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SAARC
Ineffective in Promoting Economic Cooperation in South Asia
By Raghav Thapar

Since its creation in December 1985, the South Asian Association for Regional Cooperation (SAARC) has sought to increase economic unity between India, Pakistan, Bangladesh, Nepal, Bhutan, Sri Lanka and the Maldives. While the organization was designed to improve both the economic and social progress of its member states, most scholars have focused on SAARC’s ability to promote economic cooperation among its members.1 South Asian scholars have attempted to compare SAARC efforts to increase economic cooperation with those of other regional trading bodies such as the European Union and Association of South East Asian Nations (ASEAN).

Unlike the EU or ASEAN, however, trade between the seven SAARC states has remained limited despite the fact that all are located within a close proximity of one another and all are part of the World Trade Organization (WTO). A growing emphasis on attracting foreign investment and seeking access to new markets in SAARC states indicates that economic progress is central to the future of South Asia. SAARC, however, is likely to play only a limited role in that future because of India’s considerable position of power over the other SAARC states. This imbalance of power within SAARC allows conflicts between India and its neighbors to undermine organizational unity. Clashes between South Asian countries end up jeopardizing the creation and effectiveness of regional trade agreements. They also lead individual SAARC countries to advance their economic interests through bi-lateral agreements, reducing the incentive to engage in multi-laterally. In the future, it seems likely that SAARC will act more as a forum to encourage regional discussion through conferences and seminars than as an architect for economic policy in South Asia.

This paper will first analyze the growing importance of trade relations among South Asian states. It then discusses SAARC’s historical problems with cooperation and how bi-lateral deals between member states have undermined the organization as a whole. Finally, it examines SAARC’s role as a mediating agency and forum for discussion among South Asian leaders.

Newfound Focus on Economic Growth in South Asia

Over the last thirteen years, the Indian government has increased its focus on economic development. Since 1991, when a debt crisis forced it to undertake a serious program of market oriented economic reform, India has gradually opened up its economy to the world. Over the time India has moved from a closed economy with heavy central planning to a more privatized economy with lower tariffs. This reform resulted in a seven percent growth rate for the economy from 1994-1997.2 Foreign investment in India also increased from $68 million in 1991 to $5 billion from 1996-97.3 To sustain this growth, New Delhi has sought access to new markets and an increase in foreign investment. India’s foreign policy has reflected the importance of these economic goals. India is increasing border trade with China and is seeking to establish trade relations with the Association of South East Asian Nations (ASEAN).4 New Delhi has placed a serious emphasis on turning India into an economic power. India is expected to become the world’s 4 th largest economy (in terms of purchasing power parity).5 It is unlikely that this emphasis on economic development will diminish in the near future. The movement to market economics in 1991 brought “irreversible” changes in India’s economic thinking—changes that will force India to constantly remain active in the global economy.6 The majority of Indian leaders, irrespective of their political parties, believe that globalization and privatization are necessary for India to reduce its mass poverty.7 This has resulted in the gradual reduction of tariffs and other trade barriers over the past decade and a half. However, India is not the only state in South Asia seeking to expand its presence in new markets.

Other SAARC states are also seeking to enhance their trade relations across the globe. India’s chief political rival, Pakistan, is openly seeking new markets and increased aid from countries in the European Union (EU) and Japan.8 It has also struggled to expand trade into Central Asia because of stiff competition from Japan, the EU and Russia. Nepal and Sri Lanka, both reliant on the Indian economy as a supplier and market for goods, would like to increase intra regional trade and foreign investment in its developing industries. Similarly, Bangladesh is also looking for new markets to export goods.9 Since a desire to expand trade in South Asia exists among the majority of SAARC nations, one would assume that SAARC would receive more attention from South Asian states.

Cooperation Troubles

SAARC is structured in a way that often makes regional cooperation difficult. Thomas Thornton argues that in regional organizations it is difficult for “countries to establish balanced relations when one has a significant advantage in power over the other states.”10 In the case of SAARC, India is the most powerful country in terms of its economic might, military power and international influence. Thus, India’s potential as a regional hegemon gives SAARC a unique dynamic compared to an organization such as ASEAN.11 Pakistan was initially reluctant to join SAARC due to fears of SAARC succumbing to Indian hegemony. Indeed, if India does take a prominent role in SAARC, it could further fears that India will use SAARC for hegemonic purposes.12While the smaller states in South Asia recognize that they will need India’s help to facilitate faster economic growth, they are reluctant to work with India, fearing that such cooperation will admit Indian dominance in SAARC.13

