Pakistan is likely to benefit from the agreement on a South Asian Free Trade Area (SAFTA) only in the longer

run while in the short term high power tariffs in the country are likely to hurt the country’s prospects. “When power tariffs would go down as is being promised by independent power producers under their respective agreements, then our input cost would be reduced,” he said. Many of the thermal power generation are being shifted into gas and Ghazi Barotha Hydropower Project is already generating the cheap electricity more than 900 mw of electricity, while it will generate 1,450 mw by June 2004. He said India is extending highly subsidized electricity to its farmers and some areas farmers are being given the electricity free of cost, adding at present India has 200 dams which are producing the cheaper hydel electricity due to which Indian agriculture products are cheaper than Pakistani products. Terms of the treaty: Pakistan and India will bring down their tariffs to zero to five percent in the next seven years, Sri Lanka will do the same in eight years while Bangladesh, Nepal, Bhutan and Maldives will bring their respective tariffs to a similar level in 10 years under the SAFTA treaty. A senior government official told Daily Times the SAFTA treaty would come into force from January 1, 2006 and would be fully materialized by December 31, 2015. He said the treaty will enter into force on the due date upon completion of four procedural formalities which included formation of sensitive lists, rules of origin, revenue loss compensation mechanism and ratification by all member states. He said the non-least developed countries (non-LDCs) will reduce their tariffs to 0-5 per cent in a period of seven years from the date of entry into force of the agreement. Under the agreement, Pakistan and India will reduce their tariffs to zero to five per cent in a seven year period, while Sri Lanka will do the same in eight years of time. Other countries including Bangladesh, Nepal, Bhutan and Maldives will cut their tariffs to 0-5 per cent in 10 years.

The official said every country would have to make two sensitive lists of products on which tariffs will not be reduced, and added that issues like anti-dumping duties, countervailing duties and safeguard measures will be dealt in accordance with the World Trade Organization (WTO) principles as per reservations on the part of Bangladesh. He said it has already been decided that the sensitive lists would be reviewed after every four years. The official said under the agreement a Dispute Settlement Body (DSB) would be set up to resolve any dispute among the SAARC countries. The decision of the DSB will be binding on all member states, the official said, and added that the SAFTA ministerial council will work as an appellate body for dispute settlement. “SAARC countries had earlier developed consensus on some of the key issues in the last meeting of the committee of experts held in Katmandu,” he said. He said the commerce ministry was earlier negotiating with the donor agencies to conduct studies on SAFTA, Trade Investment Facilitation Agreement (TIFA) and Most Favored Nation) MFN Status to India, but in wake of changing atmosphere between the two rival nations, it was decided to ink the SAFTA treaty. “India would be an instant beneficiary of the SAFTA,” he said. The official said that least developed contracting states, during the technical talks at commerce secretaries’ level, had shown their apprehension about the timeframe but later with the exception of Bangladesh, the other countries agreed. He said Bangladesh was the only country which continued resisting the signing of SAFTA as it was not in the favor of implementing the rules and regulations relating to WTO, antidumping, countervailing and safeguard measures. The commerce secretaries’ talks failed to develop consensus on SAFTA, he said, and added that it was during the counsel of ministers meeting that members reached an agreement. United States came into play: Sources say the United States of

America was very keen on developing consensus on SAFTA and the US commercial counselor continued to monitor the SAFTA talks at secretaries’ level talks and was in constant touch with Pakistani officials to this effect. A source said that after the failure of talks at the commerce secretary level, the US played a role to convince Bangladesh to sign the SAFTA as its economy is also dependent on the US. “The US wants harmony in the region which can only be achieved if the economic interests of the SARRC countries are attached with each other,” the source said, and added that the US is keen to reap economic gains from this region as well. SAFTA: will it turnaround the regional economies? By M. Sharif Great expectations have overrun pessimism and caution expressed by diehard antagonists and moderates of Indo-Pak detente that seems to be in the making after signing SAFTA on 6 January 2004 in Islamabad. It has been aired and declared to be an economic imperative to turnaround the regional economies, which support nearly one-fourth-world population and where fifty per cent of world’s poor people live below poverty line. How will this come about? SAFTA agreement has still two years to go before it comes into force and that too if it would be ratified by all the seven member states. From the day of its coming into effect, it would need another seven years to reduce intra-regional trade tariff between 0-5 per cent by the developed countries which are India and Pakistan and 10 years for other five SAARC member states which are considered LDCs according to UN laid down policy and have been accepted as such. There have to be certain cogent reasons to ride on the waves of ‘Great Expectations’. We can have a look at the expectations particularly with reference to ground political and economic realities that prevail at present and are likely to prevail in near future.

Region’s backlog SAARC region in general and Indo-Pak in particular have suffered because of political miscalculations and misadventures of their leaders. India under the Congress rule remained addicted to state controlled economy that could give it at best 4 per cent growth rate till it opted to liberalize its economy in early 90s. Pakistan underwent traumatic political experiences but despite them made enviable economic progress in 60s. It could not maintain the same momentum during 70s and 80s. The decade of 90s proved to be a ‘decade lost’. Bangladesh showed signs of improvement but the task of uplifting the country economically within three decades was hard dedicated efforts. The regional economic stagnation towards economic integration persisted at least for no less than 10 years after coming into being of SAARC in 1985. Specific reasons for it were that none of the SAARC member states then opted for bold economic reforms, India held onto the policy of protecting her market and Indo-Pak political conflict made the region, a ‘dead region’ as far as economic cooperation and integration was concerned. The consequences of living with political conflicts, adopting protectionist and non-integrative economic policies holding against the wind of globalization, and remaining indifferent towards growing regional economic models severally limited the prospects of making economic gains for SAARC countries. The benefits would have, otherwise, accrued because of enhancement of regional trade, increased foreign investment, human resource development and innovation to improve industrial and agricultural sectors. Some of the economic indicators give credence to this stark reality. SAARC region’s share in global trade is around one per cent, intra-regional trade is 4-5 per cent of member states’ exports and SAARC’s total GDP is 1.5 per cent of global GDP. Intra-region per capita income varies steeply between US$ 600 (for Sri Lanka, the highest) and US$ 180 (for Bhutan, the lowest). In direct contrast to low SAARC intra-regional trade, world’s leading integrated regions, the EU and ASEAN have 60 per cent and 25 per cent intra-regional trade respectively. The most important question is: will SAFTA provide an opportunity to enhance intra-regional trade to any reasonable percentage? The answer to this question should be positive. But, it is difficult to quantify at this stage.

