The Political Economy of Regional Cooperation in South Asia,

The formation of the South Asian Association for Regional Cooperation (SAARC) in December 1985 was hailed as a major diplomatic breakthrough in South Asia. But SAARC’s slow progress and modest achievements over the past decade have evoked different reactions among different people. To some, SAARC is merely a talking shop, which can provide nothing more than a lip service to the various issues of peace and development in the region. To others, SAARC may not be a panacea to the region’s problems, but its existence has certainly provided an opportunity for the policy makers, administrators, and experts to meet regularly and hold informal dialogues on important bilateral and regional issues. This practice of informalism and behind-the-scenes discussions among the political leaders on various SAARC forums has helped contain many difficult situations in the region and has contributed to the beginning of a confidence-building process in South Asia. Additionally, the ratification of SAARC Preferential Trading Arrangement (SAPTA) by all SAARC members in December 1995 and their decision to create a SAARC Free Trade Area (SAFTA) as early as possible have generated guarded optimism about the relevance of SAARC in promoting regional economic cooperation in South Asia.(1)
Will economic interests drive the South Asian countries toward greater cooperation? If so, what is the potential for the growth of regional economic cooperation in South Asia? Given the decades of mutual hostility and distrust, to what extent will the South Asian countries be able to achieve economic interdependence? The answer to these questions requires a thorough understanding of the domestic political and economic dynamics of the South Asian countries. Accordingly I have divided this paper into four main parts. First, I briefly discuss the origin and evolution of SAARC to provide an understanding of various internal and external influences on the creation of SAARC. Second, I explain the domestic political and economic dynamics of major South Asian countries to underline the existence of impediments and opportunities for the expansion of regional cooperative activities in South Asia. Third, I examine the current level of economic interactions among the South Asian countries and highlight the potential for economic interdependence in the region. Finally, underlining the importance of the state in the growth of regional cooperation, I suggest some areas where policy cooperation among the South Asian governments is possible in order to promote pragmatic regional economic interdependence.
The first concrete proposal for establishing a framework for regional cooperation in South Asia was made by the late president of Bangladesh, Ziaur Rahman, on May 2, 1980. Prior to this, the idea of regional cooperation in South Asia was discussed in at least three conferences: the Asian Relations Conference in New Delhi in April 1947, the Baguio Conference in the Philippines in May 1950, and the Colombo Powers Conference in April 1954.(2) Since 1977, the Bangladesh president seemed to have been working on the idea of an ASEAN-like organization in South Asia.(3) During his visit to India in December 1977, Ziaur Rahman discussed the issue of regional cooperation with the new Indian prime minister, Morarji Desai. In the inaugural speech to the Colombo Plan Consultative Committee, which met in Kathmandu in December 1977, King Birendra of Nepal gave a call for close regional cooperation among the South Asian countries in sharing river waters. The king’s call was welcomed by President Ziaur Rahman during the former’s visit to Bangladesh in January 1978. President Ziaur Rahman had also informally discussed the idea of regional cooperation with the leaders of the South Asian countries during the Commonwealth Summit in Lusaka (1979) and the Non-Aligned Summit in Havana (1979). Finally, the Bangladesh president seemed to have given a concrete shape to the proposal after his visit to Sri Lanka and discussion with the Sri Lankan president, J. R. Jayawardene, in November 1979.(4)
Several factors seemed to have influenced President Ziaur Rahman’s thinking about establishing a regional organization in South Asia during 1975-1979: (1) change in the political leadership in the South Asian countries and demonstration of accommodative diplomacy by the new leaders; (2) Ziaur Rahman’s need for Indian support to legitimize his coup d’etat regime; (3) an acute balance of payment crisis of almost all the South Asian countries, which was further aggravated by the second oil crisis in 1979; (4) failure of the North-South dialogues, and increasing protectionism by the developed countries; (5) publication of an extremely useful background report by the Committee on Studies for Cooperation in Development in South Asia (CSCD), identifying many feasible areas of cooperation; (6) assurance of economic assistance for multilateral cooperative projects on sharing water resources of Ganga and Brahmaputra by United States President Jimmy Carter and British Prime Minister James Callaghan during their visit to India, Pakistan and Bangladesh in January 1978; and (7) the Soviet military intervention in Afghanistan in late December 1979 and the resulting rapid deterioration of the South Asian security situation.(5) During this critical period, President Ziaur Rahman’s initiative for establishing a regional organization, which would permit the leaders of the South Asian countries an opportunity to improve their understanding of one another’s problems and to deal with conflicts before they turn into crisis, became much more appealing.
