South Asian Association for Regional Cooperation (SAARC)

1. Introduction
The South Asian Association for Regional Cooperation (SAARC) is an economic and
geopolitical organization of eight countries that are primarily located in South Asia or Indian
subcontinent. The SAARC Secretariat is based in Kathmandu, Nepal. The combined economy of
SAARC is the 3rd largest in the world in the terms of GDP (PPP) after the United States and
China and 5th largest in the terms of nominal GDP. SAARC nations comprise 3% of the world's
area and contain 21% (around 1.7 billion) of the world's total population and around 9.12% of
Global economy as of 2015. India makes up over 70% of the area and population among these
eight nations. All non-Indian member states except Afghanistan share borders with India but only
two other members, Pakistan and Afghanistan, have a border with each other. During 2005-10,
the average GDP growth rate of SAARC stood at an impressive 8.8% p.a., but it slowed to 6.5%
in 2011 largely because of economic slowdown in India, which accounts for nearly 80% of
SAARC's economy. But driven by a strong expansion in India, coupled with favorable oil prices,
from the last quarter of 2014 South Asia once again become the fastest-growing region in the
world.
The idea of regional political and economical cooperation in South Asia was first raised in 2 May
1980 by Bangladesh President Ziaur Rahman and the first summit was held in Dhaka on 8
December 1985, when the organization was established by the governments of Bangladesh,
Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. Since then the organization has
expanded by accepting one new full member, Afghanistan, and several observer members.
The SAARC policies aim to promote welfare economics, collective self-reliance among the
countries of South Asia, and to accelerate socio-cultural development in the region. The SAARC
has developed external relations by establishing permanent diplomatic relations with the EU, the
UN (as an observer), and other multilateral entities. The official meetings of the leaders of each
nation are held annually whilst the foreign ministers meet twice annually.

2. History
The idea of co-operation in South Asia was discussed in at least three conferences: the Asian
Relations Conference held in New Delhi on April 1947; the Baguio Conference in
the Philippines on May 1950; and the Colombo Powers Conference held in Sri Lanka in April
1954.
In the ending years of the 1970s, the seven inner South Asian nations that included Bangladesh,
Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka agreed upon the creation of a trade bloc
and to provide a platform for the people of South Asia to work together in a spirit of friendship,
trust and understanding. President Ziaur Rahman later addressed official letters to the leaders
of the countries of the South Asia, presenting his vision for the future of the region and the
compelling arguments for region. During his visit to India in December 1977, President Ziaur
Rahman discussed the issue of regional cooperation with the Indian Prime Minister Morarji
Desai. In the inaugural speech to the Colombo Plan Consultative Committee which met in
Kathmandu also in 1977, King Birendra of Nepal gave a call for close regional cooperation
among

South

Asian

countries

in

sharing

river

waters. After

the USSR's intervention in Afghanistan, the efforts to established the union was accelerated in
1979 and the resulting rapid deterioration of South Asian security situation. [19] Responding to
the President Ziaur Rahman and King Birendra's convention, the officials of the foreign
ministries of the seven countries met for the first time in Colombo in April 1981. The
Bangladesh's

proposal

was

promptly

endorsed

by Nepal, Sri

Lanka,

Bhutan and

the Maldives but India and Pakistan were skeptical initially. The Indian concern was the
proposals reference to the security matters in South Asia and feared that President Ziaur
Rahman's proposal for a regional organization might provide an opportunity for new smaller
neighbors to renationalize all bilateral issues and to join with each other to gang up against India.
Pakistan assumed that it might be an Indian strategy to organize the other South Asian countries
against Pakistan and ensure a regional market for Indian products, thereby consolidating and
further strengthening Indias economic dominance in the region.

However, after a series of quiet diplomatic consultations between South Asian foreign ministers
at the UN headquarters in New York from August to September 1980, it was agreed that
Bangladesh would prepare the draft of a working paper for discussion among the foreign
secretaries of South Asian countries. The foreign secretaries of the inner seven countries again
delegated a Committee of the Whole in Colombo on September 1981 which identified five broad
areas for regional cooperation. New areas of co-operation were added in the following years.
In 1983, the international conference held by Indian Minister of External Affairs P.V. Narasimha
Rao in New Delhi, the foreign ministers of the inner seven countries adopted the Declaration on
South Asian Association Regional Cooperation (SAARC) and formally launched the
Integrated Program of Action (IPA) initially in five agreed areas of cooperation namely,
Agriculture; Rural Development; Telecommunications; Meteorology; and Health and Population
Activities.
Officially, the union was established in Dhaka with Kathmandu being union's secretariatgeneral. The first SAARC summit was held in Dhaka on 78 December 1985 and hosted by
the President of Bangladesh Hussain Muhammad Ershad. The declaration signed by King of
Bhutan Jigme Singye, President of Pakistan Zia-ul-Haq, Prime Minister of India Rajiv
Gandhi, King of Nepal Birendra Shah, President of Sri Lanka JR Jayewardene, and President
of Maldives Maumoon Gayoom.

3. Why is SAARC Important?

It protects Intra-Regional trade from outside forces.

Establishes regional security.

Helps to become regionally and globally competitive.

Deeper economic cooperation among the South Asian countries can avoid high costs to
consumers.

To integrate the SAARC countries and to get benefit from economic interdependence.
3

It can be used as a platform for the South Asian development.

Helpful for reducing the tariff barriers.

Increases the intra-regional trade as well as promotion of trade with other part of the
world.

4. Objectives of SAARC
The objectives of the Association as defined in the Charter are:
i) To promote the welfare of the peoples of South Asia and to improve their quality of life;
ii) To accelerate economic growth, social progress and cultural development in the region and
to provide all individuals the opportunity to live in dignity and to realize their full potential;
iii) To promote and strengthen collective self-reliance among the countries of South Asia;
iv) To contribute to mutual trust, understanding and appreciation of one anothers problems;
v) To promote active collaboration and mutual assistance in the economic, social, cultural,
technical and scientific fields;
vi) To strengthen co-operation with other developing countries;
vii) To strengthen co-operation among themselves in international forums on matters of
common interest; and
viii) To cooperate with international and regional organizations with similar aims and
purposes.
The Declaration on South Asian Regional Cooperation was adopted by the Foreign Ministers in
1983 in New Delhi. During the meeting, the Ministers also launched the Integrated Program of
Action

(IPA)

in

nine

agreed

areas,

namely,

Agriculture;

Rural

Development;

Telecommunications; Meteorology; Health and Population Activities; Transport; Postal Services;

Science and Technology; and Sports, Arts and Culture.
The South Asian Association for Regional Cooperation (SAARC) was established when its
Charter was formally adopted on 8 December 1985 by the Heads of State or Government of
Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.
Afghanistan was added to the regional grouping at the behest of India on November 13, 2005
and became a member on April 3, 2007. With the addition of Afghanistan, the total number of
member states were raised to eight (8). In April 2006, the United States of America and South
Korea made formal requests to be granted observer status.
The European Union has also indicated interest in being given observer status and made a formal
request for the same to the SAARC Council of Ministers meeting in July 2006. On August 2,
2006 the foreign ministers of the SAARC countries agreed in principle to grant observer status to
the US, South Korea and the European Union. On 4 March 2007, Iran requested observer status.
Followed shortly by the entrance of Mauritius.

5. Secretariat
The SAARC Secretariat was established in Kathmandu on 16 January 1987 and was inaugurated
by Late King Birendra Bir Bikram Shah of Nepal.
It is headed by a Secretary General appointed by the Council of Ministers from Member
Countries in alphabetical order for a three-year term. He is assisted by the Professional and the
General Services Staff and also an appropriate number of functional units called Divisions
assigned to Directors on deputation from Member States.
The Secretariat coordinates and monitors implementation of activities, prepares for and services
meetings and serves as a channel of communication between the Association and its Member
States as well as other regional organizations.
The Memorandum of Understanding on the establishment of the Secretariat which was signed by
Foreign Ministers of member countries on 17 November 1986 at Bangalore, India contains
5

various clauses concerning the role, structure and administration of the SAARC Secretariat as
well as the powers of the Secretary-General.
In several recent meetings the heads of state or government of member states of SAARC have
taken some important decisions and bold initiatives to strengthen the organization and to widen
and deepen regional co-operation.
The SAARC Secretariat and Member States observe 8 December as the SAARC Charter Day.

6. Regional Centers
The SAARC Secretariat is supported by following Regional Centers established in Member
States to promote regional co-operation. These Centers are managed by Governing Boards
comprising representatives from all the Member States, SAARC Secretary-General and the
Ministry of Foreign/External Affairs of the Host Government. The Director of the Centre acts as
Member Secretary to the Governing Board which reports to the Programming Committee.

SAARC Agricultural Centre (SAC), Dhaka, Bangladesh

SAARC Meteorological Research Centre (SMRC), Dhaka, Bangladesh

SAARC Tuberculosis and HIV/AIDS Centre (STAC), Kathmandu, Nepal

SAARC Documentation Centre (SDC), New Delhi, India

SAARC Human Resources Development Centre (SHRDC), Islamabad, Pakistan

SAARC Coastal Zone Management Centre (SCZMC), Maldives

SAARC Information Centre (SIC), Nepal

SAARC Energy Centre (SEC), Pakistan

SAARC Disaster Management Centre (SDMC), India

6

SAARC Forestry Centre (SFC), Bhutan

SAARC Cultural Centre (SCC), Sri Lanka

7. SAARC Recognized Bodies

As an organization, SAARC mainly operates through six apex bodies which ensure regional
cooperation on multiple levels:
SAARC Chamber of Commerce & Industry (SCCI): The entity encourages intra-regional
trade by creating business linkages among the entrepreneurs. Its primary focus is on the holistic
growth of service sector and small & medium enterprises.
SAARCLAW (South Asian Association for Regional Cooperation in Law): The desire to
establish an association within the SAARC region to disseminate information and promote an
understanding of the concerns and developments prompted the birth of SAARCLAW in 1991.
This association of legal communities of SAARC nations was established in Colombo.
South Asian Federation of Accountants (SAFA): In 1984, this organisation came into
existence with an objective of strengthening and serving the accountancy profession in the South
Asian Region.
South Asia Foundation (SAF): A non-profit and non-political organisation founded by
UNESCO Goodwill Ambassador Madanjeet Singh in 2000, SAF encourages regional
cooperation through UNESCO Madanjeet Singh Institutions of Excellence. The institutions offer
courses on varied subjects ranging from Climate and Green Energy to Human Rights and Visual
Arts.
South Asia Initiative to End Violence Against Children (SAIEVAC): Founded in 2005, this
regional forum aims at ending all forms of violence against children in South Asia.
Foundation of SAARC Writers and Literature (FOSWAL): Its the first non-government
organization working towards nurturing and strengthening cultural connectivity through
interactions among SAARC nations.