In addition to poor economic indicators of SAARC region, the region suffers because of illiteracy, gender biases, high maternal and infant mortality, poverty, poor governance, religious extremism and other socio-economic ills, which indirectly affect economic growth and regional cooperation.

India-Pak trade relations: a historical perspective India and Pakistan have a long and chequered history of bilateral trade relations. Soon after independence, India was Pakistan’s biggest and most important trading partner. In 1948-49, Pakistan’s exports to India were 56 per cent of her total exports (mostly from former East Pakistan) and her imports were 32 per cent of total imports. But, Pakistan’s quest for industrialization and non-resolution of political conflicts, made trading between the two countries gradually prohibitive. The second important factor was the sheer large size of the Indian market and its central location. 80 per cent of SAARC’s intra-regional trade is to and from India. India has a stronger, finer and broad based industrial base. Some of its products like steel, autos, electronic goods, garment and medicines and software are comparatively of better quality and cost effective. Pakistan’s industrialists have been entertaining fears in the past that an open trade with reduce tariff rate would give India a big advantage to overwhelm the Pakistani market and thus put them in the corner. India remained interested in boosting trade relations with Pakistan and gave trading preference over conflict resolution. That is why India in principle granted ‘most favored nation’ (MFN) status to Pakistan in 1995. But she made trading less attractive by imposing high tariff. Pakistan did not reciprocate but maintains a positive list of 600 trading items that can be imported from India. Despite official barriers to boost trade between the two countries that have kept trading volume low to around US$ 237 million annually; illegal trade along the contiguous IndoPak border has remained a well-known secret. Its volume is estimated to be around US$ 1.5 billion annually. Informal trade through "third" countries Dubai and UAE involving items like pharmaceuticals, cosmetics, chemicals and viscose has been taking place since past many years. The volume of the trade is to the tune of US$ 1 billion to 1.5 billion annually. There is a

wide spread belief among the trading communities of the two countries that with the introduction of SAFTA rules, trading between India and Pakistan would get boost and may touch around US$ 4.0 billion mark within a few years.

Economic realities and scope In the context of boosting of Indo-Pak economic relations knowing a few economic realities of the two countries, will give a better picture of the scope of trading between them. India is an emerging giant with a huge market, high economic growth rate of more than 6 per cent for the past few years; exports of around US$ 40 billion and forex reserve of around US$ 100billion. She is producing world-class products of steel, software, medicine, autos, textile and many other items. There is a profound realization among the Indian political and business leaders that their policy of remaining somewhat in different towards ever changing winds of globalization and regional cooperation has put India in visible economic disadvantage. During past 5-6 years she has tried hard to leap forward to make up for the deficiency of past by increasing bilateral trade with China. The volume of trade between them stands at US$ 10 billion, which is to grow rapidly. India-ASEAN trade accounts for around US$ 12.5bilion at present. India is targeting to increase its volume by 250 per cent during next five years. India maintains 1 to 4 ratios in her imports-exports to SAARC countries. She has overall US$ 2 billion trade surplus with them at present. Her trade surplus with Pakistan is around US$ 175 million. Will execution of SAFTA help increasing trade among the member states, particularly between India and Pakistan? The answer is positive as stated earlier. Keeping in view the illegal and informal trade via third country, and across the border between the two countries; achieving US$ 4 billion target within a few years should not be difficult. It could be more as well. There is a long list of items that show commonality of economies and trading pattern of two countries. Agriculture is pivotal for both countries for achieving higher economic growth rate. Its contribution towards GDP of both the economies is around 25 per cent. This sector is the largest employers in both the countries and contributes substantially

towards textile sector. Pakistan’s textile is the main source of foreign exchange i.e. around 66 per cent. Pakistan’s low value textile sector such as grey cloth, yarn, thread and spinning is more developed than value-added textile sector (garments, knitwear, hosiery, apparel) of India. The variation in products of textile sector can be mutually beneficial. Pakistan has been trying during past one year to modernize her value-added textile sector. With the implementation of WTO regime from January 2005 and SAFTA from January 2006, Pakistan has nothing to fear but to compete. Pakistan can import iron ore, medicine, tea, coffee, tyres and export fertilizers. It should benefit the consumer. Pakistan can also benefit from India’s world-class quality IT software, and autos. Our automobile products have been made quite expensive because of protection provided by the government to automobile industry. SAFTA and WTO will dilute effects of protectionism. Pakistan’s economy is in the phase of recovery. Her debt burden though reduced to 90 per cent of GDP from 102 per cent of GDP around four years earlier is still a big burden on national economy. Forex reserves position is comfortable, (US$ 12.02 billion) growth rate is expected to be 5.4 per cent of GDP this year, and exports are likely to overshoot the target of US$ 12.2 billion. But, despite these positive macro economic indicators Pakistan like India attracts less investment. India on the average attracted around US$ 4 billion FDI compared to US$ 45 billion, the average FDI attracted by China during past few years. Pakistan on the average has attracted US$ 500-600 million during past a few years. Making SAFTA workable would create an environment to attract foreign investment. Large number of multinational houses are already stepping into the Indian market and with the opening of intra-regional trade, more are likely to step in Pakistan and Bangladesh will also benefit from the positive investment environment. SAFTA is likely to brighten the chances of laying gas pipeline between CAS (Central Asian States) or Iran and India via Pakistan. It will benefit all. The project is presently shelved because of political uncertainty that has existed between India and Pakistan.