While the Bangladesh proposal was promptly endorsed by Nepal, Sri Lanka, the Maldives and Bhutan, India and Pakistan were skeptical initially. India’s main concern was the proposal’s reference to the security matters in South Asia. Indian policy makers also feared that Ziaur Rahman’s proposal for a regional organization might provide an opportunity for the small neighbours to regionalize 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 India’s economic dominance in the region.(6) However, after a series of quiet diplomatic consultations between the South Asian foreign ministers at the U.N. 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 the South Asian countries. The new Bangladesh draft paper, sensitive to India’s and Pakistan’s concern, dropped all references to security matters and suggested only nonpolitical and noncontroversial areas for cooperation.(7)
Between 1980 and 1983, four meetings at the foreign secretary levels (April 21-23, 1981, Colombo; November 2-4, 1981, Kathmandu; August 7-8, 1982, Islamabad; March 28-30, 1983, Dhaka) took place to establish the principles of organization and identify areas for cooperation. After three years of preparatory discussion at the official level, the focus of discussion shifted to the political level in 1983. The first South Asian foreign ministers’ conference was held in New Delhi from August 1-3, 1983, where the Integrated Program of Action (IPA) on mutually agreed areas of cooperation (i.e., agriculture, rural development, telecommunications, meteorology, health and population control, transport, sports, arts and culture, postal services and scientific and technical cooperation) was launched. The foreign ministers of this conference also adopted a Declaration on Regional Cooperation, formally beginning an organization known as the South Asian Regional Cooperation (SARC). Following the New Delhi meeting, three more meetings of the foreign ministers were held at Male (July 10-11, 1984), Thimpu (May 13-14, 1985), and Dhaka (December 5, 1985) to finalize details and determine a date and place for the first meeting of South Asian heads of state. At the Dhaka foreign ministers’ meeting, a decision was taken to change the name of the organization from South Asian Regional Cooperation (SARC) to South Asian Association for Regional Cooperation (SAARC). The change in the acronym was based on the thinking that while SARC refers to the process of South Asian Regional Cooperation, SAARC marks the establishment of an association (organization) to promote and develop such cooperation. Finally, the first summit meeting of the heads of state or government of the South Asian countries was held at Dhaka from December 7-8, 1985.
Since 1985, SAARC has evolved slowly but continuously both in terms of institutions and programs.(8) However, it is true that most of the programs and achievements of SAARC exist on paper. The much talked about SAARC Food Security Reserve could not be utilized to meet the needs of Bangladesh during its worst natural disaster in 1991. The Convention on Suppression of Terrorism appears to be a failure, as both India and Pakistan have failed to curtail the movement of terrorists across their borders. It is also true that most SAARC activities are confined to the holding of seminars, workshops, and short training programs. These activities may be useful, but they do not address priority areas and lack visibility and regional focus, so essential for evolving a South Asian identity. Most importantly, SAARC suffers from an acute resource crunch. Unless the organization is successful in mobilizing funds and technical knowhow from outside sources, most of its projects cannot be implemented and, thus, its relevance will remain limited.
SAARC’s existence, however, has enabled the South Asian political leaders to meet regularly and carry on informal discussion to address their mutual problems. This is no mean achievement given South Asia’s past history and low level of interaction among South Asian countries since their independence. Informal talks among the leaders at regularly held SAARC meetings have led to inter-elite reconciliation on many sensitive issues, producing some noteworthy results in South Asia. The informal talks between the Indian and Pakistani Prime Ministers at the second SAARC Summit meeting at Bangalore in November 1986 led to the diffusion of tension between the two countries on the issue of India’s troop exercise (Operation Brasstacks) on the Indo-Pakistan border; the India-Sri Lanka talks at the 1987 SAARC foreign ministers’ meeting led to their accord on the Tamil problem. As a result of an informal meeting and discussion between the Prime Ministers of India (Narasimha Rao) and Pakistan (Nawaz Sharif) at Dayos (Switzerland) in 1992, the Pakistani government took action to prevent the move of the Jammu and Kashmir Liberation Front (JKLF) to cross the cease-fire line in Kashmir later that year. The Davos meeting was possible because of an earlier informal agreement between the two leaders at the sixth SAARC Summit meeting at Colombo in December 1991. Given this utility of SAARC, can the organization grow or expand its role in the coming decade? In order to understand the future prospects of SAARC, it is essential to examine three important features of this organization. First, the economic and security concerns and interests of the South Asian states led the policy makers to take the first initiatives for the establishment of SAARC. Even today, initiatives for SAARC programs and activities are primarily taken by the governmental actors. Second, unlike the European Union, the Association of the Southeast Asian Nations, and the Gulf Cooperation Council, external actors or developments did not play any major role in the emergence of SAARC. Third, SAARC came into existence primarily as a response to the domestic political and economic needs of the South Asian countries. Consequently, SAARC’s future growth is not likely to be affected adversely by the vagaries of the international system, but rather will be predominantly driven by the domestic political and economic dynamics of the South Asian countries.
SAARC’s success is likely to bring enormous economic and security benefits to Bhutan and the Maldives, the two smallest South Asian countries. It is, therefore, not surprising that these two countries have shown, and continue to show, a great deal of interest in the growth of regional cooperation in South Asia. In this section, I will briefly discuss the political and economic interests and concerns of the other five South Asian countries and their effects on the prospectus of the growth of regional cooperation in South Asia.
Except for the Maldives and Bhutan, India has bilateral disputes with all her neighhours. However, with the establishment of a democratic government in Nepal and withdrawal of India’s peacekeeping forces from Sri Lanka in 1990, India’s bilateral relations with these two countries have improved considerably. But India’s relations with Bangladesh have not improved despite the resolution of the Tin Bigha controversy. The disputes over Chakma refugee problems and the Farakka issue on the sharing of the Ganges water continue to adversely affect Indo-Bangladesh relations.(9)
The most crucial and serious problem that divides South Asia is the Indo-Pakistan conflict. Since independence, the relationship between India and Pakistan has shown a unique pattern of dualism: while the official relations are based on a zero-sum mentality and the classic “security dilemma,”(10) ordinary people across the border continue to recall past contacts with nostalgia and are eager to maintain a close relationship with each other.(11) However, over the years the official paranoia has dominated Indo-Pakistan relations. Since independence, the two countries have fought three wars, two of which were about Kashmir (1948 and 1965) and one on the Bangladesh liberation issue (1971). Much of the Indo-Pakistan conflicts can be attributed to the following factors: (1) structural imbalances between the two countries; (2) India’s desire to maintain a hierarchical regional order and Pakistan’s opposition to this design as well as its effort to achieve parity with India with external military and economic support; (3) divergent political systems (for most of its history Pakistan has been ruled by the military while India has been a functioning democracy since independence); (4) Pakistan’s emphasis on Islam as the basis of the state as opposed to India’s secularism; and (5) scapegoating (blaming the external enemy, often the neighhour) by the ruling elites of India and Pakistan in order to ensure their political survival.