Aside from a few overtures to its neighbors, India has done little to allay the fears of other South Asian states. The core of these fears is likely derived from the displays of India’s power by New Delhi in the past. Realizing its considerable advantage in military and economic power, India has consistently acted in an “arrogant and uncompromising” manner with its neighbors.14 Bangladesh is afraid of India exploiting its geographical position to redirect water flows vital to Bangladeshi agricultural production. Nepal and Bhutan are still worried about India’s control over their world trade and transit links as their geographical position will always make them dependent on India.15 These disputes between India and its neighbors have directly affected SAARC.

Namely, disputes between South Asian states have undermined SAARC efforts to promote regional trade. These disagreements make consensus building and cooperation among SAARC states complicated. Attempting to promote regional cooperation while doing little to resolve regional conflicts makes SAARC’s mission looks nearly impossible.16 Moreover, SAARC has no institutional mechanisms or punishments capable of preventing or fully resolving a dispute. Two examples illustrate how conflicts in South Asia have proven detrimental to SAARC.

The first involves Indian intervention in Sri Lanka from 1986-1990. The Indian military intervention to put down an insurgency by The Liberation Tigers of Tamil Eelam made Indo-Sri Lankan relations tense during these four years. Subsequently, the apprehension between India and Sri Lanka was considered a primary reason behind Sri Lanka’s “lukewarm” support for SAARC into economic and social spheres of its member states until relations improved with India.17

A second, more prominent example of a conflict derailing SAARC progress is the Indo-Pakistani conflict. Pakistan has demanded a resolution to its dispute with India over the Kashmir Valley before discussing trade relations with New Delhi. Pakistan has enforced this policy by violating WTO regulation for failing to confer Most Favored Nation (MFN) status on India.

India has recently attempted to improve its relationship with the rest of South Asia. Under the Gujral Doctrine established by former Indian Prime Minister I.K Gujral, India signed a 30-year water sharing treaty with Bangladesh and a trade and transit treaty with Nepal. India also joined a sub regional group within SAARC comprising of Bangladesh, Bhutan, Nepal and India.18 Despite political impediments to trade, value of goods smuggled from India to Pakistan via a third party generally totals 250-500 million per year. 19 If trade between the states was opened, Pakistan would receive cheaper imports due to lower transport costs and the absence of payments to a middleman. This implies that there is potential for lucrative trade between India and Pakistan. Moreover, if these two states, arguably the largest powers in SAARC, pushed for economic cooperation, it is likely that other states will follow their lead. Therefore, it is not surprising that the Indo-Pakistani dispute over Kashmir is considered a primary cause of SAARC’s impotence.20

Due to these conflicts, the desire for South Asian states to trade with one another has been limited. By squelching trade between South Asian states, the disagreements between India and its neighbors have limited the effectiveness of SAARC trading initiatives. The South Asian Preferential Trading Agreement (SAPTA) signed in December 1995 had SAARC countries reduce tariffs in certain economic areas to promote intra regional trade. The proposal was initially met with enthusiasm as India agreed to reduce tariffs in 106 of the 226 fields recommended by SAARC and Pakistan agreed to concessions in 35 fields. This statistic emphasizes a trend in SAARC— India seems gung ho about intra regional cooperation. In 1995, when SAPTA was being implemented, only 3 percent of all South Asian trade was conducted in the region.21 Six years later, the improvements seen in regional trade have been marginal. India’s trade within South Asia accounts for only 4 percent of its total global trade and Pakistan’s trade in the region accounts for merely 3 percent of its overall trade.22 Compared to other countries with similar proximities and income levels, intra regional trade among SAARC states is relatively small.23 Much of the trade that is conducted in South Asia is also considered symbolic and generally does not involve goods vital to the economies of the South Asian states.24 Moreover, some states still have high tariff and non-tariff barriers to trade, indicating that the spirit of free trade does not seem alive in SAARC.25 However, SAARC is trying to remedy this problem.