Political conflict resolution: a must SAARC region during past 18 years has remained hostage to Indo-Pak political antagonism. Changes that have taken place in the world after end of Cold War; impetus given to free

market regime and global trade; conflict resolution through dialogue; visible benefits of integrating regions economically and Washington’s assertive role playing in South Asian conflict resolution, have gone a long way to bring a strategic shift in New Delhi and Islamabad’s hard positions for not developing a ‘composite’ dialogue, till now. The groundwork done thus far, Islamabad declaration and desire of the Indian and Pakistani leaders and people to improve relations should help in resolving political conflicts not only between India and Pakistan but set momentum to resolve conflicts between IndiaSri Lanka and India-Bangladesh. Economic integration will get going if political conflicts are insight for resolution.

Conclusion South Asian region has remained hostage to self-created vulnerabilities at least for one and a half decade. People have suffered. Islamabad declaration along with SAFTA is on scene belatedly and a lot of mileage is still to be traversed to reap benefits of economic integration. It would be possible to do so only if the fruits of economic integration and political conflict resolution are shared equitably and according to the wishes of the people.

The recently signed Agreement on a South Asian Free Trade Area (SAFTA) during the recent 12th SAARC Summit (January 4-6, 2004) held in Islamabad, could be considered a watershed in the history of regional economic cooperation. More often than not, the focus of any analysis of a regional cooperation agreement is based on the various provisions that it contains. Both in terms of its economic philosophy and its possible implications for harnessing development through trade, the SAFTA Agreement is unique. Very often, the focus of any analysis of a regional cooperation agreement is based on the various provisions that it contains. In the process, one of the most important components of an agreement, i.e., its preamble, objectives and principles, are lost sight of. But a close reading of the SAFTA Agreement would suggest that it is based on a profound economic philosophy as manifested in its preamble, objectives, principles and articles.

The economic philosophy of the SAFTA Agreement can be summed up in two statements: First, the Agreement takes cognizance of the region’s specific economic realities in a manner consistent with its member’s global trade-related commitments and obligations. Second, it shows an understanding that the causality between trade and development runs in both directions. Moreover, it displays that the two dimensions of its economic philosophy are inextricably inter-linked. The two major region-specific realities that are captured by the Agreement are that trade and economic cooperation initiatives need to be considered as instruments for achieving the overall developmental goals of the SAFTA members and that they are at different stages of economic development. The asymmetry in the development stages is taken note of in Article 3 (1.b), whereby it aims at “ensuring equitable benefits to all Contracting States (CS), taking into account their respective levels and pattern of economic development”. This dimension of economic philosophy is amply visible in terms of special and differential treatment to the Least Developed Contracting States (LDCS) in the preamble and Article 7, wherein these countries have got a longer time-frame for implementing the trade liberalization program (TLP). While the Non-LDCS would implement SAFTA over the 7-year period, Sri Lanka, being a small country, gets eight years and the LDCs get ten years. It is worth highlighting here that the TLP would begin from January 1, 2006, when the Agreement comes into effect. This has been done in order to complete the on-going trade liberalization process under SAPTA, which would be subsumed in SAFTA by 2006. The asymmetric development profiles of the SAARC members is further taken into account by devoting a separate article (Article 11) entitled Special and Differential Treatment for the LDCS. This takes into account most of their concerns in the domains of application of anti-dumping measures, quantitative restrictions, direct export promotion in LDCs, technical assistance and some appropriate revenue compensation mechanisms. Moreover, there are special provisions for the Maldives contained in Article 12, whereby with its potential graduation from the status of LDC, it will still qualify for LDC-treatment under SAFTA. In terms of making the Agreement consistent with the global multilateral trading obligations, the intent is imbibed in Article 3 (objectives and principles) clause 2(b), Article 5 (national treatment), Article 8(l), and Article 16(4) on Safeguard Measures. In terms of its consistency with WTO, SAFTA aims at covering “substantially all trade” within stipulated “time frames”, given the members’ differential stages of development. The Agreement in its preamble shows how trade cooperation under SAFTA

needs to be understood as a means towards achieving the members’ broader developmental goals. It states: “Convinced that preferential trading arrangements among the SAARC member states will act as a stimulus to the strengthening of national and SAARC economic resilience, and the development of the national economies of the CS by expanding investment and production opportunities, trade, and foreign exchange earnings as well as the development of economic and technological cooperation”. Recognizing the fact that trade-development causality runs from development to trade promotion, the Agreement emphasizes setting in place a variety of trade facilitation measures, as expressed in Article 3 and included for implementation in Article 8 on the dimensions that include a whole spectrum of developmental goals, such as harmonization of standards, reciprocal recognition of tests and acc-radiation of testing laboratories of CS and certification of products; simplification and harmonization of customs clearance procedure; harmonization of national customs classification based on HS coding system; customs cooperation to resolve disputes at customs entry points; simplification and harmonization of import licensing and registration procedures; simplification of banking procedures for import financing; transit facilities especially for efficient intra-SAARC trade, especially for the landlocked CS; removal of barriers to intra-SAARC investments; macroeconomic consultations rules for fair competition and the promotion of venture capital, development of communication systems and transport infrastructure. The above analysis demonstrates that the Agreement on SAFTA is based on economic philosophy which takes into account the nuances of economic theories of trade and development as well as practical realities at national, regional and global levels. How far SAFTA would succeed depends on the dynamism of the region’s business communities and instituting the complementary economic measures. There’s no doubt that the SAFTA Agreement is only the first step towards more intensive economic cooperation like a South Asian Economic Union and a single currency. Nevertheless, it is a historic one, considering the economic and non-economic constraints that the region confronts The success of trade facilitation depends on the success that a country can achieve to simplifying and harmonizing international trade. The important step, therefore, is removing the procedural obstacles (rationalizing border controls in Customs, standards, quarantine regulations, immigration-