Two aspects of India’s foreign policy based on its national interest are often misunderstood by the South Asian neighbours and especially by Pakistan. First, India is concerned about its autonomous status in the region. Autonomy for India requires that the whole South Asian region be free of outside influences. Thus, India has always opposed outside intervention or roles in South Asian affairs. Second, contrary to her neighbour’s perception, India has a vital interest in the territorial integrity, sovereignty, and independence of all the South Asian countries. India expects that the South Asian countries should also respect India’s unity and territorial integrity. Thus, it is not surprising to see that the Indian policy makers seek the status quo and consider Pakistan as the irredentist power in the Kashmir dispute.
During the cold war era, external military and economic support was one of the important factors that made the ruling elites of India and Pakistan less willing to accommodate each other. The end of the cold war provides new opportunities and challenges for India to reexamine her regional policy options. The continuing improvements of Indo-U.S. relations as noticed by growing economic and security cooperation between these two countries may change the perception of the Indian policy makers about the role of the United States in the region. With the cooperation of the United States, it now appears possible to create a South Asian regional security structure in which India can play a greater role in maintaining regional stability and order.(12) It is possible that the Indian policy makers, more confident of their responsibility in maintaining South Asian stability, may seek to sort out their differences with the neighbours by undertaking regional negotiations. With the disintegration of the Soviet Union, China may find South Asia of less strategic concern. As a result, China may not be as worried about India as a client of the Soviet Union and may, despite its alleged recent sale to Pakistan of uranium enrichment material, reduce its future support for Pakistan. This will certainly have a positive impact on Sino-Indian relations which is already showing signs of improvement.(13) Besides, China’s generally low profile on the nuclear nonproliferation issue in South Asia and her open support after 1990 for a bilateral negotiation between India and Pakistan on the Kashmir issue may lead to a change in New Delhi’s perception of any Sino-Pakistani design against India and may persuade India to be more flexible toward its neighbours on regional issues.
Does this also mean that India will be more inclined to play a much greater role and make bolder initiatives in order to make SAARC more effective and visible? Indian policy makers are aware of the fact that any bold initiatives or a greater role by India in SAARC will strengthen the South Asian neighbours’ perception of Indian hegemonism, and thereby jeopardize prospects for further regional cooperation. On the other hand, India’s lack of initiatives may be interpreted as a lack of sincerity for SAARC. As India’s support is crucial for the growth of SAARC, India needs to take moderate policy initiatives with respect to SAARC activities and pursue accommodative diplomacy more vigorously to inspire confidence in her neighbours.
Adoption of such a policy by India is more likely in the changing economic and political environment at both the regional and global levels in the post-cold war era. The earlier thinking of New Delhi that India is unlikely to get any substantial benefits from any SAARC economic arrangements appears to be changing. India’s policy makers have now realized that it is in India’s interest to promote intraregional trade. The success of India’s economic liberalization will largely depend upon her ability to increase exports to new markets both in the developed and developing countries. Until recently, India has achieved only restricted access to the markets of Japan, North America, and Western Europe due to these countries’ protectionist policies and various kinds of nontariff barriers against Indian products.(14) Additionally, with the collapse of the Soviet Union and the gradual incorporation of Eastern Europe into the Western European economies, India has lost two of her privileged market links. Recently, India’s association with ASEAN, active interest in joining the Asia-Pacific Economic Cooperation, and Indian Ocean-rim economic cooperation are indicative of her desire to expand market links. However, although India will continue to explore markets in other regions, she can no longer ignore her own base in South Asia where she enjoys a comparative advantage in almost every economic sector. Not surprisingly, India has recently shown renewed interest in promoting intraregional trade through the framework of SAPTA.
At the political level, Indian policy makers are not only concerned with the loss of the Soviet Union as an ally, but are also sensitive to the declining relevance of the Non-Aligned Movement and a gradual slipping of leadership from India’s hands to Indonesia in G-15 meetings.(15) Doubtless, India’s ambition of a global leadership role has received a setback by these developments. Indian leaders know well that the smooth operation of SAARC will provide them the opportunity, to convince the world about their ability to pull the South Asian countries together. By demonstrating such leadership in SAARC, they can hope to recapture some of India’s lost prestige in the international arena. Moreover, to the extent that Indian political leaders perceive that the existence of SAARC can ensure the status quo in South Asia, leading to political stability in the region and future improvements of India’s bilateral relations with its neighbours, one would expect a validation and strengthening of New Delhi’s commitment to SAARC. Indeed, India’s decision not to react negatively to Pakistan’s reference to the contentious issue of the demolition of the Babri Mosque in Ayodhya at the seventh SAARC summit in Dhaka and the Kashmir issue at the eighth SAARC summit in New Delhi indicates India’s growing interest in regional cooperation in South Asia.