8. Statistical Reports of SAARC

8.1 Exports and Imports share of Major Trade Groups

Figure-01: Exports and Imports share of Major Trade Groups (in percentage)

8.2 SAARC Countries Export in Worlds Total Export

Figure-02: Percentage share of SAARC countries export in worlds total export

8.3 SAARC Countries Import in Worlds Total Import

Figure-03: Percentage share of SAARC countries Import in worlds total import

8.4 SAARC Countries Trade in Worlds Total Trade

Figure-04: Percentage share of SAARC countries trade in worlds total trade

8.5 FDI as a Percentage of Total Inflows to SAARC Countries

10

Figure-05: Country Shares of FDI as a Percentage of Total Inflows to SAARC Countries

8.6 SAARC in FDI Inflows

Figure-06: Share of SAARC in FDI Inflows (In Percentage)

Sources: Source: UNCTAD Handbook of Statistics-2011

9. South Asian Free Trade Area (SAFTA)

11

Figure-07: Countries under the South Asian Free Trade Area

SAFTA was envisaged primarily as the first step towards the transition to a South Asian Free
Trade Area (SAFTA) leading subsequently towards a Customs Union, Common Market and
Economic Union. In 1995, the Sixteenth session of the Council of Ministers (New Delhi, 1819
December 1995) agreed on the need to strive for the realization of SAFTA and to this end an
Inter-Governmental Expert Group (IGEG) was set up in 1996 to identify the necessary steps for
progressing to a free trade area. The Tenth SAARC Summit (Colombo, 2931 July 1998)
decided to set up a Committee of Experts (COE) to draft a comprehensive treaty framework for
creating a free trade area within the region, taking into consideration the asymmetries in
development within the region and bearing in mind the need to fix realistic and achievable
targets. The SAFTA Agreement was signed on 6 January 2004 during Twelfth SAARC Summit
held in Islamabad, Pakistan. The Agreement entered into force on 1 January 2006, and the Trade
Liberalization Program commenced from 1 July 2006. Under this agreement, SAARC members
will bring their duties down to 20 per cent by 2009. Following the Agreement coming into force
the SAFTA Ministerial Council (SMC) has been established comprising the Commerce Ministers
of the Member States. In 2012 the SAARC exports increased substantially to US$354.6 billion
from US$206.7 billion in 2009. Imports too increased from US$330 billion to US$602 billion
over the same period. But the intra-SAARC trade amounts to just a little over 1% of SAARC's
GDP. In contrast, in ASEAN (which is actually smaller than SAARC in terms of size of
economy) the intra-bloc trade stands at 10% of its GDP.

12

10. The SAARC Visa Exemption

The SAARC Visa Exemption Scheme was launched in 1992. The leaders at the Fourth Summit
(Islamabad, 2931 December 1988), while realizing the importance of having people to people
contacts, among the peoples of SAARC countries, decided that certain categories of dignitaries
should be entitled to a Special Travel document, which would exempt them from visas within the
region. As directed by the Summit, the Council of Ministers regularly kept under review the list
of entitled categories. Currently the list included 24 categories of entitled persons, which include
Dignitaries, Judges of higher courts, Parliamentarians, Senior Officials, Businessmen,
Journalists, Sportsmen etc. The Visa Stickers are issued by the respective Member States to the
entitled categories of that particular country. The validity of the Visa Sticker is generally for one
year. The implementation is reviewed regularly by the Immigration Authorities of SAARC
Member States.

11. Awards
11.1 SAARC Award
The Twelfth Summit approved the SAARC Award to support individuals and organizations
within the region. The main ends of the SAARC Award are:

To encourage individuals and organizations based in South Asia to undertake programs

and activities that complement the efforts of SAARC

To encourage individuals and organizations in South Asia contributing to bettering the

conditions of women and children

To honor outstanding contributions and achievements of individuals and organizations

within the region in the fields of peace, development, poverty alleviation, environment
protection and regional cooperation

13

To honor any other contributions and achievement not covered above of individuals and
organizations in the region.

The SAARC Award comprises of a gold medal, a letter of citation, and cash prize of US $25,000.
Since the institution of the SAARC Award in 2004, it has been awarded only once and the Award
was posthumously conferred upon the late President Ziaur Rahman of Bangladesh.

11.2 SAARC Literary Award

SAARC Literary Award is an annual award conferred by the Foundation of SAARC (South
Asian Association of Regional Cooperation) Writers and Literature (FOSWAL) since 2001 which
is an apex SAARC body. Shamshur Rahman, Mahasweta Devi, Jayanta Mahapatra, Abhi
Subedi, Mark Tully, Sitakant Mahapatra, Uday Prakash, Suman Pokhrel and Abhay K are some
of the prominent recipients of this award.[54]
Nepali poet, lyricist and translator Suman Pokhrel is the only poet/writer to get this award twice.
[55]

11.3 SAARC Youth Award

The SAARC Youth Award is awarded to outstanding individuals from the SAARC region. The
award is notable due to the recognition it gives to the Award winner in the SAARC region. The
award is based on specific themes which apply to each year. The award recognizes and promotes
the commitment and talent of the youth who give back to the world at large through various
initiatives such as Inventions, Protection of the Environment and Disaster relief. The recipients
who receive this award are ones who have dedicated their lives to their individual causes to
improve situations in their own countries as well as paving a path for the SAARC region to
follow. The Committee for the SAARC Youth Award selects the best candidate based on his/her
merits and their decision is final.
Previous Winners:

14

1997: Outstanding Social Service in Community Welfare Mohammed Sukur Salek

(Bangladesh)

1998: New Inventions and Shanu - Najmul Hasnain Shah (Pakistan)

2001: Creative Photography: South Asian Diversity Mushfiqul Alam (Bangladesh)

2002: Outstanding contribution to protect the Environment Masil Khan (Pakistan)

2003: Invention in the Field of Traditional Medicine Hassan Sher (Pakistan)

2004: Outstanding contribution to raising awareness for TB and/or HIV/AIDS Ajij

Prasad Poudyal (Nepal)

2006: Promotion of Tourism in South Asia Syed Zafar Abbas Naqvi (Pakistan)

2008: Protecting the Environment in South Asia Uswatta Liyanage Deepani Jayantha
(Sri Lanka)

2009: Outstanding contribution to humanitarian works in the aftermath of Natural

Disasters Ravikant Singh (India)

2010: Outstanding contribution for the Protection of Environment and mitigation of

Climate Change Anoka Primrose Abeyrathne (Sri Lanka)

12. Anthem
SAARC does not have an official anthem like some other regional organizations (e.g. ASEAN).
A poem by poet-diplomat Abhay Kumar spurred a search for a better SAARC Anthem. Nepal's
foreign minister has expressed the need for a SAARC anthem to connect SAARC nations. Nepal
at the 18th summit in Kathmandu in November 2014 planned to introduce proposal for a
SAARC Anthem in the agenda of summit when heads of all member states meet here.

15

13. Secretaries-General of SAARC

Abul Hasan

16 January 1985 to 15 October 1989

Kant Kishore Bhargava

17 October 1989 to 31 December 1991

Ibrahim Hussein Zaki

1 January 1992 to 31 December 1993

Yadav Kant Silwal

1 January 1994 to 31 December 1995

Naeem U. Hasan

1 January 1996 to 31 December 1998

Nihal Rodrigo

1 January 1999 to 10 January 2002

Q. A. M. A. Rahim

11 January 2002 to 28 February 2005

Chenkyab Dorji

1 March 2005 to 29 February 2008

Sheel Kant Sharma

1 March 2008 to 28 February 2011

Fathimath Dhiyana Saeed

1 March 2011 to 11 March 2012

Ahmed Saleem

12 March 2012 to 28 February 2014

Arjun Bahadur Thapa

16

March 2014 to (present)

14. SAARC Summits

No

Date

1st

78 December 1985

2nd

Country

Host

Host leader

Bangladesh

Dhaka

Ataur Rahman Khan

1617 November 1986

India

Bengaluru

Rajiv Gandhi

3rd

24 November 1987

Nepal

Kathmandu

Marich Man Singh Shrestha

4th

2931 December 1988

Pakistan

Islamabad

Benazir Bhutto

5th

2123 November 1990

Maldives

Mal

Maumoon Abdul Gayoom

6th

21 December 1991

Sri Lanka

Colombo

Ranasinghe Premadasa

7th

1011 April 1993

Bangladesh

Dhaka

Khaleda Zia

8th

24 May 1995

India

New Delhi

P V Narasimha Rao

9th

1214 May 1997

Maldives

Mal

Maumoon Abdul Gayoom

10th 2931 July 1998

Sri Lanka

Colombo

Chandrika Kumaratunga

11th 46 January 2002

Nepal

Kathmandu

Sher Bahadur Deuba

12th 26 January 2004

Pakistan

Islamabad

Zafarullah Khan Jamali

13th 1213 November 2005

Bangladesh

Dhaka

Khaleda Zia

17

14th 34 April 2007

India

New Delhi

Manmohan Singh

15th 13 August 2008

Sri Lanka

Colombo

Mahinda Rajapaksa

16th 2829 April 2010

Bhutan

Thimphu

Jigme Thinley

Maldives

Addu

Mohammed Nasheed

18th 2627 November 2014

Nepal

Kathmandu

Sushil Koirala

19th TBA 2016

Pakistan

Islamabad

17th

1011

November

2011[62]

Figure-08-09: Secretaries-General of SAARC and SAARC Summits

15. Free Trade Agreement

Over the years, the SAARC members have expressed their unwillingness on signing a free trade
agreement. Though India has several trade pacts with Maldives, Nepal, Bhutan and Sri Lanka,
similar trade agreements with Pakistan and Bangladesh have been stalled due to political and
economic concerns on both sides. India has been constructing a barrier across its borders with
Bangladesh and Pakistan.