related procedures) to international trade and designing a methodology to correctly address these procedural impediments. Bilateral, regional and multilateral agreements intend to facilitate trade. In trade facilitation, a major aim is also to ensure a continued flow of information on the complexities of trade procedures to the exporters and importers to make them better able to comply with trade rules. Nepal has still a long way to go in achieving these successes. Against this background, the draft Treaty of South Asia Free Trade Area (SAFTA) has been signed in the 12th SAARC summit in Islamabad in January 2004 with a view to strengthen intraSAARC economic cooperation to maximize the realization of the region’s potential for trade and development for the benefit of their people. It is also hoped that this agreement would contribute significantly to the expansion of investment and production opportunities, trade, and foreign exchange earnings as well as the development of economic and technological cooperation. The twelve page long Agreement on South Asian Free Trade Area (SAFTA) has 25 Articles. Article 4 includes six major instruments on the basis of which the SAFTA Agreement will be implemented. These instruments include trade liberalization program, rules of origin, institutional arrangements, consultations and dispute settlement procedures, safeguard measures and any other instrument that may be agreed upon. Article 6 consists of the arrangements relating to tariffs, Para tariffs, non-tariff measures and direct trade measures. The new agreement will take effect from January 1, 2006 in SAARC countries simultaneously. As a first step developing countries will reduce import duty on all goods to a uniform duty of 20 per cent within a period of two years. The LDCs are allowed to maintain tariff rate at 30 per cent. During the second phase of liberalization, India and Pakistan will reduce tariff to 0-5 percent by 2013 and Sri Lanka will do it by 2014 while the LDCs will get the transitional period of eight years, from the third year of the Agreement coming into force i.e. these countries will have to implement the same by 2016. Ultimate objective would be to reduce import duty to zero. There is a strong belief that SAFTA would automatically bring down import duties and transaction costs while giving the benefits of MFN status, for example, to India in her trade with Pakistan. The SAARC Chamber of Commerce predicts a boost of up to four billion dollars in bilateral trade over two years.

Categorical explanations are still needed to effectively implement the sensitive issues such as revenue compensation mechanism, anti-dumping duty, rules of origin and provision of including negative list to protect weaker industries. Developing countries agreed to the mechanism to compensate LDCs for the loss of their revenue from tariff reduction. The flexibilities are found in extending negative list to protect vulnerable industries. However, policies and bylaws to govern these concessions have not been formulated. The developing countries did not remove the provision for executing antidumping duty but incorporated the provision for considering LDC’s problem. These provisions are subjective and will largely depend on bilateral relationship. The flexibility given to include negative list is also under question when the framework considers that discussion can be held every four months or as decided by the SAARC Council of Ministers to shorten the negative list in the regional trade arrangement. Therefore, as benefit may largely depend on non-economic factors, the future of SAFTA should be taken with caution. Nepal’s Competitiveness Nepal has absolute cost disadvantage as compared to other SAARC countries in almost all the goods that Nepal exports to SAARC countries or outside. SAFTA framework has not yet formulated implementing rules in most of the sensitive issues that affect the growth of LDCs within the SAARC. Those who prepare themselves in advance and become competitive will survive and those who are lethargic will lose out. Globalization policies are mainly guided by efficiency and profitability goals. It is more likely that this environment will support only efficient economies that have a greater chance of gaining a competitive edge. The SAARC countries have not gathered information on each other’s import needs, economic opportunities, market and labor work force, investment opportunities, export potentials and constraints. Bilateral political tensions are other hurdles in promoting intraregional trade and investment. This is perhaps the reason why studies reveal that SAARC member countries have given much weight to their relationship in trade and investment with other countries outside the region. Nepal has not been concentrating on the development of economies of scale and increasing intraregional trade and investment flows. Constraints such as inadequate infrastructure, unstable prices and exchange rates, the existence of uneconomic and sick industries, non transparent economic policies, locally oriented production,

absence of an adequate regulatory structure and a low level of intraregional trade have so far led to a lack of exploitation of potential industrial complementarities. When I say Nepal’s position in terms of competitiveness is weak, I do not however mean that we don’t have a future. Nepal’s industrial complementarities, especially in hydropower generation, agro-based industries, textiles and garments and food processing are possible with production, processing and marketing being spread on a sub regional basis. This can have possibilities of decreasing current reliance on one or a few export products by increasing the value added of processed raw materials and by diversifying the product base. As a result, it is essential to explore into ways of establishing firms and workable industrial complementarities among the economies in the South Asian sub region. Negotiating Capacity What is finalized now is only the treaty framework, which means the actual negotiation on the list of the goods and the tariff rates is yet to start. Article 13 notes that, notwithstanding the measures as set out in SAFTA Agreement, its provisions shall not apply in relation to preferences already granted outside the framework. It gives enough room for entering into negotiated settlement for mutual benefit among the contracting parties. But Nepal lacks negotiating skills. Our experience during foreign aid negotiation reveals that we do not show the confidence and acumen that other SAARC member countries show at the bilateral and multilateral negotiations. There is a problem of inadequate information. Nepal needs to maintain trade and investment statistics through the development of uniform database system. Secondly, the administrative system of the country, around whose periphery governance can be improved, is itself not in a very good shape. The government bureaucracy is in a demotivated state and lacks initiative. The change brought out in the Civil Service Code in 1997 through the statutory provision that ensures a minimum tenure of a civil servant at one position for two years, have been violated quite often. This may have a negative effect in our negotiating ability reducing the chances of receiving special and differential treatment provided to the LDCs. Therefore, capacity building and governance reform are important steps to be considered in order to get benefit from the existing regional arrangement.