In addition to India, Pakistan’s initiatives and active role are necessary for the growth of regionalism in South Asia. Unfortunately, while Pakistan has shown great enthusiasm and taken many initiatives for the growth of the Economic Cooperation Organization (ECO),(16) it has shown only a modest interest in the growth of SAARC. The bilateral dispute with India (mainly on Kashmir) and the perception that the strengthening of SAARC will lead to the consolidation of India’s dominance in the region appear to be the main reasons for Pakistan’s lack of enthusiasm for the growth of SAARC. It is important to note that except for India, Pakistan has cordial relations with all the South Asian countries.
Since independence, Pakistan’s regional policy has revolved around two objectives: (1) liberation of Kashmir to prove the validity of the Two-Nation Theory, and (2) to achieve balance of power vis-a-vis India. In order to accomplish these two objectives, Pakistan has always sought external support to challenge India’s predominance in South Asia. During the cold war era, Pakistan became a member of two United States-sponsored security organizations, the South-East Asian Treaty Organization (SEATO) and Central Treaty Organization (CENTO), to ensure American support in case of any military confrontation with India. From 1950 to 1970, despite two wars on Kashmir and India’s relative victory in these two wars, Pakistan was largely successful in offsetting India’s ambition of predominance in the region with economic and military support from the United States, China, Iran and Turkey. However, the emergence of Bangladesh as an independent state in 1971, largely with India’s intervention, changed the structural dynamics of power in South Asia. First, it reduced Pakistan’s structural strength, and second, it made the basis of the Two-Nation Theory irrelevant to South Asian politics. But Pakistan was not prepared to give up its objectives. After 1971, Pakistan became increasingly dependent on the Gulf states, China, and the United States for military and economic support, and vigorously pursued its Kashmir liberation policy. Although the Simla Agreement of 1972 created an opportunity for both India and Pakistan to resolve their disputes on Kashmir, Pakistan subsequently violated the stipulation of the agreement by raising the Kashmir issue in various international forums. Kashmir, doubtless, remains the major bone of contention between India and Pakistan and unless it is resolved Pakistan’s participation in the growth of regional cooperation in South Asia is likely to remain limited.
The end of the cold war offers new challenges for a reevaluation of Pakistan’s foreign policy. Since the 1990s, India has received more support from Washington as a result of a shift in the policy of the United States toward South Asia. With a decline in American interest and support, Pakistan looks toward the Gulf states and Central Asia for both economic and diplomatic support. But the intraregional conflict among the Gulf states, the strategic support of Iran and Iraq for India’s position on Kashmir, and the yet-to-be stabilized status of the Central Asian republics will inevitably narrow Islamabad’s options at least for some period of time. With China’s bilateral relationship improving with India, Pakistan will no longer be assured of China’s support in any future conflict with India. Besides, Pakistan’s efforts to cope with the problems of rising ethnic conflicts, drug trafficking, and interstate terrorism are not likely to succeed without India’s cooperation.
Like India, Pakistan also needs new markets for its exports. But so far, Pakistan has achieved only limited access to the markets of Japan, North America, and Western Europe because of these countries’ protectionist policies. As a result, Pakistan has taken initiatives to form the Economic Cooperation Organization (ECO) to boost its exports and improve intra-regional trade with the Central Asian republics. But Pakistan’s efforts to seek new markets in the Central Asian republics are likely to achieve limited success, given the competition of the developed countries to capture these markets. In meeting the needs of the Central Asian republics Pakistan’s capital and technology are no match to what Western Europe, the United States, Japan, and even Russia have to offer. Growing recession in the Gulf countries has put further limitation on Pakistan’s exports to these markets. Consequently, Pakistan can no longer ignore the South Asian markets, where, next to India, she enjoys some comparative advantage.
Besides increasing exports, Pakistan has to reduce its budget deficits to GDP ratio from the current 8-10 percent range to the 4-5 percent range in order to succeed in its liberalization efforts. Substantial reduction in defence expenditure and reallocation of scarce resources in the development sectors are prerequisites to accomplish this objective. Additionally, Pakistan will have to compete with India and other South Asian countries as well as Eastern Europe and the former Soviet Union to attract official development assistance (ODA) and private investment. The Pakistani policy makers are well aware of the fact that an environment of regional confrontation will only deter the investors which will be detrimental to Pakistan’s interest. Given these circumstances, Pakistan’s interest will be better served by the growth of regional cooperation in South Asia.
Bangladesh has an enormous interest in the growth of regional cooperation in South Asia. With a population of more than 115 million out of which 65 percent live below the poverty line, limited natural resources, proneness to frequent floods and cyclones, absolute aid dependency, limited industrial, scientific and technological development, and more than 13 percent of its export earnings going to debt service, Bangladesh’s capacity to cope with the nation-building process is severely limited. After its independence in 1971, a strong bilateral economic and political cooperation with India and a generous flow of foreign aid provided the necessary support for Bangladesh’s economic development. But soon, the flow of foreign aid dried up and, more importantly, the Indo-Bangladesh relations deteriorated after the assassination of President Mujibur Rahman in 1975. Among the issues which most adversely affect Bangladesh’s cordial relationship with India in the post-1975 period are the conflicts over the sharing of the Ganges water; the flow of refugees across the border to India as a result of the tribal insurgency in the Chittagong Hill Tracts; and the migration of thousands of Bangladeshi citizens each year into the Indian states of West Bengal and Assam. The political realities of India and Bangladesh in the post-1990 period have made the leaders of these two countries less accommodative. Successive weak governments (defined in terms of narrow political base and coalitional nature of governments) in India since 1980 and the emergence and the growing popularity of nationalist and fundamentalist coalitions (such as the Hindu Bharatiya Janata Party) have contributed to a lack of willingness among the ruling Congress party leaders to take a bolder policy initiative on these politically sensitive issues. On the other hand, the existence of “quasi-democracy”(17) in Bangladesh in the post-1990 period offers only limited opportunities for the leaders to take any bold or innovative approach to resolve the bilateral problems with India. Instead, the Bangladeshi leaders seem to thrive by resorting to combative regional postures and scapegoating (blaming India for its intransigent attitudes).
