Currently, South Asia is grappling with issues, solutions to which might well be in the domain of economic cooperation as well. This has a direct reference to the India-Pakistan conflict. The South Asian economic integration has remained afflicted with a narrative that is more often than not, a negative one. As a part of this, the arguments put forth include the assertion that the region lacks in trade complementarities due to similarities in production structures. Therefore, the region can only compete in products and there is limited scope for intra-regional trade. Not only that the negative narrative has had deleterious effects on bilateral and regional integration processes, such a view-point is also flawed on account of both conceptual and empirical considerations. This also results in ‘Costs of Non-Cooperation’ (CNC).
‘Costs of Non-Cooperation’ occurs when a country imports from the global market at prices higher than the price at which the same product is available from the regional market, and thereby incurs an additional foreign exchange expenditure on such imports. The additional foreign exchange expenditure incurred on such imports from the global market is ‘Costs of Non-Cooperation’. It may be highlighted that the lower price of regional products may not necessarily be of lower quality as compared to products that are imported from the global market.
It is true that production structures in South Asian region are similar. But this cannot deter trade within the region. It is now a common knowledge that similarities in production structures and in consumers’ tastes and preferences is a good regional feature, whereby intra-regional trade of the intra-industry variety can take place. A country can export one type of textiles and import another type of textiles. Countries can simultaneously both export and import various types of medicines while the industry which is pharmaceuticals remains the same.
Going by this logic of the New Trade Theory based on the determinants of product differentiation, imperfect markets and economies of scale, the South Asian region is amenable to intra-industry trade. The empirical estimates of ‘Costs of Non-Cooperation’ were first estimated in 1995 (Das, 1995). Further, RIS (1999) carried out a detailed quantitative assessment of costs of non-cooperation in the SAARC region. The empirical exercise revealed that in 1994 Sri Lanka and Pakistan imported many items at higher unit values than that would have prevailed if they imported from within the SAARC region. On this account Sri Lanka lost US$ 266 million and Pakistan lost US$ 511 million.
Our recent assessment of the welfare loss for Pakistan and Sri Lanka arising out of importing items at a higher unit values from outside the region than that would have prevailed if they imported from within the SAARC region shows that not only the costs of such non-cooperation have been very substantial over the years but it has been increasing as well reiterating that greater regional cooperation and integration offers immense opportunities and benefits for SAARC member countries (see also Das, 2016). As per our recent estimates for 2014 Pakistan have suffered a loss to the tune of US$ 6821 million while Sri Lanka in the same year have lost around US$ 2848 million. The estimates of costs of non-cooperation in 1994 i.e. two decades back were US$ 511 million and US$ 266 million for Pakistan and Sri Lanka respectively. Thus, the current level of overall non-cooperation costs for both Pakistan and Sri Lanka are very high. To add the worsening scenario, these costs are not only increasing but increasing at a faster rate implying a lot of potential opportunities being unutilised or being wasted. If we compare the period 1994-2009 and 2009-2014 we can clearly see that rate of increase of these costs have also substantially increased from approx 160 % to 420 % for Pakistan and 126 % to 375 % for Sri Lanka between the two periods.
Apart from having a detailed look at the absolute levels and overall values and trends of these costs, it is imperative to look after the structure and composition of these costs in terms of product categories constituting these costs. The value of top ten product categories constituting these costs for Pakistan and Sri Lanka are approximately $14 Billion and $5 Billion respectively over the last five years 2010-2014 while their shares in total over the same period are almost 50 % and 40% of the costs for Pakistan and Sri Lanka, respectively. Petroleum oils, Gold (non-monetary) and Aviation spirit are in top ten product categories for both Pakistan and Sri Lanka highlighting the importance of these items in reaping the benefits of cooperation for the entire region. Also for Pakistan petroleum oils product category makes up for around 30% of the total costs of non-cooperation while for Sri Lanka petroleum oils and gold together make up for around 23% of the total costs of non-cooperation. This leads to an interesting insight that even if Pakistan and Sri Lanka focus on just one product i.e. Petroleum oil (HS 270900) they could have reaped a benefit of approximately US$ 9400 million over 2010-2014 by sourcing them from within the SAARC region.
The preceding sections have highlighted as to how a lack of conceptual clarity on various dimensions with regard to regional economic integration has somewhat prevented an objective appreciation of the potentials and imperatives of economic cooperation in the South Asian region. As we can see from the analysis above that there is immense potential to augment economic linkages in the region. Also while trade integration in the region has remained low, it has remained important for different countries on different dimensions and offers further potential to be enhanced. The ambit of investment cooperation can create production networks and help evolve supply chains by strengthening trade-investment linkages. It is particularly significant in forging developmental cooperation in the region by exploiting locational advantages. This would also be instrumental in creating adequate export supply capacities and help expanding the size of the markets.
In short, the costs of non-cooperation are high in South Asia and are also increasing, as the illustrations reveal. To address this some of the above mentioned measures in addition to changing the regional mindset towards a greater ‘economic optimism’ is warranted on an urgent basis, even to avoid conflicts in non-economic realms. Peace needs to be achieved as much from peaceful means, since the end is as important as the means to achieving it!
*(Dr Ram Upendra Das is Professor at Research and Information System for Developing Countries (RIS), New Delhi. Insightful discussions with Prof. Sachin Chaturvedi, DG, RIS are gratefully acknowledged. Thanks are also due to Anup Kumar Jha, Visiting Faculty, Delhi University for sincere research support).
Das, Ram Upendra (2016). ‘Costs of Non-Cooperation in South Asia: An Illustration and Way
Forward’, Policy Brief No. 75, September, New Delhi:RIS
Das, Ram Upendra. (1995). ‘Costs of Non-Cooperation’, Policy Note prepared for the Ministry of Commerce and Industry, Government of India.
RIS. (1999). SAARC Survey of Development and Cooperation: 1998-99, RIS, New Delhi.