Regional Trading Blocks & Inefficiency The consumers are still denied the advantage of lower prices that is possible only under totally free trade regime. It is generally argued that when the participating countries in regional grouping are higher cost producers, trade diversion occurs. As a result, an importing country begins to import from cost efficient countries. This results in resource misallocation and trade diversion. Therefore, regional grouping is almost certain to bring about trade diversion and efficiencyreduction. On the contrary, it is also argued that short-run static trade diversion effects are outweighed by the long-run positive dynamic effects of regional integration in terms of increased competition, economies of scale and benefits of intra-industry trade. An intelligent answer should be based on the proper analysis of product-specific short and long-term benefit and cost. Secondly, free trade should mean free flow of goods and services in international exchange without direct government restriction. Through studies, it has been revealed that free-trade policy optimizes world output and income levels in the long run. However, countries can still regulate overseas trade through various tariff and non-tariff measures even in the free-trade regime. The bottom line is how much competitive a country’s product is in terms of quality and price. Free trade should not be taken as a free lunch. It certainly has its cost. Proposal for South Asian Single Currency The President of European Central Bank had said, “The Euro is much more than a currency. It’s a symbol of European integration in every sense of the word”. If you take the proposal of Indian Prime Minister Mr. Bajpayee in this perspective, there is a sense that we should initiate the dialogue. If not, I don’t see immediate possibility of South Asian monetary integration since the sequencing and cycle of development of currency is different among SAARC member countries. Europe took half a century, after World War II, to progress from economic cooperation to a single currency. The economic and political diversity might make the issue of monetary union remote in the short-run. A study is needed to look into the production structure, the labor market, public finances and economic policy of South Asia to understand if there is any benefit in adopting common exchange rate system to stabilize regional currencies. We should carefully analyze the technicalities to find out how the conversion into single

currency is possible. As the sequence and stage of development is different in SAARC region as already explained above, we should give due recognition to different stages and speed to switch over to the single currency. It is not always true that single currency system is the best choice. After September 11, the countries outside the system such as Norway and Switzerland became richest and stable in comparison to the single currency nations, which experienced higher level of unemployment and lower economic growth. We should thoroughly examine the lessons that South Asia can learn from the phases the European Monetary System went through. Brian Denny, Foreign Editor of the Morning Star considers that single currency is the compromise on national sovereignty. He observes, “Introduction of the euro is direct assault on democracy and national independence”. We have the knowledge how Argentina’s economy was shattered when they could not devalue their currency on their own at a time when they really needed it. Therefore, “one size does not fit all”. The system will create additional cost to the economy in training and educating the consumers and employees. There exists a cost for new technology as well. Since we agree to the existence of different development cycles, one central bank can not determine appropriate inflation level for all the member countries. The single currency system, when materialized, does certainly have advantages. The gains include: simplified travel across South Asia; less costly fund transfers from one currency to another; less exchange rate uncertainty; easier price comparisons; growth of international trade; increased competition; more efficient financial markets; growth of investment between participating countries and a more efficient international allocation of capital. There is a possibility that SAARC Central Bank may have the capability to implement a more credible policy than the central banks of individual countries. There are different phases that the integration process goes through. After comprehensive analysis of the stages of economic development of the member countries and determination to go into the single currency system we will have a couple of tasks to execute. Initially monetary policy and their implementing rules should be formulated and policies for the production of bank notes and coins should also be made after the establishment of South Asian Central Bank. Phase

two would be the beginning of monetary union where exchange rate is determined only through the single currency. The third phase will eliminate national currency and the SAARC countries will move towards single currency system. However, South Asia has a long way to go before implementing single currency system when there still exist a restriction in the movement of the citizens within the SAARC region. England had conducted following five economic tests on June 2003 to decide her convergence into common currency system. # Sustainable convergence between Britain and the economies of a single currency; # Whether there is sufficient flexibility to cope with economic change; # # # The effect on investment; The impact on financial services industry; and Whether it is good for employment.

The public opinion sought on August 2003 has the following result: Vote To Join Vote Not To Join Don’t Know 29% 59% 16%

So you decide what Nepal should do about it. ssage/2004/feb/economy.htm Even though South Asian countries have agreed to put in place the mechanism to promote free trade amongst them, it is still doubtful if they will actually move towards economic integration. The spoiler could, once again, turn out to be Pakistan, which, for tactical reasons, is buying peace with India now to get over its many difficulties but may, in due course, revert to its confrontationist posture. Pakistan has accepted the South Asian Free Trade Agreement at the recent

Islamabad SAARC Summit and to operationalise it by the end of 2006, but its leadership continues to harbor reservations about allowing unrestricted entry to Indian imports and also exports to India, to the extent feasible, given the limited span of its economic superstructure. During my recent Pakistan visit, it was heartening to see that the people harbor a strong desire for strengthening political and economic relations with India, buying the controversial and hostility-ridden past and open a new chapter of cooperation which would boost the living standards of millions of the people living in the two countries. Savings in defense expenditure would also make resources available for development and up gradation of social services, which in Pakistan, are practically non-existent. Textiles are Pakistan's strong point and revolutionary changes in the world textile trade are expected after 2004 when the quota system ends and a free-for-all in this sector prevails. Textile exporters of the world are getting ready for the new challenges, including small entrepreneurs in Pakistan. It is realized that, to survive, Pakistan has to upgrade technology to improve its manufacturing products and produce cheaply to meet international competition. It is no use arguing that Pakistan is a small country and hence cannot compete with India, because small countries like Belgium, Denmark and the Netherlands, living in the neighborhood of France and Germany, are thriving with industries known for their excellence. They are focusing on core areas of competence and competitiveness and upgrading their capabilities constantly through research and market surveys. Pakistan's industrialists and exporters have to learn to accept lower profits and spend more money on research and market surveys. Hence, fears regarding free trade are unjustified. Actually SAFTA does not introduce free trade but merely set up a framework in which a free trade area is to be set up. It is not a customs union and does not imply need for coordination of economic policy that would, in any way, compromise the economic sovereignty of the members. It does not prevent any country from restricting imports from another country. But it is not clear how far SAFTA, when it comes into effect, will take into account the effect of domestic subsidies on the prices of products. For instance, the Indian farmers enjoy huge power