Except for India, Bangladesh has no outstanding disputes with any SAARC country. Bangladesh’s political and economic relations with Pakistan have improved after a brief disruption from 1971 to 1975. Throughout the 1980s, Pakistan accounted for almost 60 percent of Bangladesh’s exports to South Asia.(18) There is still more scope to improve Bangladesh’s exports to Pakistan in such items as tea, newsprint, jute goods, and leather. In turn, Bangladesh can import, at a competitive price from Pakistan, such items as textiles, cement, light engineering goods, machinery, and railway rolling stock. The recent visit of Bangladesh Prime Minister Khaleda Zia to Pakistan in April 1995 and her cordial and high-level political talks with Pakistani Prime Minister Benazir Bhutto make the prospects of revival of trade cooperation between the two countries possible. Once the political bottlenecks over the issue of the repatriation of Pakistani nationals from Bangladesh are resolved, trade cooperation between the two countries can be restored soon because it is relatively easy for the entrepreneurs of both Pakistan and Bangladesh, who were either involved in interregional trade or had been located in the two countries prior to 1971, to renew and reestablish their contacts.
The most important concern for Bangladesh, however, is to improve political and economic cooperation with India. India has the capability to provide security and meet Bangladesh’s need for manufactured goods, such as steel, chemicals, light engineering goods, capital goods, coal and limestone. At the same time, India can increase its imports substantially in such areas as urea, sponge iron, semi-processed leather, and newsprint from Bangladesh to reduce the latter’s trade deficit with India. Besides, both India and Bangladesh can agree to set up joint ventures to improve the latter’s export base and the mutual capacity of the two countries. But a lack of political will between the leaders of these two countries has restricted the trade on mutually beneficial items and prevented the setting up of industries with Indian capital and technology in Bangladesh.(19) Given the current trend of a limited flow of ODA to the South Asian countries in the face of competition from countries in Eastern Europe and the Central Asian republics, Bangladesh’s limited structural abilities, and the hesitation of the World Bank and the International Monetary Fund to provide continuously concessional loans, Bangladesh’s need to improve economic cooperation with India and other countries in South Asia has increased in recent years. Of late, india has shown considerable interest in expanding economic cooperation with Bangladesh. But given the apprehensions and political sensitivity of Bangladeshis about their country’s dependence on and potential domination by India, closer economic cooperation with India appears to be more feasible under the cover of SAARC programs.(20)
Nepal has no deep-rooted political conflicts with her neighbours. It is because of her cordial bilateral relationships that the South Asian countries unanimously agreed to set up SAARC’s permanent secretariat in Kathmandu. Nepal remains deeply interested in the growth of regional cooperation in South Asia. Two major considerations guide this interest of Nepal: (1) the desire to promote the country’s security through multilateral diplomacy; and (2) the desire to promote balanced interdependence as opposed to an absolute dependence on India.(21) Landlocked between India and China, Nepal has been dependent on India for its security and economic development since the signing of the Indo-Nepal Treaty of Peace and Friendship in July 1950. Nepal’s thousand-mile border with Tibet is critical to India’s security interest vis-a-vis China. Therefore, India has always tried to maintain a close strategic relationship with Nepal. However, India’s overwhelming influence in the political and economic life of Nepal has produced tensions in their bilateral relations. There are three major irritants in the Indo-Nepal bilateral relations. First, the security provision of the 1950 Treaty of Peace and Friendship obligated the governments of Nepal and India to consult with each other in devising effective countermeasures to meet a security threat to either of the countries emerging out of foreign aggression. The treaty also stipulated that the two governments must inform each other of any serious friction or misunderstanding with any neighbouring country that may be likely to adversely affect the friendly ties between India and Nepal.(22) The Nepalese ruling elites under the monarchical regime have long resented this provision of the treaty because it essentially restricted the autonomy of Nepal in conducting its foreign policy and provided scope for Indian domination. It is not surprising that Nepal occasionally attempted to use the China card to move away from the Indian sphere of influence. The most serious Indo-Nepalese dispute occurred when Nepal allowed China to build the Lhasa-Kathmandu road after the Sino-Indian conflict in 1962.(23) India considered this move as Nepal’s acquiescence to China’s overall military strategy in South Asia which was a serious threat to India’s security interest. Consequently, throughout the 1960s and the 1970s, Indo-Nepal relations remained at a low ebb. The second major irritant in Indo-Nepalese relations is related to the declaration of Nepal as a zone of peace and India’s reluctance to endorse this proposal. Nepal’s peace zone plan is clearly a strategy to distance itself from India in defence and security matters. Third, both India and Nepal accuse each other of exploiting the open Indo-Nepal border. Nepal argues that the open border has encouraged Indian migration into Nepal and the smuggling of Indian goods to the detriment of Nepal’s economy.(24) The Gurung Commission report of 1983 found that of the total immigrants in Nepal’s Terai region, more than 97 percent came from India. The report alleged that the total control of Terai’s commercial and industrial sectors by the Indian immigrants and their indulgence in capital flight and tax evasion adversely affected Nepal’s economy. Accordingly, the report suggested that Indian and other foreigners should not be allowed to work in Nepal without work permits.(25) Such accusation of demographic invasion by India obviously drew strong condemnation from New Delhi. Although there has been significant improvement in the Indo-Nepal relations in the post-1990 period, these issues remain major irritants and need immediate attention to further improve the two countries’ bilateral relations.(26)
With one of the world’s lowest per capita incomes of $190 and GDP growth of about 4 percent over the past decade, Nepal desperately needs economic development. Nepal has no strong industrial sector and its export base is quite narrow. The country is critically dependent on India for foreign assistance and its imports, including oil, petroleum, cement, and coal. More than 700,000 Nepalese are employed in India in addition to some 20,000 Gurkha armed personnel in the Indian army.(27) Nepal’s India-centric economy has occasionally produced tension in the Indo-Nepal bilateral relationship. In 1989, when India cancelled the supply of essential commodities to Nepal as a result of serious disagreement between the two countries over the trade and transit issues, the limited nature of Nepal’s economic autonomy was exposed. Nepal is, therefore, eager to diversify its trade and increase trade links with other South Asian countries in order to reduce its dependence on India. Recently, Nepal also has faced reduced ODA and concessional loans from the World Bank. Foreign direct investment (FDI) in Nepal is insignificant. In such a situation, Nepal’s interest can be best served by maintaining the existing bilateral economic relations with India and, at the same time, working for promoting regional interdependence in South Asia.