18

In 1993, SAARC countries signed an agreement to gradually lower tariffs within the region, in
Dhaka. Eleven years later, at the 12th SAARC Summit at Islamabad, SAARC countries devised
the South Asia Free Trade Agreement which created a framework for the establishment of a free
trade area covering 1.4 billion people. This agreement went into force on January 1, 2006. Under
this agreement, SAARC members will bring their duties down to 20 per cent by 2007.

16. Areas of Co-operation

At the inception of the Association, the Integrated Program of Action (IPA) consisting of a
number of Technical Committees (TCs) was identified as the core areas of cooperation. Over the
period of years, the numbers of TCs were changed as per the requirement.
The current areas of cooperation under the reconstituted Regional Integrated Program of
Action which is pursued through the Technical Committees cover:
1. Agriculture and Rural Development;
2. Health and Population Activities;
3. Women, Youth and Children;
4. Environment and Forestry;
5. Science and Technology and Meteorology;
6. Human Resources Development; and
7. Transport.
Recently, high level Working Groups have also been established to strengthen cooperation in the
areas of Information and Communications Technology, Biotechnology, Intellectual Property
Rights, Tourism and Energy.
Given the emphasis laid down at successive Summits on the need to expand the areas of
cooperation and strengthen the regional cooperation, a number of other areas have been included
in the SAARC agenda. Several Ministerial level meetings have taken place to give due emphasis
19

in various fields. The details of work Program under each agreed areas of cooperation can be
viewed by clicking the respective links.

16.1 Economic Co-Operation

The acceleration of economic growth is a Charter objective of SAARC. Cooperation in the core
economic areas among SAARC Member Countries was initiated following the Study on Trade,
Manufactures and Services (TMS), which was completed in June 1991.
Currently, the following important processes of SAARC are promoting cooperation in the
field of Trade, Economy and Finance and related areas:
i) Committee on Economic Cooperation: Overall Coordination of cooperation in economic areas;
ii) South Asian Free Trade Area (SAFTA) Committee of Experts and SAFTA Ministerial
Council: Administration and implementation of SAFTA;
iii) Finance Ministers Mechanism: Cooperation in the field of Finance and related areas;
iv) Standing Group on Standards and SAARC Standards Coordination Board: Cooperation in the
field of harmonization of Standards;
v) Group on Customs Cooperation is dealing with issues related to harmonization of Customs
rules and procedures.

16.2 International Co-Operation

Successive SAARC Summits have acknowledged the importance of SAARC pursuing mutually
beneficial cooperation with regional, United Nations (UN) and other international organizations
in the areas of cooperation agreed to in SAARC.

20

A Memorandum of Understanding was signed with the United Nations Conference on Trade and
Development (UNCTAD) in February 1993 on UNCTAD Database on Trade Control Measures
and Trade Analysis and Information System (TRAINS).
A Memorandum of Understanding on cooperation between SAARC and the European
Commission was signed in July 1996 under which projects for cooperation have been identified
out of which some have already been implemented.
A Memorandum of Understanding (MOU) has also been signed with the German Metrology
Institute with regard to capacity building for the harmonization of Standards among the SAARC
countries.

17. Economic Relationship among SAARC Nations

The South Asian Association for Regional Cooperation or SAARC was created to promote
economic integrity and cooperation among 8 South Asian nations namely India, Bangladesh,
Pakistan, Bhutan, Nepal, Maldives, Afghanistan and Sri Lanka.
The Association was formed in 1985 with the aim to ensure social and economic development of
the member countries. However, over the years it has been seen that SAARC mainly worked
towards development of economic relationship among the SAARC nations. Attempts are also on
to further trade relations with the member nations of ASEAN (Association of South East Asian
Nations) and the European Union.
In spite of lying in the vicinity of one another, trading activities were restricted among the
SAARC nations. Over the years, there has significant improvement in the trade relations among
the seven SAARC members.
The focus has been shifted to get access to the markets of the other members. Methods have also
been devised to attract foreign direct investments to strengthen economic infrastructures of the
SAARC nations. All these initiatives point towards an improvement in the economic relationship
among the 8 South Asian countries.

21

Despite the sincere attempts of the Association, there are several factors that stand in the way of
economic integrity among the SAARC nations. The clashes between India and the neighboring
countries have prevented the SAARC members to make the most of the economic benefits
derived from the Association.
This has prompted the South Asian countries to go for bilateral trading activities instead of
getting involved in multilateral trade agreements. However, the Association is expected to take
more proactive steps to improve the economic relationship among its members.
Besides devising policies for economic integration, SAARC is supposed to function as a medium
to facilitate discussions among the South Asian nations. Seminars and conferences are going to
be helpful measures for promoting cross border trade and investment.
As an aftermath of globalization, Indian government has resorted to open trade policy. The
economic reforms of early 1990s have opened an array of challenges for the Indian
entrepreneurs. The growth rate of the Indian economy was around 7% during the period from
1994-1997. The inflow of foreign fund also recorded substantial increase.
All these resulted from the flexible economic policies adopted by the Indian government. The
economic prosperity of India prompted the other SAARC members to seek resort to international
trade as a platform for economic growth.
Both Sri Lanka and Nepal have shown their interests to enhance intra-regional trade. Bangladesh
is also following the same trend. With the increased intra-regional trading activities, the
economic relationship among the SAARC nations is bound to be stronger in future.

18. Relationship between Bangladesh and Other SAARC Countries

Countries
BHUTAN
INDIA
NEPAL

1997
0.08
19.69
0.15

1998
0.04
14.82
0.16

1999
0.03
12.37
0.07

2000
0.03
6.66
0.01

2001
0.03
10.88
0.00

22

2002
0.02
13.40
0.02

2003
0.01
14.16
0.00

2004
0.01
11.34
0.00

2005
0.00
10.86
0.00

2006
0.00
10.36
0.00

2007
0.00
11.71
0.00

PAKISTAN
SRI LANKA

0.96
0.20
21.08

1.11
0.12
16.24

1.24
0.12
13.83

1.40
0.13
8.22

1.28
0.12
12.31

1.24
0.01
14.70

1.22
0.09
15.51

1.25
0.08
12.59

1.24
0.09
12.20

1.70
0.10
12.16

SOUTH
ASIA
TOTAL
REST OF 78.92 83.76 86.17 91.73 87.69 85.30 84.49 87.41 87.80 87.84
THE
WORLD
Figure-10: Share of Bangladeshs import from SAARC Countries in its total Imports

1.58
0.09
13.39

86.61

***Source: UN COMTRADL

Countries
BHUTAN
INDIA
NEPAL
PAKISTAN
SRI LANKA
SOUTH ASIA
TOTAL
REST OF
THE WORLD

1997
0.00
0.59
0.13
0.85
0.12
1.69

1998
0.00
0.20
0.00
0.65
0.03
0.88

1999
0.00
0.31
0.00
0.79
0.07
1.17

2000
0.00
0.35
0.00
0.91
0.10
1.36

2001
0.00
0.43
0.02
0.56
0.06
1.07

2002
0.00
0.47
0.01
0.57
0.04
1.09

2003
0.03
0.64
0.01
0.56
0.09
1.33

2004
0.05
1.27
0.01
0.57
0.12
2.02

2005
0.02
1.90
0.01
0.87
0.13
2.93

2006
0.00
1.95
0.01
0.48
0.11
2.55

2007
0.00
1.78
0.01
0.47
0.13
2.39

98.31

99.12

98.83

98.64

98.93

98.91

98.67

97.98

97.07

97.45

97.61

Figure-11: Share of Bangladeshs exports to SAARC Countries in its total Imports

***Source: UN COMTRADL

In recent years, there has been an increased interest in regional economic integration in South
Asia. Regional integration in South Asia got the momentum in 1995 when the South Asian
Preferential Trading Arrangements (SAPTA) came into force. In early 2004, SAARC member
countries agreed to form a South Asian Free Trade Area (SAFTA), which came into force from
July 1, 2006. Bangladesh is negotiating with India, Pakistan, Nepal, and Sri Lanka for regional
FTAs.
In order to achieve rapid economic development through intensifying trade relation by gradually
removing tariff, non-tariff and para-tariff barriers amongst the member countries. An FTA among
economies such as Bangladesh-SAARC would likely maximize the gains from trade.
SAPTA was signed with a view to promoting and sustaining mutual trade and economic
cooperation within the SAARC region through exchange of tariff concession. Since 1995, four
rounds of negotiations have been concluded and tariff concessions on around 5,500 products

23

were exchanged. Products coverage and extent of concessions granted by the member countries
under SAPTA to LDCs were not significant, except those by India.
Moreover, for SAARC countries, India had removed in 1998 all quantitative restrictions that it
maintained till 2003 for others. The preferential tariff concession offered by India for
Bangladeshi export products was mainly for fertilizers, sugar confectionery, biscuits, leather
products, footwear, jute products, cosmetics, soaps, ceramic products, textiles, artificial flowers,
electrical goods, clocks and watch, furniture, plastic products, textiles etc.
Until 1951, total intra-regional trade in South Asia as a percentage of the region's total trade was
double. However, as South Asia became progressively more closed to the world market, and as
political rivalry between India and Pakistan intensified over time, intra-regional trade came down
to just 2% of the region's total trade by 1967. The share began to grow during the 1990's
following multilateral trade liberalization in these countries, and by 2002 it rose to 4.4% (Baysan
et al. 2006). Bangladesh is the second largest importer in South Asia. In 2007, Bangladesh
accounted for 26% of total intra-regional import.
In contrast, in 2007, Bangladesh's exports to the region accounted for only 6% of the total
regional exports, implying that it has a large deficit in its trade with the region. Bangladesh's
trade with other SAARC countries is also highly unequally distributed. Bangladesh trades very
little with Bhutan, Nepal and Sri Lanka.
In South Asia, India is the major trading partner of Bangladesh with Pakistan a distant second.
But trade with India is one-sided, as the volume of imports from India to Bangladesh is much
larger than the volume of exports from Bangladesh to India. Therefore, Bangladesh has a large
bilateral trade deficit with India which has increased over time.
Bangladesh exports constitute a miniscule (1%) share of India's imports, a negligible share (1%)
of its own exports and cover only a small range of products (fertilizer and jute goods made up
two-thirds of exports), though ready-made garment (RMG ) is the major export item for
Bangladesh, very little is exported to India.