subsidies, whereas Pakistan farmers do not, which makes a difference to the rice of the end product. Judging by the experience of the European union, agricultural issues are likely to be the most contentious. Pakistan, India and Sri Lanka are committed to reducing their tariffs to the zero to five per cent level by 2013, the rest of the SAARC countries by 2016. The significance of January 1, 2006 when the agreement will come into effect upon notification by the member states is that it is the cut off date for all governments to file their lists of "sensitive items" to which tariff reductions will not apply. That will set the scene for prolonged negotiations and many trade offs. The expectation is that the SAFTA agreement will not be a nonstarter like its predecessor SAPTA (South Asia Preferential Trade Agreement). SAFTA is taking place within less than a year to go before the WTO regime comes into effect and can be seen as a desperate measure to create a defense against this. The WTO framework accommodates pre-existing regional arrangements, like the European union, ASEAN and NAFTA, but the rules change for those free trade areas, which comes into existence afterwards. Though SAFTA will not have been operationalised by the time the WTO comes into force on January 1, 2005, the framework agreement being signed will give it the relevant benefits. However India is trying to speed up the process by mentioning 2015 as a target for economic union, rather than 2020. As far as single currency, which was not put on the agenda, it is not being considered seriously at this juncture. No doubt, India and Pakistan have embarked on a process of recon- ciliation after a frosty two year period. South Asia represents an extreme conflict of realities. Between commonality and exclu- sivity, past and present, and the challenge of our times and reluctance to meet them. This is one of the most contiguous regions in the world with commonality of historical and cultural roots. Yet. The present is marred by distances that are, in turn, in conflict with the demands of the 21st Century. Despite living in a global village, the two South Asian giants are separated in many ways. Facing similar problems ranging from poverty and unemployment, their failure to harness natural and human re- sources to finding palpable space in the world, they have yet to learn how to be reliable partners in overcoming the maladies and backwardness.

The Eminent Persons Group had also suggested the creation of a SAARC Development Area. Asian Security Grid, vertical industrial integration and h harmonization of fiscal and monetary policies. The SAFTA also does not contain and provisions for pursuing the "additional measures" proposed in it, which gives the impression that it was a job done in a hurry and without seriousness of purpose. The biggest benefit of improve political relations between India and Pakistan could occur in the sphere of energy cooperation. Pakistan's potential role in facilitating transmission of energy supplies, of which India's demand will grow at a tremendous speed, could be providing the transit route for oil and gas from Iran and Central Asia. This would require construction of at least two pipelines running through Pakistan. India has so far shown reluctance to accept energy supplies via Pakistan, but the scenario might change if relations between the two countries really normalize. Huge investments on the pipeline will make sense only if political stability and economic reliability of the projects are ensured. The summit meeting of the South Asian Association for Regional Cooperation (SAARC) is now scheduled in Islamabad January 4-6. The seven SAARC foreign secretaries agreed on the date at their meeting in Katmandu, but it needs to be endorsed by the foreign ministers. It is hoped that intervening bilateral irritants will not once again lead to a further postponement of this important summit. People of South Asia constitute more than a fifth of mankind, are heirs to great civilizations and yet face momentous problems of poverty, illiteracy and deprivation. Though the SAARC countries have made efforts since independence to improve the condition of their people these attempts are often thwarted by multifarious religious, ethnic and linguistic problems.

Discontentment and frustration among the masses faced with such tribulations embolden subversive forces both within and outside to exploit national inadequacies. Solution to their common predicament requires peace and an atmosphere of dialogue and cooperation rather than of conflict and confrontation. Peace is essential for national as well as regional prosperity. How do we achieve prosperity in South Asia? Regional economic cooperation is a pivotal element. Economic synergy leads more often than not to the solution of disputes, including political differences. It is often claimed that unless economic cooperation between India and Pakistan is normalized, regional economic cooperation will not succeed. Normalization of trade relations between the two countries is indeed crucial for the success of SAARC. The late Mehboob-ul-Haq, former Finance Minister of Pakistan and founder of the world-renowned UNDP Human Development Reports, had debunked what he called "myths about PakistanIndia trade". Haq had underscored the urgency of effective trade relations, pointing out that "political expediency triumphs over economic rationality when it comes to bilateral trade between India and Pakistan." According to him, denial of trade does no good to either country and lack of trade only weakens them. Countries do not grow strong when cheap and quality products are denied to millions of consumers, when profitable opportunities are refused to thousands of producers and the scope for revenue generation is left unveiled of. Haq said India and Pakistan had a great deal to learn from the global experience where trade was increasingly being used as a prelude to political reconciliation. Addressing the concern that trade liberalization between India and Pakistan would weaken their domestic economies, he commented: "This is a classic misunderstanding of free trade that benefits all sides. Europe and America are the largest trading partners of both India and Pakistan and if trade with

them does not weaken them how can bilateral trade be harmful?" Interestingly Pakistani products that are likely to face intense competition from India are the same that face maximum competition in the global markets. In any case India and Pakistan can maintain a negative import list of key items that they wish to protect from each other for a definite period, he had said. This reasoning is valid for all countries of South Asia. Fears of any of the SAARC countries that economic cooperation might destroy their own domestic economy are unfounded. In any case, adverse effects can always be prevented by using such devices as the negative list, the quota system or the tariff mechanism. It is through regional arrangements that the countries of Europe as well as those of South Asia obtained increased benefits and reduced, and sometimes even eliminated, the negative fallout of globalization. The process of economic globalization has so far gone mostly in favor of developed countries and against the interests of developing nations. Regional groupings are necessary to increase the bargaining power of countries in the WTO negotiations. The SAARC nations successfully coordinated their strategies at the Seattle and Doha rounds of negotiations. They should again present a unified approach at the round to be held in Cancun in September on such crucial issues as the agreement on agriculture, agricultural subsidies, market access and TRIPS. Intra-regional trade among SAARC countries as a percentage of their world trade is negligible at 3.4 percent. Intra-regional trade as percentage of world trade is 38.4 percent in East Asia, 37.3 percent in North America and 63.4 percent in the European Union. The South Asian Preferential Trade Agreement (SAPTA) came into effect in 1995 and there has been some modest progress but the SAARC countries must now move towards the South Asian Free Trade Area (SAFTA). SAFTA should come into force at the earliest, before the SAARC countries are overtaken by the obligations under WTO. Three rounds of meetings were held on SAFTA in October, November