Sri Lanka
Sri Lanka shared the initial enthusiasm with Bangladesh and Nepal for the establishment of SAARC. Sri Lanka’s enthusiasm for SAARC reflected the anxiety that usually exists in the small state-large state relationship. In fact, since its independence in 1948, Sri Lanka has always shown keen interest in joining with such international or regional organizations as the United Nations, the Colombo Plan, the Non-Aligned Movement (NAM), and ASEAN. Sri Lanka’s interest was shaped by the thinking that membership in a regional or international organization would provide some scope for developing a collectivity of small states anxious about larger neighbours. While other countries in South Asia have contiguous neighbours besides India, Sri Lanka has only India as its neighbour to the north and on all other sides there is the Indian Ocean. Such a geographic reality, coupled with India’s overwhelmingly superior size, population, natural resources, and military, economic, and technological power, generates a great deal of anxiety in Sri Lanka. Not surprisingly, Sri Lanka’s attitude toward SAARC has always been, and will likely continue to be, determined by the degree of cordiality in the Indo-Sri Lankan bilateral relationship.
Basically, there are two main problems between India and Sri Lanka: (1) Sri Lanka’s denial of citizenship to a large number of Tamils and their repatriation to India despite the latter’s protest of discrimination; and (2) the spillover effect of Sri Lanka’s Tamil ethnic conflict since 1983 and the impact of the India factor in Sri Lanka’s domestic problem. The last factor appears to be the most serious one. From 1986 to 1990, Indo-Sri Lanka relations suffered the most because of the active Indian intervention in the Sri Lankan civil war. Not surprisingly, Sri Lanka’s response to the growth of SAARC during this period was lukewarm. However, with India showing support toward the Sri Lankan government’s efforts to achieve peace in the island, the Indo-Sri Lankan bilateral relationship has improved substantially in the post-1990 period. Since Sri Lanka has no major bilateral disputes with other states of South Asia, the improved Indo-Sri Lankan relationship has revived the latter’s enthusiasm for SAARC.
In South Asia, Sri Lanka has the second highest per capita income ($600), and it enjoyed a robust 7 percent GDP growth until the outbreak of the civil war in 1983. While Sri Lanka has always maintained a dynamic economic linkage with extraregional countries, its intraregional trade has never been impressive. It defies all economic logic that Sri Lanka imports railway coaches from Romania when better-quality coaches are available at a much cheaper price in the Indian state of Madras, only a short distance away. Similarly, in cement and ship building, Sri Lanka can stand to gain by trading with Pakistan and India rather than South Korea. Recently, Sri Lanka’s exports to the developed countries has declined because of the adverse terms of trade and increase in protectionism in the United States, Japan, and Western Europe. With the protracted civil war, Sri Lanka has also been losing foreign direct investment. It is not surprising that since 1992, Sri Lanka has consistently advocated improving intra regional trade through the framework of SAPTA.
As shown in tables 2 and 3, the volume of legal intraregional trade in South Asia is quite insignificant, resulting in a limited interdependence among the South Asian countries. From 1980 to 1994, intraregional trade among SAARC countries, as compared to their world trade, has remained low and stagnant at little over 3 percent. During 1980-1994, intraregional exports of the SAARC countries in relation to their global exports showed a declining trend from about 5 percent in 1980 to less than 4 percent in 1994. During the same period, intraregional imports hardly exceeded 3.5 percent of the global imports of the South Asian countries.
From 1980-1994, except for the Maldives and Nepal, the intraregional imports and exports of all SAARC countries have remained very low. Although the intraregional imports of Bangladesh and Sri Lanka have shown some improvement, their legal exports to the region have declined during this period. The extremely low level of intraregional imports and the exports of India and Pakistan during this period indicates how little these two relatively developed economies in South Asia depend on the region’s markets (table 3).