24

South Asia has not been a significant export destination of Bangladeshi export products. In facts,
over the last 10 years, there has not been any major change in this pattern. In 1997, Bangladesh's
exports to the South Asian region accounted for only 1.69% of her total exports, which, by 2007,
rose to only 2.39%.
Figure 11 also suggests that over time, Bangladesh's dependence on South Asia as a source of her
imports declined. In 1997, Bangladesh's imports from South Asian region accounted for 21.08%
of her total imports, which by 2007 declined to 13.39%. In other words despite all the trade
agreements to promote Bangladesh within the region, it did not show much improvement
between 1997 and 2007.
The existing trade relation of Bangladesh with SAARC countries implies that during the past
decade trading in both directions -- export and import -- has increased markedly. However,
having explored the implications of negotiating FTAs with SAARC member countries, it appears
that the possibility of an FTA with India should be examined for all possible implications. At
present the trade gap with India compared to other SAARC countries is very high. In this case,
Bangladesh will have to look for broadening her category of non-traditional items to increase
export to SAARC member countries.
A recurrent theme for all trade negotiations is the need for skillful negotiators. Unfortunately,
Bangladesh has not built up this capacity; our resources are few and far between. Most countries
we negotiate with have trained and experienced negotiators.
***Source: The Daily Star (Wednesday, October 19, 2011)

19. Impact of SAARC on Bangladesh

The formation of SAARC was with the objective of helping each other in the growth. The mutual
understanding and the development of the countries with the similar geosocial background, the
resources available and the path of development taken by each member with the cooperation and
collaboration of each other. The member countries are no doubt benefited with this.
Bangladesh economy, after independence in 1971, followed a highly restricted trade strategy of
high tariffs and non-tariff barriers to trade. Moreover, the economy adopted more overvalued
exchange rate system or more comprehensive termed as Import Substitution. The trade regime
was shifted in the mid-1980s and the fastest pace of liberalization took place in the period of
1991-95. Raihan (2008) conducted a numerical study to observe the relationship in context
25

of manufacturing industries. He concluded that, in general, trade liberalization, in Bangladesh,

has generated employment in the major export-oriented industries where as labor suffered in
major import-substituting industries such as textiles and paper products. Another study (Rahman,
Shadat, & Raihan, 2007) concluded that sectoral and overall employment has experienced
negative growth particularly in agriculture and industrial sector in the periods of 1991-95.
Although employment in the manufacturing did increase in the third phase of liberalization (after
2000) but the sector failed to absorb the increasing labor force as pointed out in low share of total
employment. Another key finding of this study depends on the wage and price stickiness. It
proposed that stickiness of wages during periods of rising productivity in manufacturing sector
would imply that workers were not getting a share which might have led to a fall in
competitiveness as a trade-off with the real wage determination. Thus, generally, trade
liberalization has negatively impacted the employment structure of Bangladesh. An alternative
study (Williamson, 1999) proposed that while trade liberalized reforms have negatively impacted
employment but it has potential to become positive. So it has suggested formulation of trade
reforms in those sectors where Bangladesh has lagged such as financial sector, infrastructure and
privatization.
Source: http://www.academia.edu/

20. Reasons for Slow Progress

The problem between the nations in the South Asian region dates back to the late 1940s. The
problem initiated with the separation of India and Pakistan in 1947. From that tie onwards a
very sensitive political difference existed between India and Pakistan. Later with partition of
the East and West Pakistan the political difference between Bangladesh and Pakistan also
became significant. Political division also existed between India and Sri Lanka regarding the
Tamil Nadu issue. Some political distance also exists between India and Bhutan and India and
Nepal. The formation of SAARC could not overcome this problem and thus SAATC has
become a platform with no action and slow positive results.
As already discussed India is the largest country among the SAARC nations with the highest
population, GDP and most resources. Since most of the nations have a problem with India,
India is considered the bottleneck for growth and further cooperation in the region. India is a
vast country and it also has political problems within itself. The seven sister states of India is
one of the most backward regions which receives very little attention. The border trade has
special significance to these states due to their geographical location. With the exception of a
narrow area the rest of the border of these states are shared with Bangladesh. These states

26

however possesses significant amount of natural resources which can be utilized for the growth
of the seven sister states, for India and for the region as a whole. The main reason for the
backwardness and weak links of these states with mainland India is the high transport cost
involved in moving goods from mainland India to these states and the poor infrastructure of the
region. However, if a transport network is set out through Bangladesh the transport cost of
transportation will come down significantly. Although the seven sister states possess natural
resources investment in the area is low by the Indian government. The goods produced in
mainland India also seldom reaches these places since the price becomes too high since
transport cost is very high.
The political tension between Pakistan and India has also retarded the progress of SAARC.
India often assumes that the smaller nations of SAARC will join hands with Pakistan and
become stronger than India. On the other hand Pakistan seems to fear that the SAARC is an
Indian strategy to organize the other South Asian nations against it.

21. Future Potentials that can be Achieved

In order for the nations to come forward with more enthusiasm and enhance cooperation they
must have something to offer which their other partners would be needing, be it a product or a
service. Even transit facilities for products having export potentials, especially for landlocked
countries could serve as a basis for further integration. This would provide economic
complementarity. It would help countries to optimize the benefits which could be derived from
the exploitation of latent regional potentials. Complementarity could also occur in the area of
production, available resources, technology and skills in the areas of specialization of labour
forces and even in geographical locations. Thus, complementarity arises mainly from the
differentials in factor endowments and it is an important factor determining the pattern of trade
between and among nations.
Geographical proximity or contiguity is an important factor for countries intending to cooperate
with one another. Since cooperation means exchange or transaction of something, a cost

27

effective transaction among countries is only possible if they are contiguous. The SAARC
countries can establish a multi-modal system of transportation within the region to facilitate
exchange of goods since they are geographically in close proximity to each other. The
proximity factor and a better transport system within the region will lead to increased
interaction among the people of the nations which would in turn lead to a more intense
cooperation. The SAARC nations must integrate their road and rail networks for improved
transportation within the zone. Smooth movement of different modes of transport including the
waterways and airways will facilitate exchanges of all kinds. An improved transportation
system will ensure lower transaction cost. The countries within the region should also have
regional power and energy grids since the countries have natural supply of energy and mineral
resources. Similar integration in other major infrastructure depending on the differences in
factor endowments would also enhance the growth of the economies and ensure a harmonious
relation between the nations.
The potential of growth also exists in exploiting the huge untapped resources of the region
including energy and mineral resources. Establishment of common power and energy grids are
possible which would ensure the optimal use of the huge natural and mineral resources of the
region. Another important potential of the region is the huge reserve of natural gas and coal in
the West Bengal, Bangladesh region. The free movement of labour and integration of
infrastructure would facilitate external trade and investment into the zone. Technologies could
be exploitable economically since cooperation would bring in opportunities for economies of
scale.
Lack of political will was a major hindrance to the success of the planned free trade area. A
major change in the mindset of the political leadership of the countries is required in order to
ensure successful economic integration. An important pre-requisite for establishing close
cooperation is to have a shared perception of common benefits. There has to be a feeling
amongst the governments as well as the people of the participating countries that they are
benefiting equitably, if not equally, from cooperation. The distribution of the benefits has to be
fair among the member states. Lack of political will mainly generated from lack of mutual trust
at both government and non-government levels. The strained relationship that exists between
some of the SAARC nations needs to be overcome in order for the SAARC to exist and provide
28

positive result for the region. Many view the normalization of the bilateral relation between
India and Pakistan as an important prerequisite for successful regional integration among the
SAARC nations. Strong political will and commitment on the part of the governments of
constituent countries is a vital factor for the success of a regional economic cooperation. All
this can only be done if the political tension between the SAARC nations can be overcome with
the vision of better life for the people of the region and acceleration in the regions economies.
At the present time it is a challenge for the economic and business people to bring in
integration into the region. India has to realize that if the SAARC platform cannot be
strengthened they will lose out. Excluding India, the countries within the SAARC region have
about 50% of the population of the region. This huge population could prove to be a potentially
profitable market for India. If India wishes to tap this market they have to share in the light of
trade theory and economic integration. The Seven Sister States is an expensive area for India,
since transport to that region is expensive. In order to bring forward this region India needs to
integrate with Bangladesh in terms of transportation through Bangladesh and this would
improve relation with India. Seven Sisters have a lot of untapped resource. Improvement of
relations between India and Bangladesh will help accelerate the efficient use of these resources.
Bangladesh can bring energy from Nepal and Bhutan, price of energy would fall and it would
benefit Bangladesh. Nepal and Bhutan would also benefit since their resources would be used
more efficiently. Such integration and cooperation has to be set out between all countries so
that the benefit is reaped by each nation.
In recent years China has entered into the South Asian market with its export of cheap goods
especially electronic. China has become competent in the production of all types of goods at a
very cheap rate and an acceptable quality. India on the other hand is a vast country with a
varied supply of natural resources. India can easily produce products similar to China at almost
equivalent prices and good quality. However, in order to do that it may need to integrate with
some of its neighboring countries. If India does not do this they will lose out the market in the
SAARC regions who are currently importing a lot of products from China. However, if India
moves ahead and integrates to produce the Chinese products and sets up a free trade area with
its partners China will lose the market and India can tap a huge market in the region. The
SAARC nations would also be more eager to trade and cooperate with India rather than with
29

China. The nations are all developing economies and they can only receive from China but
have little to offer. For most nations it is a one way track with China which is leading to
widening of the trade gap. But if similar products can be obtained from neighboring countries
and resources can be shared the nations can give and take and be more competitive. This can
lead to the formation of and development of an economic hub in the region. The region can
grow to be a strong economic power which can compete with other regional blocs. Sharing and
exchange will be done and political issues can be resolved. However, the above are proposed
and potential achievement that can be made. The edge line and risk is whether SAARC will
survive or not.