and December 2002. These meetings discussed the draft treaty prepared by the SAARC Secretariat but so far the Framework Agreement has not been finalized. One hopes that the recent India-Pakistan peace initiative will achieve positive results and that it will create a favorable climate to operationalise SAFTA at the earliest and to achieve the ultimate objective of a South Asian Union on the lines of the European Union. SAARC must also strive towards sustainable consensus. Government decisions ought to be taken by involving all concerned including opposition parties but decisions once taken must hold notwithstanding changes in government or other political vicissitudes. Governments apart, the civil society, the intelligentsia, the business community, the NGOs must all emphatically promote awareness about the need and advantage of regional cooperation. There ought to be a much greater interaction between the civil society and the political class across the different countries of South Asia. Regrettably such interaction is minimal. It would contribute significantly towards a quicker settlement of differences and a greater South Asian solidarity, which is essential for the progress and prosperity of all peoples of the region. South Asian Free Trade Agreement (SAFTA), the draft of which was agreed to by the SAARC foreign ministers, will come into force from January 2006 after ratification by all member states. SAFTA is to bring down the tariff level to zero and five per cent in a period of 10 years. Hailing the agreement as a landmark decision, the Pakistan foreign minister Mr. Kurshid Mehmood Kasuri said that each member state will be allowed to maintain a sensitive list of products on which tariffs would not be reduced. This list will be finalized between now and the date on which SAFTA is expected to come into force — January 1, 2006. Nonleast developed member states will reduce their tariffs to

zero to five per cent in a period of seven years from 2006 and LDC member states will bring it to the same level in a period of ten years. Mr. Kasuri said SAFTA framework will be put up before the SAARC summit for approval. BUSINESS & ECONOMY 'SAARC itself is caught up in rhetoric' The South Asian for Regional Cooperation (SAARC), set up in 1985, is only fifteen years old. To expect the ‘teenager’ to keep up with more mature organizations which have been around for much longer is quite unrealistic. Its proposed trading bloc for the region, the South Asian Free Trade Area (SAFTA), is also seen as an idealistic and perhaps an unrealistic goal. Nihal Rodrigo, secretary general, SAARC, a career diplomat from the Sri Lankan foreign service, who took over as secretary general on January 1, 1999, spoke on issues which confront the multilateral body and the methods he has adopted to achieve a consensus. What is holding up progress on SAFTA? The goals set for the creation of SAFTA were unrealistic to begin with and SAARC itself is caught up in rhetoric. SAFTA was proposed at a time, in 1998, when relations between India and Pakistan were excellent. The time frame then set out was for it to be in place by 2001, was unrealistic. It is now getting down to ground realities, hitting the hard ground now. The foreign ministers met in New York after Kargil and outlined an economic union for the region. Now, we have begun to look at steps that are needed to be taken to achieve this. We need data, which we are gathering from several sources, doing sect oral studies. We are also looking at the experiences of the European Union (EU) and the North American Free Trade Area (NAFTA). Which issues top the agenda for SAFTA? Among the issues which have to be sorted out are those of special relations, like those between India and Bhutan, India and

Nepal or the free trade ties between India and Sri Lanka and how to integrate all these in SAFTA. We are looking at issues where broader cooperation is possible, for instance, energy, where the hydro power of Nepal and Bhutan can be tied up with gas from Bangladesh and technology from India and the US. We are taking one step at a time, insulating these issues from the political factor. A step towards integration is the formation of professional associations, like that of master printers or cardiologists of the region, or of management education institutions. We have the SAARC Chamber of Commerce which provides relevant inputs from trade and industry, reflecting ground reality. Political issues and SAFTA are like a pause button on a VCR: after all, 80 per cent of the issues are economic! Which issues are the most contentious for SAFTA? There is the issue of rules of origin, which India is doing, the status of Least Developed Countries (LDCs) in SAFTA, the new equation which will come into effect once the special relationships change, the loss of revenue for countries when tariff barriers are lowered and a time frame for the entire exercise. Then, Sri Lanka would like to be considered in a separate category, as a small economy, since it is not an LDC and has a strong economy but being small has a limit to growth. Similarly, the loss of revenue through lowering of tariff barriers is important for Sri Lanka since it has already lower rates than, say, India. What is the time-frame for SAFTA to come into being? The SAARC secretariat experts to have a draft treaty ready by December 31, 2001. Some draft agreements on social issues, like the one on trafficking in women, are ready and will be signed in Kathmandu, when the summit is held. We have adopted the approach that whatever is unviable should be discarded, there is no point in retaining it. For instance, the proposed SAARC food security: it was notional since there is no central granary to implement it! So, why retain it? We have discarded it. I believe that we need to get on with whatever is possible, not hold one issue hostage to agreement on others. We cannot concentrate on

one issue at the expense of all others: we have to move on all fronts. Home Ministry assures security to industries By a staff reporter In response to the demands made by a delegation of Federation of Nepalese Chambers of Commerce and Industries (FNCCI) led by its president Pradeep Kumar Shrestha, the Home Ministry has assured the business community of effective security to all industries. Following the series of bombing incidents targeted at multinational companies including Surya Tobacco Company and Colgate Palmolive Ltd., the apex body of business organizations had raised its serious concern over the deteriorating situation of law and order in the country. While appraising about the damage done to these companies, the FNCCI delegation strongly demanded for the security of industries, failing to which would discourage the investment in the country. According to sources, Home Minister Govinda Raj Joshi also proposed for further meeting with the business community regarding the effective management of security measures in the industries. The FNCCI delegation is comprised of Third Vice President Binod Bahadur Shrestha, Chairperson of Export Promotion Committee Kishore Kumar Khanal, Chairperson of Foreign Investment Promotion Committee Narendra Kumar Basnyat, general secretary Badri Prasad Ojha. Representatives of joint venture companies including Surya Tobacco Company, Dabur Nepal, Nepal Lever Ltd., Colgate Palmolive Ltd. and Nepal Battery Company also participated in the delegation. The Summit meeting of the South Asian Association for Regional Cooperation (SAARC) held earlier this month was a landmark in the life of this