Among the SAARC countries, only India has the necessary experience, expertise, technology, and capital to invest and set up joint ventures in the region. Indian technology can be appropriately scaled down to local conditions and is less demanding of scarce capital and foreign exchange resources. Despite this fact, not much Indian investment has taken place in the region because of political conflicts and a general suspicion of India’s intentions. In 1988, there were 152 Indian joint ventures in operation, of which only 24 were in the South Asian countries. While 83 percent of Indian total equity was distributed between Southeast Asian and African countries, only little more than 8 percent was invested in South Asia.(28)
In brief, the intraregional investment and trade among the South Asian countries is quite modest, and has remained stagnant over the years. Consequently, the interdependence among these countries is quite limited. Four factors can be mentioned here to explain the limited intraregional trade among the South Asian countries. First, most of the South Asian countries, being primary producers, tend to export similar items and thus compete with each other. Second, the South Asian countries, with the exception of Sri Lanka, have a high rate of tariff and non-tariff barriers, which is the most important constraining factor for the expansion of intraregional trade. Third, lack of adequate transport and information links among the South Asian countries poses serious problems for the expansion of intraregional trade. Finally, political differences and a lack of willingness to create trade complementarities among the leaders of the South Asian countries contribute to the current low level of intraregional trade.
The above constraining factors notwithstanding, specific trade complementarities can be created in order to foster greater intraregional trade in South Asia. One important study sponsored by the Committee on Studies for Cooperation in Development in South Asia (CSCD) has identified as many as 110 items for intraregional exports and 113 items for intraregional imports in South Asia.(29) Broadly speaking, however, promising prospects for immediate intra-SAARC trade expansion exist in such products as tea and coffee, cotton and textiles, natural rubber, light engineering goods, iron and steel, medical equipment, pharmaceuticals, and agro-chemicals.(30)
The enormous water resources of the Himalayas offer a great potential for the growth of regional interdependence. Since the Himalayan rivers flow through Bangladesh, Bhutan, India, Nepal and Pakistan, close cooperation is necessary among these countries to harness the Himalayan water resources for flood prevention and management of water flow, development of an inland navigation system, developing ecological watersheds and reforestation programs, and controlling river pollution. It is estimated that the Himalayan rivers flowing through Nepal have a hydropower potential of 83,000 megawatts, while in India, Bangladesh and Pakistan the estimated hydropower potential is about 70,000 megawatts, 1,772 megawatts, and 21,000 megawatts respectively.(31) It is encouraging to note that in Bhutan, another country of enormous hydropower potential, the Chukha hydroelectric project was recently completed with India’s assistance. Besides Bhutan and India, the project has the potential to benefit Bangladesh, Nepal, and Pakistan. Similarly, through cooperation between India, Nepal, Pakistan and Bangladesh, it is possible to develop hydropower projects which will provide a great relief to the energy crisis in this region.
There are other compelling economic reasons to suggest that it is in the interest of the South Asian countries to promote intraregional trade and economic cooperation. Direct trade in such products as steel and aluminum, textile machinery, chemical products, and dry fruits currently being diverted through third countries will benefit both India and Pakistan quite substantially in terms of price, quality, and time.(32) Besides, many goods being imported at high cost from other countries can be made available from India. By importing from India, the SAARC countries will be able to save their hard-earned foreign currencies.
The recent economic reforms in India and Pakistan will doubtless provide these two countries an opportunity to diversify their exports and make manufacturing products more competitive. But the success of their economic liberalization will essentially depend upon their ability to find new markets both in the developed and developing countries. Two developments in the international environment make the prospects of South Asian exports to new markets less promising. First, the world economy is currently experiencing weak growth and in the 1990s the major industrialized countries are likely to grow more slowly than in the 1980s. Thus, it will be difficult for the South Asian countries to expand exports rapidly. Second, with the formation of regional economic blocs and growing protectionism in both the developed and developing regions, the South Asian countries may find it difficult to gain access to these markets.
Recent developments in Eastern Europe and the former Soviet Union are also likely to have adverse impacts on South Asian economies. The immediate impact has been on trade. India’s export to these markets has declined from 20 percent in 1990 to 10 percent in 1991. The trend is likely to continue. The longer-term impact is likely to be on the official development assistance (ODA) to South Asia. As some major studies have indicated, the former Soviet Union and Eastern Europe are likely to receive a major share of ODA from the donor countries in the 1990s.(33) Additional demands for ODA will come from the poorer republics of the former Soviet Union in the near future. Given the slower economic growth in the industrialized countries (compared to past performance) and tighter supplies of such funds from the traditional donors, these additional demands will certainly contribute to a reduction of ODA to South Asia in the 1990s. Besides, the expectation of the South Asian countries for an increase in foreign direct investment may not materialize until they are able to create a stable political climate in the region.
Thus, both the international climate and domestic needs are conducive for expanding regional cooperation in South Asia. It is often argued that if the South Asian countries are able to increase their intraregional trade from the current level of 3 percent to 6 or 7 percent over a decade, set up some regional joint ventures, and share the available technology in the region, there will be considerable improvement in the region’s interdependence and economy. Gradually, the policy makers of the South Asian countries seem to realize this. The ratification of SAPTA by all SAARC members is a beginning in the direction of promoting intraregional interdependence.