22. Analysis on the basis of Trade Theories

22.1 Absolute Advantage
A country has an absolute advantage in the production of a product when it is more efficient
than any other country in producing it. Each of the SAARC countries has absolute advantage in
the production on certain goods. Some nations even have natural resources which gives them
absolute advantage in those goods. Some countries also have acquired advantages on mainly
industrial products. The ability to produce the goods and services at the cheapest possible price
in comparison to the other nations has given the nations absolute advantage. India has natural
advantage in iron ore deposit of coal, manganese, chromite, bauxite, mica, nickel ore, copper
ore and gold mines. On the other hand it has acquired advantages in automobile, basic food
items, textile, computer software and some heavy industries like arms, ship manufacturing etc
Bangladesh has natural advantage in shrimp, coal, natural gas, limestone, kaolin and alluvial
clay, glass sand, construction stones and mineral sand. It has acquired advantage in textile
goods, leather goods, jute products, cement, pharmaceuticals and manpower. Pakistan has
natural advantage in antimony, bauxite, chromite, copper, gypsum, iron ore, limestone,
magnesite, marble, molybdenum, rock salt and sulphur. The country has acquired advantage in
clothing, cotton and cotton products, rice, carpets and leather goods. Sri Lanka has natural
30

advantage in limestone, graphite, mineral sands, gems, phosphates, clay, pearls and hydro
power. They have acquired advantage in aqua fish, aqua culture and sea food, coconut and
coconut products, handicrafts, gems and jewelries, rubber and rubber products, tea, toys etc.
Nepal has natural advantage and acquired advantage in tourism and hydroelectric power.
Bhutan on the other hand has natural and acquired advantages in coal, dolomite, ferrosilicon,
gypsum and limestone. Maldives, being a very small country has natural and acquired
advantage in fisheries, tourism and cottage industries.

The traditional theory of absolute advantage explains:

A. India has a good market in the SAARC countries for:

Automobile industry

Computer software

Some heavy industries like arms, ship manufacturing

India can penetrate the SAARC markets by:

Materializing the objectives of SAARC and SAPTA

Solving border issues with Pakistan will help India to capture the markets of Pakistan

Moving from basic industries and concentrating on heavy industries.

B. Bangladesh has a good market in the SAARC countries for:

Leather goods

Jute products

RMG
31

Cement

Pharmaceuticals

Natural gas

India and Bangladesh can come to an agreement so that Bangladesh can enter the market
of seven sisters with the products like:

Natural Gas

Cement

Pharmaceuticals

C. Pakistan has a good market in the SAARC countries for:

Marble

Sulfur

Carpets

Leather goods.

India can give Pakistan advantage in the product like carpets and leather goods. On the
contrary Pakistan can open up for Indian heavy industries.

D. Sri Lanka has a good market in the SAARC countries for:

Gems, pearls

Aqua fish, aqua culture and sea food

Coconut and coconut products

Jewelries
32

Rubber and rubber products

Tea

E. Sri Lanka has potential in the SAARC region is for:

Jewelries in the market of other SAARC countries

Rubber and TEA extensively to Indian market by allowing India to utilize its
automobile and heavy industries in the Sri Lankan market

F. Nepal has a good market in the SAARC countries for:

Tourism

Hydroelectricity

Among the SAARC countries Nepal has the unique advantage for hydroelectric project
because of its geography. Nepal can allow India:

Establishing Hydroelectric project in a joint venture

India needs to help Nepal by giving free transit of its product using Indian land. Also, Nepal
can sell its energy to Bangladesh and hence the cost of production of industrial goods will fall
significantly in Bangladesh, which in turn will be a contributing factor in supplying the
neighboring countries with good quality products at a more competitive price. But before that,
India must be economically motivated to let Nepal establish the supply pass through it to
Bangladesh.
F. Maldives has a good market in the SAARC countries for:

Fisheries

India can establish joint venture in Maldives to capitalize the natural opportunity.
33

22.2 Comparative Advantage/Factor Proportion Theory

According to the factor proportion theory a country should concentrate on the product where a
relatively cheap input is required. The following table shows recent export import patterns of the
SAARC countries and major partners.

BANGLADESH
BHUTAN

INDIA

MALDIVES

NEPAL

PAKISTAN

SRI LANKA

1981
N/A

2.5

5.3

0.3

N/A

1.0

0.5

2.6

N/A

1.4

0.7

2.3

0.4

N/A

1.2

N/A

0.3

0.8

0.4

0.02

1.1

N/A

0.1

0.6

0.2

1987

1991

1995

1999

Figure-12: Intra-Country Exports in the SAARC Region (As a percentage of total exports)
***Source: IMF, Direction of Trade Statistics Yearbooks, IMF, 1988, 1992, 2002.

34

22.3 Product Life Cycle Theory of International Trade

According to this theory, the innovator country of a technology is initially an exporter then it
loses its competitive advantage. Its trading partner may eventually become an importer of the
commodity.
This theory has a good implication in the South Asian Economy. The new booming sectors with
high growth potential for the Indian economy are:

Software Business

Indian Automobile sector

Heavy machine equipment

This business was once in the hands of the USA, EU and Japan. The SAARC countries having
a large demand for these products can be good market for India. Already India has entered the
Bangladesh market with this business.

23. Promoting and Facilitating Investment in South Asia

The seven member states of SAARC (South Asian Association for Regional Cooperation),
Bangladesh, India, Pakistan, Nepal, Bhutan, Sri Lanka and Maldives, collectively have a
population of 1.5 billion, approximately 22 per cent of the worlds population. It is also the
region in which a large majority (around 43 per cent) of the worlds poor live. South Asias
gross domestic product (GDP) is only 2 per cent of the worlds GDP, indicating the low level of
per capita income in the region.
Lack of investment capital accumulation and regional cooperation are considered important
reasons for the low level of economic dynamism in South Asia. Unlike East and Southeast Asia
where regional cooperation initiatives have contributed significantly to the economic growth of
35

the countries in these regions through an increase in inter-regional trade and investment,
regional cooperation in South Asia remains weak. An opportunity for accelerated growth and
further energizing the economies of South Asia does exist by increasing investment through
regional cooperation. Therefore, enhancing investment cooperation and facilitating investment
among the countries in the region will be crucial for the development of the economies in the
region.
A recent study shows that there is considerable convergence between South Asian economies.
Both theory and evidence suggest that regional integration arrangements may provide an
important stimulus to foreign investment. Besides attracting more foreign investment, there are
many areas, particularly the energy and transportation sectors, in which South Asia can benefit
through increased regional investment cooperation given the existing complementarities.
Regional investment cooperation can also help lower transport costs, generate more
complementarities by expanding and diversifying the production base and trade structure,
diversify comparative advantage, introduce appropriate technologies and encourage
competition.

Countries
1980-85

1990

1995

1998

-0.1

0.1

0.1

9.2

N/A

N/A

N/A

N/A

Bangladesh

Bhutan

36

India
34.7

35.4

71.3

65.8

-0.2

N/A

0.2

0.2

0.1

1.3

0.2

0.3

42.0

53.3

26.2

14.5

23.5

9.4

1.9

10.0

Maldives

Nepal

Pakistan

Sri Lanka

Figure-13: Country shares of FDI as a Percentage of Total Inflows to SAARC Countries

24. The Investment Scenario in South Asia

Most of the South Asian countries have undertaken far-reaching economic reforms; they have
adopted industrial policies that encourage foreign direct investment (FDI) resulting in an
increase in FDI flows. However, the amount of inflows attracted by the region remains relative
to East Asia and South East Asia quite insignificant. In 1998, it was only US$ 3.43 billion, a
mere 0.5 per cent of global flows. In contrast, China received more than 10 per cent of all
global inflows. By 2002 although total FDI flows to South Asia had increased to US$4.58
billion, this was still well below 1 per cent of global FDI flows.