organisation. SAARC was created in 1985 to promote economic development and social progress in South Asia through regional cooperation. Whilst SAARC has done commendable work in some areas it has not advanced as expected. Continuing tensions between the two largest countries of the subcontinent have often been blamed for such lack of progress. The announcement of a composite dialogue between India and Pakistan is therefore a most important outcome of the Summit. One does hope that the machinations of extremist elements who are active in both countries do not once again succeed in derailing the Peace Process. The South Asia Free Trade Agreement (SAFTA) is another significant achievement. As mentioned at the Summit, we in South Asia face the danger or marginalization in the global economy and even the risk of regression in spheres of social and economic development. Regionalization is an effective instrument to advance collective interests and a defense against unrestrained globalization and the negative fallout of the WTO. At present intraregional trade among SAARC countries is less than 5 percent whilst it is 62 percent in the European Union, 55 percent in the NAFTA area and 35 percent in the ASEAN. SAFTA is the first step towards a more intense synergy aimed at the South Asian Union and the single currency. The Agreement comes into effect on January 1, 2006 but there are hurdles to overcome before it fully materializes. SAFTA rightly takes note of the asymmetry in the development stages of the South Asian countries. It aims at ensuring equitable benefit to all Contracting Parties taking into account their respective levels of economic development. It provides for a

special and differential treatment to the Least Developed Contracting States (LDCS). The LDCS are allowed a larger time frame for implementing the trade liberalization program. Whilst the non-LDCS must implement SAFTA over a period of 7 years, Sri Lanka being a small country gets 8 years and the LDCS are permitted 10 years for implementation. In view of the constraints that this region does face it would be advisable for India to enter into bilateral Free Trade Agreements without waiting for SAFTA to materialize fully. Indeed, if the Indian economy is to grow at the rate of 7-8 percent it is essential that it should have Free Trade access to entire South Asia and to as many other countries as possible. signed 5 years ago. Trade between India and Sri Lanka has expanded one and a half times since their bilateral FTA, 2 years ago. As a result of the very positive fallout and mutual benefit, a Comprehensive Economic Partnership Agreement is now being negotiated by the two Governments to further expand bilateral trade and also to address the services sector. The Indo Sri Lanka Free Trade Agreement ought to be a model for similar agreements with not only countries of South Asia but elsewhere. Formal trade between India and Pakistan stands presently at about US 251 million dollars. If a Free Trade Agreement comes into effect bilateral trade could easily increase to over US 4 billion dollars within 2 to 3 years. SAARC attaches great importance to people to people contacts in the region so as to strengthen goodwill and foster better understanding. Travel between India and Pakistan has now been restored but relaxation of the

visa regime is essential for full benefit of the re-opening of road, rail and air links between the two countries. Sri Lanka though it faces a major terrorist threat has taken the initiative to exempt SAARC nationals from visa requirements for business and tourism. Government of India should reciprocate this move not merely with regard to Sri Lanka but also other SAARC countries. Indeed, terrorists do not travel on passports and visas. Travel restrictions as well as those on exchange of books and journals should be removed without delay. The positive impact will far outweigh the negative factors involved in a visa free South Asia . The Social Charter announced at the SAARC Summit addresses itself to the issue of poverty alleviation, education and health. South Asia continues to have the highest number of people in the world living below poverty line outstripping sub-Saharan Africa in this regard. Last year, UNESCO released the "Education for All Global Monitoring report 2002 : Is the World on Track?". The report points out that among the 154 countries for which data are available 28 are not expected to attain any of the three objectives which the international community gathered at the World Education Forum had agreed should be achieved by all nations by the year 2015. The three goals are : universal primary education, free schooling of acceptable quality and removal of gender disparities in Education. All the countries of South Asia with exception of Sri Lanka are among these 28 countries. Regrettably, the subcontinent makes more investment on armaments than on social infrastructure. India and Pakistan spend more than three times on weaponry than they do on

education or health. Military expenditure in South Asia increased by 54 percent from 1992 to 2001, whilst for the world as a whole such expenditure decreased by 9 percent during the same period. India has augmented its own defense outlay by 10 percent per year since 1997 whilst the annual increase was 1.5 percent during the previous decade. A crucial Fallout of the Indo Pak Peace Process ought to be a drastic reduction in Defense expenditure of both countries so that our scarce resources are Utilized towards welfare of our people rather than on purchase of military Hardware from abroad. In the words of Prime Minister Vajpayee at the Summit meeting "The bonds of ethnicity and culture which hold together the peoples of this region are more enduring than the barriers of political prejudice that have been erected quite recently". The Prime Minister of Pakistan added "Peace is a matter of will for the leadership of both the countries". Pronouncements at SAARC Summits are quite admirable but sometimes they are not matched by adequate implementation. Whilst congratulating the leaders of the seven nations for the success of the Summit we do now look forward to the fulfillment of the agreements arrived at. The South Asia Forum consists of present and former members of Parliament from all political parties and was inaugurated at Parliament House by Foreign Minister Yeshwant Sinha last September. The Forum shall create awareness about the critical need for peace and cooperation. It will promote greater interaction between the civil society and the political class of the countries of South Asia. Such an interaction is called for a quicker settlement of differences and greater South Asian solidarity, the

key to progress and prosperity of all our peoples.

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