SAARC hopes that the establishment of a South Asian Free Trade Area (SAFTA) by January 1, 2006 will stimulate trade in the region. However, the agreement to establish this free trade zone will take 10 years of gradual tariff reduction.26 For a proposal that has already been delayed, it will take some genuine political cooperation for the tariff reduction process to run smoothly.27 Judging from the experience of ASEAN, an organization with a better track record in producing economic coordination among member states than SAARC, creating a free trade zone could become difficult. The ASEAN free trade agreement (AFTA) has been criticized for not producing substantial economic interdependence among the region. This lack of success results from distrust and protectionism among its member states.28 If SAFTA is implemented, its success will depend on the resolution of conflicts between South Asian states—something which seems unlikely in the future.

A Bi-lateral Alternative

To counter SAARC’s ineffectiveness, individual states have used bi-lateral agreements to advance their economic interests. Due to their conflicts, it is not surprising that trade between India and Pakistan has only occurred through the smuggling of goods by a third party, usually Dubai. However, Pakistan and Bangladesh maintained relatively lucrative trade relations with one another in the 1980’s. Approximately 60 percent of Bangladesh’s exports during this decade went to Pakistan.29 Bangladesh also saw an upswing in bi-lateral trade with India during the 1990’s. While the trade between India and Bangladesh was characterized by a significant trade gap, over $1 billion in goods a year went back and forth between these states. India also signed an agreement with Nepal in December of 1996 that allowed Nepal duty free access to the Indian market.30 Moreover, on April 1, 1995, India reduced customs on goods imported from Sri Lanka. Therefore, bi-lateral, not multi-lateral, agreements have facilitated much of the trade that does occur in South Asia.

The existence of these bi-lateral agreements is significant for three reasons. First, the increase of bi-lateral agreements in South Asia shows that states are not dependent on SAARC to achieve their economic objectives. Therefore, SAARC’s importance in the future will likely diminish in the eyes of its member states. Second, a focus on bi-lateral negotiations shifts attention away from the region and onto individual countries. In the future, states are more likely pursue bi-lateral agreements where they have to negotiate with only one country instead seeking multi-lateral deals, where they have to negotiate with seven countries. Therefore, states will lack an incentive to pursue their economic interests through SAARC. Third, the growth in bi-lateral trade agreements between South Asian states highlights the priority states are giving to their own self-interests at the expense regional economic cooperation. Thus, it seems as if economic regional cooperation is not a high priority for SAARC member states. So, if SAARC has not met the economic needs of its states, does it have a role in the future of South Asia?

Another Role for SAARC

SAARC does face some serious problems but could still play a useful role in South Asia. It is important to point out that SAARC does face some serious obstacles to success. The organization is facing a serious resource crunch and the SAARC countries have shown little willingness to increase their contributions to the association. Moreover, SAARC must battle the public perception it is more a figurehead of South Asian unity than an actual facilitator of regional cooperation. SAARC has been criticized by the public for only reaching agreements on the lowest level of cooperation among states instead of pushing for cooperation that would actually benefit South Asia. The SAARC conventions on drug trafficking and terrorism have also been criticized for not producing substantial results. Most of SAARC’s noteworthy achievements have only been found “on paper.”31 Thus, it does not become surprising when the British based Economist magazine ponders whether SAARC should be put “out of its misery.”32

Despite these obstacles, SAARC can still play an important communicative role in South Asia. It can serve as a forum for South Asian leaders to discuss security concerns in South Asia on a regular basis and as an outlet for South Asian countries to communicate with other regional economic blocks. While SAARC cannot force its member states to trade with one another, it does make them interact. It provides a neutral forum for leaders to talk and sets a consistent time frame for these meetings to occur. It does not force them to sign any agreements or commit to policies; it allows them simply to discuss matters of regional security. Given the poor communication between South Asian leaders, this is not an insignificant role. SAARC has already shown in the past that it is useful in promoting dialogue among South Asian leaders.

Informal talks between Indian and Pakistani Prime Ministers at the second SAARC summit in 1986 led to the diffusion of tension between the two countries on the issue of India’s Brasstacks exercise.33 In January 2004, conciliatory talks between India and Pakistan were sparked by an upcoming SAARC conference.34 A breakthrough between Indian and Pakistani diplomats actually occurred at the conference.35 While the dialogue has yet to produce tangible results, the experiences indicate that SAARC can help promote political cooperation and serve as a forum for communication among South Asian leaders. Since political conflicts are a primary cause of SAARC’s inability to foster cooperation among its members, serving as a forum to alleviate those problems could in turn aid efforts to improve economic integration in the future.