37

Gross Private Capital Flows

Country

(% of GDP) 1990 2000

Gross Foreign Direct

Investment (% of GDP)
1990 2000

Bangladesh

0.9

0.0
3.6

India

0.8

0.6
0.0

3.0
Nepal

3.5

0.6
0.0

4.8
Pakistan

4.2

0.0
0.6

2.5
Sri Lanka

13.1

0.5
0.5

7.6

1.1

Figure-14: Private Capital Flow and Foreign Direct Investment in South Asia
***Source: World Bank (2002) World Development Indicators Table 6.1

FDI to the region is predominantly from outside the region. The sectors that have attracted most
foreign investment vary between countries. In the case of Bangladesh and Sri Lanka, the textile
and garment sectors account for 28 per cent and 16 per cent respectively of FDI, whereas 56
per cent of FDI has gone into infrastructure projects in India. In the case of Pakistan, 40 per
cent of all FDI has gone into the power sector. While FDI from outside the region has been far
greater than intra-regional investments, there are signs that intra-regional investments are
increasing. The major outward FDI flows are from Indian firms, which have started to expand
FDI both within South Asia and beyond. Firms from other South Asian countries are also
38

increasingly undertaking FDI within the region and investing in a wide range of sectors and
activities.
There are two SAARC countries, Nepal and Bhutan, where FDI from India is the predominant
source of FDI. On the other hand, none of the SAARC countries are significant investors in
Pakistan though there is a very limited FDI flow from the other countries in the region. India is
the largest investor among the SAARC countries in Sri Lanka, while Pakistan and Maldives are
respectively second and third to India as investors. In the case of Bangladesh, firms from India,
Pakistan and Sri Lanka have in recent years invested US$418 million in 133 ventures covering
a wide range of sectors. In spite of Indias huge internal market, investments from other
SAARC countries have been quite insignificant, both in relative and absolute terms, accounting
for less than one per cent of total foreign investment in India. Bangladesh is the largest investor
in India from the region, followed by Sri Lanka, Nepal and Maldives.

The Lafarge Surma Cement plant in Bangladesh is the single largest cross-border investment in
the region involving a major multinational firm. Lafarge, a French multinational, is one of the
largest cement manufacturers in the world. The plant is expected to go into production very
shortly. The raw materials, mainly limestone and shale, for this 2 10 million dollar joint venture
cement plant in the district of Sylhet, located in North-eastern Bangladesh close to the Indian
border will be supplied from a quarry in the bordering state of Meghalaya. The plant, one of the
largest in the region, and the quarry are connected by a 17 kilometer (11 mile) cross-border
conveyor belt to transport the limestone. The plant will have an initial capacity of 1.2 million
tons of cement per annum although this capacity is expected to be doubled in due course.
Another example of a successful joint venture is in the rubber sector in Sri Lanka. The vertical
joint venture was initially between an Indian motor vehicle company, Associated Motorways
Private Ltd and the Sri Lankan subsidiary of CEAT for the manufacture of tyres. Sri Lanka,
which did not have a developed rubber-based industry, gained greater access to the protected
and growing Indian market, while India obtained easy access to the supply of good quality
natural rubber. At the end of the day both countries benefited through this joint venture.

39

25. Investment Opportunities in South Asia

Given the existing complementarities, there are many areas, particularly energy and
transportation sectors, in which South Asian economies can all benefit through increased
regional investment cooperation. Establishment of joint ventures is crucial in this regard for the
economies of this region. Besides generating more complementarities, these ventures help to
expand and diversify the production base and trade structure of the South Asian countries and
in the introduction of appropriate technologies. Some investment opportunities in South Asia,
in particular for infrastructure and energy projects are discussed below.

25.1 The Energy Sector

Bangladesh, Bhutan, India and Nepal can develop and utilize a combination of thermal and
hydropower more efficiently through a regional agreement. Such an approach would enable
India and Bangladesh to use their coal and gas reserves more efficiently while allowing Nepal
and Bhutan to develop their large untapped hydro-power potential. All four countries could
benefit in the long term by optimally developing and scheduling their generation capacities on
an integrated basis through regional cooperation. This will help the countries to avoid building
transmission grids across high mountains or major rivers. Trading of electricity would widen
the market for electricity in the region and the resource base thereby leading to the least cost
development of larger hydro projects.
A study conducted by the Asian Development Bank (ADB) showed that sub-regional
cooperation among the countries of the Ganges-Brahmaputra-Meghna (GBM) basins could
generate 25000 MW of power. A sub-regional growth quadrangle (since it would cover four
countries Bangladesh, Bhutan, India and Nepal) could be established in the GBM area. The
objective of the GBM quadrangle would be (1) joint development and management of water
and energy resources (2) development of physical infrastructure mainly roads, railways, ports,

40

inland waterways and the GBM rivers and tributaries and telecom (3) promotion of intra and
inter-regional trade and (4) promotion of cooperation in other areas such as environment
protection, tourism, and establishment of export processing zones.
Cooperation between India and Bangladesh can commence with small-scale transfer of
electricity (150-200 MW) from East Zone of India to West Zone of Bangladesh, at the same
time Bangladesh may consider exporting 50 MW to Tripura from the eastern grid of
Bangladesh. A pre-feasibility study in September 2000 for Bangladesh with USAID support
established the viability of a 750 MW power project in the western region of Bangladesh. It
was envisaged that 50 per cent of the power generated could be exported to India.
At sub-regional level, there are efforts to tap hydropower potential. At a meeting sponsored by
the ADB held in New Delhi in March 2002, an Inter-Governmental Task Force of Energy and
Water Resources Secretaries of Nepal, India, Bhutan and Bangladesh agreed to develop the
hydropower resources of Arun Valley in Nepal.
A number of gas pipeline projects have also been recommended ranging from the Iranian and
Turkmanistan pipelines to pipelines from Myanmar, Tripura and Bangladesh. Each of these
proposals has their advocates and also critics. The politics of energy cooperation cannot be
divorced from the other considerations. The key to moving forward is to devise a win-win
approach which will be acceptable to all the countries in the region. As in the case of a
seamless electricity grid covering the entire region, consideration can also be given to a similar
gas grid. However, implementing such a complex project will require time, money and
expertise. The World Bank and the multilateral agencies as well as the private sector can play a
key role in making such an ambitious project possible.
Non-Commercial energy sources like solar, wind, small hydro, bio gas and biomass
technologies could play an important role in increasing access to electricity in rural areas.
Regional cooperation can provide the framework for such exchanges.
More recently, there is a proposal from the Tata group to invest two billion dollars in
Bangladesh in three projects: a steel mill, a fertilizer plant and a power plant. A substantial part
of the production from all the three projects will be exported back to India. Both the
41

governments of India and Bangladesh have welcomed this investment at the highest level.
However, much will depend on an agreement being reached between the Tatas and the
government of Bangladesh regarding the terms and conditions for the supply of gas for the
three projects. Should these projects be implemented they will provide an enormous impetus to
both bilateral and regional cooperation.

25.2 Transport and Communication

For enhanced regional investment cooperation an integrated transport network is
essential (Discussed in detail in the next section). Some of the recommendations for improved
logistics are as follows:
1.

Opening up borders and improved border management

2.

Open sky policy for South Asian countries

3.

Opening up ports (For example, Chittagong port of Bangladesh can be used as a

regional hub port to serve Eastern South Asia as well as land-locked South West China
which is keen to have access facilities to a port in the Bay of Bengal, while Mongla Port
can be developed and modernized to take care of Nepals exports and imports as well as
those of Bangladesh

4.

Constructing a Trans South Asian railway

5.

Building integrated roads and high ways

6.

Integrating South Asias road and railway network with that of the ASEAN countries
and China

7.

Developing coastal shipping and feeder networks in the region

8.

Improving infrastructure for telecommunication

9.

Developing a cross-country transport system linking Nepal, Bhutan, West Bengal,

Bangladesh and the NorthEasternStates of India together.

25.3 Information Technology

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Considering the enormous potential in the field of information technology (IT), particularly ecommerce, promoting regional cooperation for the development of IT infrastructure through
sharing knowledge, experiences and expertise needs to be emphasized. Information technology
(IT) plays an important role by increasing connectivity, communication and transparency in the
business process. It is also instrumental in attracting FDI. Creating a South Asia wide
information network will buttress cooperation among member countries. For example, the lead
taken by India in attracting US outsourcing in the IT sector may spill over to other SAARC
countries through a common IT infrastructure, technology transfer and knowledge sharing.

26. Current State of Transport Integration in SAARC

26.1 Railways
Before the partition of India in 1947, the intra-sub-continental movements were mainly carried
out by railway with inland water transport carrying part of the traffic, particularly between the
states of Uttar Pradesh, Bihar, Bengal and Assam. Until the 1965 war between India and
Pakistan, Indian rail wagons used to come well inside the then East Pakistan using rail lines
which crossed national boundaries (See Map 1). Although these physical links are still there,
very little cross-border movement by rail is taking place today between India and Bangladesh.
In this connection, lack of coordination between gauge conversion in Indian Railway (IR) and
dualization in Bangladesh Railways (BR) could kill prospects of uninterrupted flow in the
future. Indian and Bangladesh wagons have different coupling and breaking systems. BR
wagons do not cross the border because these cannot be connected to Indian rolling stock
without reducing the efficiency of Indian trains. Possibilities of having unit trains of BR
wagons could be looked into as a solution. Currently, Indian rail wagons are pulled by
Bangladesh locomotives only over short distances inside Bangladesh. Similarly, movement of
Pakistani passenger train across the Indo-Pakistan land frontier can move only up to in India.

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26.2 Inland Water Transport

Today, inland water transport (IWT) movements between West Bengal, Bangladesh and Assam
still continue through with periodic interruptions, The class-I routes operate throughout the year
with a minimum draft of 12 feet (See Map 2), However, shifting rivers and the increasing rate
of siltation (which requires continuous dredging) make it difficult to maintain stable depths on
the secondary routes within Bangladesh. The IWT protocol which was signed between
Bangladesh and India in 1972 is being renewed every two years with improved provisions to
stimulate use of IWT routes. In spite of this protocol, India apparently, is not making full use of
these river routes transiting through Bangladesh. Some of the problems which might be
contributing to low levels of IWT use may include: difficulties of round the year navigation
along certain major routes due to the draft limitation; lack of sufficient ports of call; and
absence of facilities for night navigation.

