Fact Sheet - South Asia: Growth and Regional Integration

February 16, 2007

Overview

• Closer regional cooperation can be an effective tool in addressing energy shortage, improve connectivity, increase investment, and promote peace and stability.

• South Asia is the least integrated region in the world. Cross-border investments, and the flow of ideas, crudely measured by the cross-border movement of people, or the number of telephone calls, are all low for South Asia. For instance, in South Asia, only 7 percent of international telephone calls are regional, compared to 71 percent for East Asia.

• Restrictive policies within the region have neutralized the beneficial effects of common cultural affinity, common geography,  and the “gravitational” pull of proximity on movement of goods and people within the region

Trade

• Intraregional trade is less than 2 percent of GDP, compared to more than 20 percent for East Asia.

• Although South Asia has significantly reduced import tariffs, the cost of trading across borders is one of the highest in the world. Often, costs of trading across borders can exceed other costs of doing business such as cost of getting credit, enforcing contracts, hiring and firing workers, or protecting investors.

• Annual trade between India and Pakistan, the bulk of which is routed through Dubai, is currently estimated at US$1 billion, but could be as great as US$9 billion.

• Trade within South Asia can be more than doubled if appropriate regional agreements on roads, rail, air, and shipping are put in place enabling seamless movement.

• There are three reasons why South Asia will need to further lower external trade barriers: to generate classical gains from trade, to lessen the chances that trade diversion will occur, and to reduce income transfers between member countries resulting from regional integration and the tensions that can arise from such transfers.

• It takes on average more than 33 days to export from South Asia compared to 12 days from OECD countries and more than 46 days to import into South Asia compared to 14 days for OECD. 

• South Asia is the fastest growing region in the export of services. Exports of services from South Asia grew at 14 percent per year over the period 1995–2003 compared to less than 8 percent for East Asia.

• Service exports from South Asia are largely global and not regional. Like the manufacturing sector, services sector also benefit from economies of scale and specialization. Internet and modern telecommunication have resulted in the transportation cost of exporting IT services to the United States, for example, being no more expensive than transporting it to Sri Lanka. Nevertheless, there is a potential for South Asian countries to gain from liberalizing regional trade in education, health, and tourism at the regional level.

Infrastructure

• Firm level surveys of investment climate have identified infrastructure, particularly power, as a major constraint to growth in South Asia. South Asia ranks the last among all world regions in terms of road density, rail lines, and mobile tele-density per capita. It is slightly ahead of Sub-Sahara Africa in terms of mainlines coverage, electricity, improved water sources, and sanitation.

• Streamlining transport and trade systems is needed to facilitate interregional trade. Many of the region’s competitors have dramatically reduced customs and port clearance times.  South Asia risks being left behind.

• Crossings between India and Bangladesh are so heavily congested that queues often exceed 1,000 trucks on the Indian side with the result that crossing time can take 99 hours instead of 21 hours without delay.

• South Asia is the only region in the world that has no city that can provide 24/7 piped water. Poor transport and communications still hinder the integration of many rural areas into the wider economy.

Energy

• Regional cooperation can play an important role in addressing the problem of energy needs in the region. Currently, South Asia lags most other regions in terms of trade in electricity and gas. 

• Energy endowments differ among the South Asian countries, but energy trade in the region is low. Only India, Bhutan, and Nepal currently trade electricity.

• The national energy systems—gas and electricity networks—in the SAARC countries are largely isolated from each other. There are no gas pipelines crossing the national borders, whether within SAARC or between SAARC and its neighbors. Electricity interconnections exist but are limited to India-Bhutan, India-Nepal, and Pakistan-Iran interconnections.

• In Pakistan, the typical business estimates that it loses 5.6 percent in annual sales revenue owing to power outages against a reported loss of 2 percent by its Chinese counterparts. In Bangladesh, the most frequent common complaint is the constraint imposed by the poor electricity system.

• Pakistan and Afghanistan can play an important role as transit states for the rest of South Asia, as they provide the best route for access to Central Asia’s energy.

Inequality

• Regional cooperation, along with national initiatives, could play a useful role in ensuring that no country or region in South Asia is left behind. Rising inequality across regions and within countries is becoming a concern to policy-makers as rising inequality is a threat to the region’s growth and stability.

• Several lagging regions in South Asia are border economies. They suffer from the disabilities typically associated with land-locked countries or geographical isolation. Examples include northeast India, northwest Pakistan, northern Bangladesh, and parts of Nepal and Afghanistan. Typically, these sub-regions have poor connectivity with the markets within the country and with the neighboring countries. Regional cooperation on transport and trade facilitation can transform land-locked regions into land-linked regions.