial Trade Arrangem ent s. Washingt on D.C.
Trade facilit at ion m easures are crit ical for reducing t he cost of t rade. While t he SAFTA declarat ion incorporat es t hese m easures, t hey have t o be int erpret ed m uch m ore broadly t han seem s t o be t he inclinat ion am ong t rade officials working on t he m odalit ies of t he arrangem ent .