26.3 Road Transport

Road transport development in the SAARC countries has been very fast. Even in India,
railways are facing the tough competition from road transport (See Map 3). In Bangladesh
around 65 to 70 per cent of all goods and passenger traffic are moved by road transport. Due to
differences in the axle load limit which is 10.2 tons in India vis--vis 8.2 tons in Bangladesh
and Pakistan, Bangladesh has not been allowing trucks from other countries to travel on its
roads. (Bangladesh has, however, revised its axle load limit to 10 tons recently). India has
imposed similar restriction, but does allow trucks from Nepal and Bhutan to operate on
designated transit routes within India. Indian trucks are allowed into Nepal but are given only
72 hours to return to India.
Considerable inefficiencies exist at the land border crossings between SAARC countries. The
basic constraints are the lack of efficient customs operations, including lack of transparency of

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procedures for inspection, informal payments, and inadequate preparation of customs

documents by the shipper, etc. An unusually long time is taken for scrutiny, checking and
completion of documents and for completion of formalities with the banks. Banking facilities
are inadequate; medical, communication, warehousing, security and firefighting facilities are
deficient; wayside amenities are absent. For want of truck terminals, vehicles are parked on the
road creating acute congestion. In most of the border points there is only one exit both for
passengers and goods creating considerable inconvenience for users. A World Bank publication
prepared in 2001 by Uma Subramanian, and her team identified key transport and logistics
impediments that have left the South Asian sub-region, comprising Bangladesh, Bhutan,
eastern India and Nepal, lagging behind in economic growth, by obstructing the seamless flow
of their goods and services to regional and global markets. Detailed information on physical
gaps and constraints, policies, procedures, commodity type, and market conditions helped to
determine where improvements in the short term can bring about significant returns in terms of
efficiency improvements.

27. Consequences of Non-Cooperation

Some of the consequences of non-cooperation in South Asia are indicated below:

27.1 Movement between North East India, Bhutan, Nepal and Bangladesh
During British India, the transport networks were all radiating outwards from the international
sea ports of Karachi, Bombay, Madras, Kolkata and Chittagong. Subsequently, several new
ports have been developed in the sub-region which includes sea ports near Karachi and
Bombay, Haldia near Kolkata, and Mongla in the south-west of Bangladesh. In the context of
North-East India, Bhutan and Nepal due to congestion at Kolkata port, Bangladesh ports
(Chittagong and Mongla) could have provided a very easy access to the sea. The shipment of
Assam tea to Europe on its traditional route through Chittagong is not possible since it is not

45

covered by the current bilateral agreement. As a result, the transportation cost includes a
trucking route of more than 1400 kilometers to KolkataPort through the land corridor termed
the chicken neck between Bangladesh and Nepal (See Map 4). The traditional route for
Assamese tea via Chittagong port would have cut the journey for export shipments by almost
60 per cent. Third-country trade for both Nepal and Bhutan is also routed through Kolkata port,
with associated delays and cost. But their export/import cargo could have moved more cost
effectively through Bangladesh ports.
Agartala, the capital of Tripura state, is also constrained by its weak transport links with the
outside world as well as with the mainland India. The southern border of Tripura state is only
75 km from Chittagong port. But since access to Chittagong port is not allowed under any
agreement between Bangladesh and India, goods from Agartala are required to travel a distance
of 1645 km to reach Kolkata, against a direct distance of 350 km across Bangladesh.
If Bangladesh would have allowed Indian cargo access to the sea through ChittagongPort, it
could have earned considerable foreign exchange for the services it would render in terms of
say railway charges, the port charge and transit fee.

27.2 Movement between Nepal and Bangladesh

Due to lack of political understanding with India, Bangladesh is not only losing the chance to
earn foreign exchange, but also paying a price. Although India has allowed a route between
Bangladesh and Nepal across the Chicken Neck for bilateral trade, yet goods are required to
be trans-shipped at the Banglabandh land port. Since this route cannot be used for third country
trade of Nepal, its export and import traffic cannot use Bangladesh seaports of Mongla,
although it has a direct broad gauge link with Rauxal, the Indian Rail head at the India/Nepal
border. Due to congestion at Kolkata port, Nepal expressed an interest in using Bangladesh
ports for its third country trade, but India did not agree to this.

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27.3 Movement between India and Bangladesh

In the absence of a clear political understanding among the countries of SAARC, overland
movement of goods and passengers among the member countries has been very limited except
between India, Nepal and Bhutan. As a result, it takes 45 days to transport a container from
Delhi to Dhaka, because the container first moves to Tughlakabad ICD, then to Mumbai (India)
and Singapore (See Map 4). From Singapore, the container is shipped to Chittagong port, and
then to Dhaka. According to a reliable estimate, the distance of around 2,000 kilometers
between Dhaka and Delhi could have been covered in two to three days by rail, similarly, the
distance between Dhaka and Lahore has also increased from 2300 km to 7162 km after 1947,
because overland movement across India is not allowed.

27.4 Movement between India and Pakistan

The movement of goods and people between India and Pakistan by road and rail remains
severely restricted. Goods movement by road is not allowed. One passenger bus a week has
been traveling across the border in either direction since 1999, with occasional interruptions.
Goods movement by rail is not allowed. Pakistani passenger trains are allowed only up to Attari
in India opposite to Wagah in Pakistan. Passengers going to Pakistan change their trains at that
station. Direct shipping between say Karachi and Mumbai port is also not allowed, unless the
ship touches a third country. All these restrictions apply due to lack of any political
understanding and expose both countries to high transaction costs. The matter does not end
there. New Delhi and Teheran are cooperating in the development of a transport corridor from
India to Afghanistan and Central Asia through Iranian territory (See Map 3). Since Pakistan has
been denying facilities for overland trade between India and Afghanistan, this corridor has
become the key to rapid expansion of economic cooperation between New Delhi, Kabul, and
Central Asia.
Iran is developing a new port at Chabahar (See Map 3) from where a road will skirt the
Pakistan border into Afghanistan where it will link up with the garland road system that

47

connects all the major cities in that nation. India will help Afghanistan build the road link from
the border with Iran to its internal road system.
The Chabahar corridor will give India the much needed access to Afghanistan and Central Asia,
although through a much longer and more expensive route. Had there been a more positive
understanding between India and Pakistan, it could have opened up much wider avenues for
economic cooperation involving other countries of South Asia as well.

27.5 Visa Requirements

With regard to visa requirements for passenger movement between SAARC countries, there has
been very little improvement over the years. Citizens of SAARC countries still need visas to
visit each other except for travel between India and Nepal, and India and Bhutan. Maldives is
the only country in the region which permits SAARC countries to enter without a visa and it
extends this facility to all countries. Recently, Sri Lanka has permitted visa free entry to all
SAARC countries, a move which has not been reciprocated by its neighbors. However, visa
less travel has given a big boost to Indian tourists visiting Sri Lanka. With regard to visa
issuance between Pakistan and India, the situation is more complicated. Visas are issued city
wise, and visitors are required to report to the police on arrival. Visas are again restricted to a
single port of entry and exit.

28. What Needs to be Done

Considering the present unsatisfactory state of transport integration and the political constraints
which are standing in the way of transport cooperation in South Asia, a number of actions are
required to address the situation. Indicated below are some of the major actions which could be
taken.

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28.1 Strong Political Commitment

Virtually all the constraints to improved transport connectivity in South Asia indicated above
remain political. Thus, the key to transport integration lies in a change in political mind-sets.
The declaration at the Islamabad summit in January 2004 seeking to strengthen transportation,
transit and communication links across the region as well as harmonization of standards and
simplification of custom procedures indicates a renewed political commitment to improve
connectivity across the SAARC countries. The challenge to the SAARC governments will be to
operationalize these commitments by dismantling the political as much as the infrastructural
barriers to improved communications.
Here civil society in South Asia and particularly the business community can play a proactive
role in pressing governments to honor the commitments made at Islamabad. Serious
professional work identifying measures to integrate the transport network of South Asia can be
undertaken at the level of civil society to supplement intergovernmental initiatives and to
accelerate official action in this area. Some ideas on the scope for coordination of transport
development and facilitation of international traffic are presented below.

28.2 Coordination in Transport Development

Traditionally, development of transport system in the South Asian countries has been
considered only as a national issue and did not seriously take into account the cross-border
issues of compatibility, uniformity of standards, infrastructure and equipment design, which are
vital to increasing movement of goods and people across national boundaries. In this context,
the following areas need urgent attention.

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28.3 Coordinated Development of Rail Network

The rail networks in South Asia are a mix of broad (1.68 meters) and meter (1.00) gauge. India
is making a concerted effort to convert its network to broad gauge and Bangladesh is currently
undertaking some conversions of meter gauge to dual gauge.
In order to ensure that traffic can move smoothly by railway between various countries of
South Asia, there is a need to coordinate the conversion program of Indian Railways with the
dualization program of Bangladesh Railways (See Map 6). The coupling and braking system
will also need to be standardized. This would be essential for providing smooth rail corridors
upto Chittagong and MonglaPort for traffic to and from Nepal, Bhutan and North-East India
including Agartala, once the dualization of track is completed up to Chittagong. However, to be
able to face the competition from road transport, it would be essential to achieve significant
improvements in rail operation if this mode is to capture most of the inter-country traffic. To
this end, use of compatible rolling stock would be essential. Since dualization has been
completed up to Joydebpur near Dhaka, freight trains from India on BG track can now move
almost up to Dhaka, if required. Once the dualization of the rail track is completed up to Dhaka
a regular train service between Dhaka and Kolkata could be initiated.

28.4 Prospects of Road Transport

Most of the movements by road transport are taking place along the Highways, the majority of
which in both Bangladesh and India consists of roads with 2 lanes (a width of 7.3 metre). To
this end, India is yet to agree to a shorter Highway route between Bangladesh and Myanmar
through Sutarkandi (Bangladesh), Karimganj and Silchar in India. The present route between
Sylhet (Bangladesh) and Tamu (India/Myanmar Border) via Shillong, Dispur, Kotima and
Imphal is 400 km longer than the route mentioned above.
Considering that road transport is already a dominant mode of transport compared to railway
and water transport in most of the South Asian countries, it would be highly undesirable to

50

overburden the road transport which is already contributing to growing environmental

pollution. In addition, considering the physical condition of roads in Bangladesh, and the axle
load limitation of Bangladesh and Pakistan, which is 8.2 tons per axle, compared to 10.2 tons in
India, Nepal and Bhutan, it would be a bit premature to open Bangladesh and Pakistan roads to
any substantial movement of international traffic without strengthening the road infrastructure.
Although Bangladesh has recently raised the axle load limit to 10 tons, it will take quite
sometime to upgrade the infrastructure to that standard. However, for movement of high value
and perishable goods trucks will continue to play a dominant if not an exclusive role. Under
those circumstances, it would be desirable to encourage use of more and more containers to be
carried by multi-axle vehicles.