Conclusion

In essence, the growing movement of emphasis on economic development in foreign policy is changing the priorities of South Asian states. South Asian countries are emphasizing the importance of access to open markets and increasing foreign investment in their businesses. It seems likely then that economic growth and development will be central to the future of the South Asian state. However, whether growth and development occurs because of economic cooperation in the region is another question. Currently, trade between South Asian states remains relatively low when compared to other regional blocks. Moreover, political and economic ties between states rest on shaky foundations. Divisions among South Asian countries have made regional cooperation difficult and have lead states to pursue their economic goals bi-laterally. SAARC is still a valuable forum for political dialogue in South Asia, but its economic role in the region has been mitigated by conflict and tension among its member states. Until these conflicts are resolved to the point where South Asian states are willing to reduce barriers to trade, it seems as if the vision of an economic interdependent South Asia is more of a dream than reality.

ENDNOTES

1     SAARC homepage http://www.saarc-sec.org/main.php. SAARC has expanded its role to address significant issues impacting South Asia such as Agriculture, Biotech, Communication and Media, Energy, Environment, Human Resources, Poverty, Legal problems and Tourism.

2     Bhabani Gupta, “ India in the Twenty-First Century”, International Affairs vol 73, no2, (April 1997) p. 297

3     Ibid p. 302

4     “Every man for himself,” The Economist. Oct. 31, 2002 p. 14

5     Gupta, “ India”, p. 205

6     Howard Schaffer and Teresita Schaffer, “Better Neighbours? India and South Asian Regional Politics”, SAIS Review, (Winter – Spring 1998) p. 120

7     Gupta p. 314

8     J N Dixit, External Affairs: Cross-Border Relations, ( New Delhi: Roli Books, 2003). p. 38

9     Kishore Dash, “The Political Economy of Regional Cooperation in South Asia”, Pacific Affairs vol 69, no 2 (Summer 1996) p. 196

10     , Thomas P Thornton, “Regional Organizations in Conflict Management”, Annals of the American Academy of Political and Social Science Vol 518, (Nov 1991), p. 135

11     Ibid p. 136. The countries of ASEAN are all relatively evenly matched in their geographic size, economic strength and military power. While there are disparities among ASEAN states in some of these areas, they are not nearly as drastic as those between India and other South Asian states.

12     Dash, “The Political Economy”, p. 192

13     Ananya Mukherjee Reed, “Regionalization in South Asia: Theory and Praxis”, Pacific Affairs, vol 70, no 2, (summer 1997) p. 246

14     Schaffer and Schaffer, “Better Neighbours”, p. 111

15     Schaffer and Schaffer, “Better Neighbours”, p. 111

16     Reed, “Regionalization”, p. 244

17     Dash, “Political Economy”, p. 201

18     Gupta, “ India”, p. 310

19     Sankar Ghosh and Somen Mukherji, Emerging South Asian Order: Hopes and Concerns, (Calcutta: Media South Asia, 1995), p. 197

20     “The Unmagnificent Seven,” The Economist Online, <http://www.economist.com/displaystory.cfm?story_id=954547 > ( Jan. 24, 2002).

21     , Ghosh and Mukherji, “Emerging South Asian Order”, p. 147

22     “The Unmagnificent Seven.”

23     Panagariya, Arvind, “ South Asia: Does Preferential Trade Liberalization make sense?”

http://www.columbia.edu/~ap2231/Policy%20Papers/Saarc-wb.pdf

24     “The Unmagnificent Seven”

25     Dash, “Political Economy”, p. 204

26    SAARC website, <http://www.saarc-sec.org/main.php?t=2.1.6>

27     According to Schaffer and Schaffer, SAFTA was supposed to come into existence in 2001. The Economist article, “The Unmagnificent Seven” also pointed out that the implementation of SAFTA has been rapidly delayed.

28     “More Effort Needed,” The Economist Online,

http://www.economist.com/displaystory.cfm?story_id=2968833> ( July 29, 2004), p. 25

29     Dash, “Political Economy”, p. 196

30     Dixit, “External Affairs”, p. 111

31     Dash, “Political Economy”, p. 188

32     “The Unmagnificent Seven”

33     Dash, “Political Economy”, p. 189

34     “Back to jaw-jaw,” The Economist Online,

< http://www.economist.com/displaystory.cfm?story_id=2335771> ( Jan 8, 2004)

35     “Giving peace a chance,” The Economist Online

<http://economist.com/displaystory.cfm?story_id=2423053> ( Feb. 15, 2004)