Given the low level of mutual trust, spillover effects of the ethnic and religious conflicts,(34) and the magnitude of bilateral disputes in South Asia, it is unrealistic to believe that any substantial growth of regional cooperation is possible without easing political tensions. To the extent that political tensions remain unresolved, SAARC is likely to experience only a “stop-and-go” pattern of growth(35) in which limited pragmatic cooperation on specific techno-economic issues is possible over a period of time. In the post-1990 period, there appears to be some realization among the South Asian leaders that the future of SAARC, like any other regional grouping, lies in concentrating on economic cooperation in specific areas. The SAARC leaders’ renewed emphasis on increasing intraregional trade at three consecutive SAARC summit meetings (Colombo, 1991; Dhaka, 1993; and New Delhi, 1995), the ratification of SAPTA, and the discussion to create SAFTA in future are evidence of their growing willingness to enhance regional economic cooperation in South Asia. But how soon and to what extent they are going to achieve success remains unclear. Any realistic assessment of the prospects for the growth of economic cooperation and interdependence in South Asia must have to address several of the following issues. The first issue pertains to the role of the state in promoting regional cooperation in South Asia. Given limited political contacts and mutual security concerns arising out of a typical security complex(36) in South Asia, a state-directed approach to economic cooperation is better suited to this region. The recent arguments about the limited role of the state in promoting regional cooperation activities in the context of the emerging “post-Westphalian,” “post-sovereign,” and “neo-medieval” international system appear to be irrelevant in the case of South Asia.(37) The South Asian states may be weak and imperfect, but certainly not irrelevant in initiating or guiding regional cooperation policies and promoting economic interdependence in the region.(38) Given the limited development of transnational market forces in South Asia, any prospect of the growth of regional economic cooperation driven exclusively by the market forces appears bleak. Besides, if regional economic cooperation is left to market forces alone, it would take decades. Therefore, conscious efforts at the political level and demonstration of political will by the South Asian leaders are absolutely necessary for the growth of regional economic cooperation in South Asia.
The second issue concerns the development of a pragmatic economic interdependence in South Asia. Three points merit attention here. (1) Given the extensive heterogeneity in levels of economic development of South Asian countries how can they proceed to achieve economic interdependence? Clearly, the approach should be gradual and based on the economic capability of each state. In this context, the recent approach of operationalizing SAPTA appears promising. India, being the largest economy in the region, has agreed to offer tariff reduction on the import of 106 items from the South Asian region. Pakistan has offered tariff reduction on 35 items, Sri Lanka on 31 items, the Maldives 17, Nepal 14, Bangladesh 12, and Bhutan 7.(39) The list of items is expected to be expanded in due course as the market space in each country increases and political confidence grows among the South Asian countries. (2) Regional cooperation should not replace, but only complement the existing bilateral trade and economic transactions between the South Asian countries. (3) The growing interest in operationalizing SAPTA as a prelude to the creation of a South Asian Free Trade Area (SAFTA) should not obscure the importance of the extra-regional and global economic cooperation that most of the South Asian countries are currently engaged in. For instance, it would be detrimental to the economic interest of India, Pakistan, and Sri Lanka if they do not seek access to the markets in Central Asia, Southeast Asia, the Gulf region, and the OECD countries. The key to the development of a pragmatic strategy to increase economic interdependence among the South Asian countries is to promote intraregional trade by lowering tariffs without delinking from extraregional and global economic relations.
Third, setting grandiose goals for intraregional trade is likely to be counterproductive. Instead, over the next ten to fifteen years, SAARC countries should pursue modest trade objectives and seek joint development projects of modest scale. In this context, the SAARC countries should negotiate with the United Nations Development Program (UNDP) and Asian Development Bank (ADB) for the development of joint projects. Some innovative approaches such as the ADB’s vision of growth triangles merit serious attention. Development of joint projects with the assistance of ADB in smaller units can create new opportunities and help establish linkages with other regions. For instance, promising economic opportunities exist, and with respective governments’ support extensive economic cooperation is possible in parts of Bangladesh, Northeast India, Myanmar, and Thailand, or South India, Sri Lanka, the Andaman and Nicobar islands, and Northwest Indonesia.
Fourth, conservation of the natural resource base should constitute an integral part of any economic development strategy. For decades, the South Asian countries have suffered from the degradation of the natural resource base and environmental pollution because of their overuse and often misuse of the natural resources. Efficient use of the natural resource base and environmental conservation should be given utmost priority by the South Asian countries to meet their growing needs of energy and to alleviate the health risks to their population. Given the integrated environment of South Asia it is essential for the SAARC countries to collectively think of strategies for environmental conservation. This will require policy coordination at the governmental as well as grassroots levels. Passage of environmental legislation and its strict enforcement, dissemination of a wide range of environmental education, and involvement of women in environmental protection programs can go a long way toward the conservation of the environment in South Asia.
Finally, it is necessary to establish a South Asian Development Fund (SDF) in order to provide financial support to regional projects. The fund should not replicate the role of existing multilateral institutions such as the ADB and the World Bank in South Asia. Besides undertaking large regional infrastructure and environmental programs, which the purely project-oriented development banks cannot undertake, the SDF can focus on poverty-alleviation programs, provide lending to a comprehensive human resources development program, finance joint ventures, support intraregional and extraregional trade by arranging finance for export credit and commodity stabilization, and support the existing regional institutions. Resources for the SDF can come from contributions of SAARC countries as well as from external sources. Japan has already shown interest in contributing 20 percent of Japanese ODA to a common SAARC Fund.(40) The SAARC countries can also persuade the United States, Germany, OPEC countries, the Nordic group, and other donor countries to contribute some percentage of their ODA to the SDF. Needless to say, a successful SDF will be able to provide the much-needed economic support to regional projects and thereby strengthen interdependence among the South Asian countries.
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