28.5 Using Full Potential of IWT

Inland Water Transport could play a very prominent role in transporting low value bulk cargoes
that move between Kolkata and Northeast India, including Tripura State. It is a mode of
transport where no trans-shipment at the border crossing is involved and its charges are the
lowest per ton km of freight. Even then it is still at a disadvantage because of its low travel
speed, in the range of 50 to 80 km per day due to limited night navigation and drafts on certain
routes. Lack of sufficient ports of call may also be discouraging movement of inter-country
trade by IWT. The above mentioned issues need to be jointly looked into by both the
governments of Bangladesh and India with a view to make water transport really competitive
for low value bulk cargo, with efficient logistics linkages to provide door to door services.

28.6 Facilitation of International Traffic

Facilitation of international traffic covers movement of both goods and passengers. As such
these have been addressed separately:

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28.6.1 Goods Movement

To facilitate movement of international traffic, there are international conventions. Taking
lessons from European experience, UN-ESCAP resolution 48/11 of April 1992, urged member
governments to accede to seven international land transport facilitation conventions mentioned
in the resolution. Meanwhile, as an interim measure, a number of sub-regional groups have
started adopting certain Transit Transport Framework Agreements (TTFAs). Important
provisions from the international conventions are being included in the protocols of these
TTFAs.
In addition, it would be essential to remove inefficiencies associated with documentation and
procedures involved in border crossing such as customs inspection, excessive documentation
and multiple signature requirements, lack of transparency, informal payments, etc. Emphasis
also needs to be placed on human resources development to deal with trade and transport
facilitation issues as well as customs management practices. Acquisition of such crucial
competency in the work force will be a major challenge for SAARC member countries.

28.6.2 Movement of Passengers

In order to facilitate movement of passengers between SAARC countries, it is essential to
simplify the visa requirements. Ideally, SAARC countries could approximate the arrangements
between India and Nepal where visa requirements have been completely abolished. In case it is
difficult for certain pairs of countries to achieve this arrangement immediately, in the interim
period, visas may be issued free of charge on arrival, at the port of entry, leading finally to the
abolition of visa requirements. In this context, it may be noted that in ASEAN countries, visafree travel for all ASEAN citizen has been in operation for some years now. In Bangkok
International Airport, separate immigration counter has also been set up for ASEAN passport
holders. To facilitate visits to SAARC countries by outsiders, an arrangement similar to the
Schengen Visa could be considered. With a Schengen visa, one may enter into one of the

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member countries and travel freely throughout the Schengen zone. Internal border controls
have almost disappeared.
The present state of transport integration among SAARC countries is totally out of step with
the global trend towards regionalization. The South Asian countries need to make a decisive
departure from the present situation in order to be fully integrated into the ongoing
globalization process. The economic pay off from such integration would be correspondingly
high. As regards the political impediments to such integration, the SAARC countries should
take some lessons from other sub-regions where mutually beneficial economic exchange are
taking place in spite of political differences.
In this context a process of awareness creation about the mutual benefit of transport integration,
or cost of non -cooperation, based on a comprehensive study referred to earlier, could go a long
way in persuading the political leadership about the importance of transport integration. Unless
rapid progress is make in this direction, the South Asian sub-region will become the missing
link in an otherwise integrated regional and world transport network. National transport
systems are within the exclusive jurisdiction of sovereign governments and their integration
can be achieved only when the national governments show a strong political commitment to the
goal of a more integrated South Asian community in general and an integrated South Asian
transport system in particular.

29. Conclusion
South Asian countries continue to be characterized by low per capita consumption of energy,
poor quality of energy infrastructure, skewed distribution and inaccessible and costly energy
availability. These countries have largely remained energy importers and increasingly face a
serious energy shortfall. All these have adversely affected their productive activities, social
development and investment climate. There has been a realization that availability and
accessibility to energy can transform the quality of life and work substantially, help raise health
and educational standards and slow down rural-urban and cross-border migration by enhancing
the level and pace of income and employment generation.
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Creation of a South Asian energy market and cooperative development of the available diverse
energy sources in the region can help increase the level of energy security in the region and
thus can subsequently contribute to achieving a sustained higher economic growth. There are
distinct advantages for South Asian countries to cooperate in the energy sector. There have been
negotiations going on among the South Asian countries on the possibility of power trading and
gas pipelines. Given the demand and supply situations in the sub-continent, it is rational to
believe that the trade in power and gas will be mutually beneficial in terms of both economic
and political gains. The studies conducted to date reveal some important regional projects that
merit serious consideration. They also provide a range of options.
However, there are several challenges ranging from trust and confidence building to investment
and technology transfer, demand centers locations, to really integrating the energy market and
sustaining the effort to match the regional aspirations with such efforts. The 12th SAARC
Summit held in Islamabad in 2004 clearly indicated the need to consolidate energy cooperation
by creating an energy ring. What is required is a breakthrough project that can be set as an
example for other regional energy and other ventures. In all these efforts and stratification, the
key element should be understanding the neighbors, strengthening both the traditional and
freshly emerging ties with them and making a much more concerted regional effort in
consolidating a regional identity. The projects need to be depoliticized through sensitizing the
general mass about the gains that accrue and providing options and alternatives to the
policymakers. An equally critical task is to build the capacities of the policymakers in the
energy sector across the region by re-skilling and reorienting them to the advantages of energy
cooperation.
At the same time the South Asian countries should realize that cooperation is a goal-oriented
action wherein not only the goal but also certain resources are shared together by the
participants. This implies sharing of national control over these resources which is taken as a
loss of national sovereignty. Whenever these countries have felt like this, they have tended to
withdraw from the regional cooperation process. States are reluctant to cooperate on merely
economic goals. Therefore, tackling of this perception of national sovereignty itself is a major
question as it demands extending a new form of cooperation, sacrifice and contribution which
the countries in this region invariably lack. That is why initiatives like beneficial bilateralism
and unilateral gestures have really worked in case of the region.

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30. Economic Integration

Definition
Economic integration is the unification of economic policies between different states through
the partial or full abolition of tariff and non-tariff restrictions on trade taking place among them
prior to their integration. This is meant in turn to lead to lower prices for distributors and
consumers with the goal of increasing the combined economic productivity of the states.
The trade stimulation effects intended by means of economic integration are part of the
contemporary economic Theory of the Second Best: where, in theory, the best option is free
trade, with free competition and no trade barriers whatsoever. Free trade is treated as an idealistic
option, and although realized within certain developed states, economic integration has been
thought of as the "second best" option for global trade where barriers to full free trade exist.

Levels of Economic Integration

Levels of Economic integration: several levels of economic integration are possible in theory.
From least integrated to most integrated , they are a free trade area, a customs union, a common
market, an economic union, and , finally, a full political union.

55

Free trade area: All barriers to the trade of goods and services among member countries
are removed. In the theoretically ideal free trade area, no discriminatory tariffs, quotas,
subsidies, or administrative impediments are allowed to distort trade between members.
Each country, however, is allowed to determine its own trade policies with regard to
nonmembers. Thus, for example, the tariffs placed on the products of nonmember
countries may vary from member to member.

European Free Trade Association (EFTA): EFTA has been on free trade in industrial
goods. Agriculture was left out of the arrangement, each member being allowed to
determine its own level of support. Members are also free to determine the level of
protection applied to goods coming from outside the EFTA.

A Customs Union: Eliminates trade barriers between member countries and adopts a
common external trade policy. Establishment of common external trade policy necessities
significant administrative machinery to oversee trade relations with nonmembers. Most
countries that enter into a customs union desire even greater economic integration down
the road. The EU began as a customs union, but it has now moved beyond this stage.

A common market: Has no barriers to trade among member countries, includes a

common external trade policy, and allows factors of production to move freely among
members. Labor and capital are free to move because there are no restrictions on
immigration, emigration, or cross- border flows of capital among member countries.
Establishing a common market demands a significant degrease of harmony and
cooperation on fiscal, monetary, and employment policies.

Economic union: Involves the free flow of products and factors of production among
member countries and the adoption of a common external trade policy, but it also requires
a common currency, harmonization of members tax rates, and a common monetary and
fiscal policy. Such a high degree of integration demands a coordinating bureaucracy and
the sacrifice of significant amounts of nationals sovereignty to that bureaucracy. The EU
is an economic union, although an imperfect one because not all members of the EU have
adopted the euro, the currency of the EU, differences in tax rates and regulations across

56

countries still remains, and some markets, such as the market for energy, are still not fully
deregulated.

Political union: In which a central political apparatus coordinates the economic, social
and foreign policy of the member status. The EU is on the road toward at least partial
political union. The European Parliament, which is playing an ever more important role
in the EU, has been directly elected by citizens of the EU countries since the late 1970s.
The United States provides an example of even closer political union, in the United
States, independence states are effectively combined into a single nation. Ultimately, the
EU may move toward a similar federal structure.

Bibliography
UNCTAD Handbook of Statistics-2011
UN COMTRADL
IMF, Direction of Trade Statistics Yearbooks, IMF, 1988, 1992, 2002.
World Bank (2002) World Development Indicators
The Daily Star

Website:
www.saarc-sec.org
www.sdfsec.org
www.saarcstat.org
www.wikipedis.com
www.academia.edu
www.study.com

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