It is a fact that the South Asian region was much more integrated in the colonial era than in the post colonial age. Political problems as well as inward-focused economic strategies pursued for development contributed to a delinking process leading to a decrease in intra-regional trade from 20 percent of total trade in 1948 to 2 percent in 1967. However, now the tide seems to be moving in a different direction, even though it is too early to predict. Starting from 1990s, the theme of economic liberalization and export orientation has gained prominence in policy making in all South Asian states. There is a new trend of general convergence in economic policies. The role of the state is also being viewed from a different perspective.
The “commanding height model” that viewed the state as the principal guide and investor in the economy is giving way to a partnership concept known as the “regulator and facilitator model” where state policies encourage the private sector to take the lead in investments. This has had a dramatic impact in unleashing the suppressed economic potential of India, the largest country in the region. Other South Asian countries are also following the same logic with varying degrees of success.
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The important point is that this new focus on liberalization and private sector participation has encouraged countries to gain from intra and inter regional trade. China and South East Asia are already following this approach with new vigor, and South Asia is gradually, though hesitantly, moving in the same direction. The interstate political dynamics of the region is one reason for this hesitation. The general unwillingness of South Asian countries to form a strategic vision of economic cooperation that allows the gravitational force of the large and dynamic Indian economy to pull all other member states in the path of collective prosperity is another reason.
Over the years, South Asian countries have shown great willingness to form institutions for South Asian regional economic cooperation. SAARC is an example. In the last two decades since the inception of SAARC many studies have been undertaken under its auspices to explore opportunities of economic cooperation and trade expansion as well as to take concrete steps in poverty alleviation in member countries. There has been a lot of noise on this front, but in fact, not many concrete steps have been taken. A strictly bilateral approach rather than a regional perspective is the preferred course of action. Nevertheless, over the years intra regional trade in the SAARC region has increased from a low 2 percent to 5 percent, but is still far below the 20 percent achieved before the 1950’s. In the meantime, India has taken new initiatives to promote economic links with East Asia.
Neighborhood Economics
There are two powerful forces at work in the South Asian region. Viewed from a gravity model perspective developed by economists and geographers, India is the most important country in the region. The size of the country, the dynamism of its economy and the distance factor involved imply that smaller South Asian countries will find the gravitational pull of the Indian economy vital in their quest for prosperity. In fact, this is one important reason to believe that in the years to come, economic logic will become increasingly more powerful in India-Pakistan relationship. This logic could be deemed naïve on the ground that the dispute between the two countries is rooted in many other issues that override economic considerations. This may be true. Nevertheless, economic well being of citizens is crucial in providing legitimacy to any democratic government in the region. On this score, the gravitational pull of Indian economy could be increasingly hard to resist in the future for any democratic regime in Pakistan. In this regard, Pakistan’s journey towards a democracy is a good omen for regional cooperation.
The other economy that has the potential to exert a strong gravitational pull in South Asia, especially for the smaller South Asian countries, is China. China’s economy has been on a high growth trajectory for over two decades, and the Chinese do not have to do much to make their presence felt. The growth in their size means that even if the Chinese do not do anything deliberately, they are becoming a factor in all countries around the world, more or less like the US. China’s size, dynamic economy, and the perception of great future potential has a built in advantage, it means that other countries, especially the neighbors, will feel its presence even without deliberate design. This logic gets more compelling when it is realized that the Chinese aim to surpass the US economy in terms of total output in the next twenty years.
The growth of Chinese economy has been a factor in the expansion of trade of the South Asian region, and the most important participant in this process has been India. In smaller countries like Nepal, trade with China has expanded rapidly, while at the same time trade deficit is increasing unsustainably. From a practical perspective both China and Nepal must address this issue so that new production units for exports to the Chinese market are set up in Nepal. Even in India, it is clear that Chinese export pattern is causing anxiety and concern. Again, according to the gravity model, it is easy to see that the growing size of the Chinese economy, its increasing focus on investments in provinces bordering South Asian countries, and its massive program to improve transport infrastructure to facilitate trade with neighboring countries means that its gravitational pull is constantly increasing, even if we are to ignore the political dimension. Nepal is bound to feel this pull in the years to come, especially when the railway from Tibet is extended to the Nepali border. Nepali policymakers, even those belonging to ideologiaclly different parties, are almost unanimous about extending the Chinese railway network from Lhasa to the Nepali border with the ultimate objective of opening a new land route for trade between China and India.
Expansion of transport infrastructure that includes both rail and road transport in provinces bordering South Asia, including Myanmar, means that cost of transferring goods from China to its neighbors will decrease significantly in the future. For the smaller South Asian countries, China is now definitely emerging as a country with a new and powerful gravitational pull factor. This has implications for all South Asian countries, including of course India. This is where economics interacts with politics.
For smaller South Asian countries, the gravitational pull of Indian economy will remain important in future, but it may not be in India’s national interest to take this factor for granted while designing trade policies. This is a perspective that remains unappreciated.
China’s size, economy, and future potential means that countries feel its presence even without design on its part.
Nepal’s trade deficit with India is increasing in an unsustainable manner. This cannot continue for long. Both countries must implement policies to reduce this yawning trade deficit, focusing on products where Nepal has a comparative advantage. Many Indian and Nepali scholars have suggested that both agricultural and industrial production units could be set up in Nepal with Indian help and facilitation to supply products to northern and north eastern markets in India. Similarly, as India advances in the IT industry, Nepal too has the potential of developing a thriving IT industry of its own, so that regional growth leads to regional prosperity.
Time to Change
The gravitational pull of Chinese economy and the pattern of its investments to facilitate and encourage trade with neighboring countries has both economic and political implications. Perhaps for both economic and geo-political reasons, it is now time for Indian policymakers to review their bilateral focused mindset with neighboring countries and begin to conceptualize the whole South Asian region as one economic hub linked with South East Asia and China. A strictly bilateral relationship that uses the gravitational pull of the larger Indian economy may not bring about the desired results because the gravitational pull of China in economic terms can no longer be ignored.
So, a change in strategy is the need of the hour, and it consists of two major elements. First, it is necessary to view South Asia as one economic region with India taking the lead to promote and encourage regional economic integration and industrialization for collective prosperity. A strictly bilateral thinking will not allow a holistic approach of this nature to take roots. Second, based on new theories of product fragmentation and supply chain in international trade, the private sector, with support from the government, could be encouraged to build new production capacities in all the smaller countries in the region. A two-pronged strategy of this nature could lead to a balanced relationship between India and other South Asian states, and also between East Asia and South Asia. This will be to the economic and political benefit of all the countries in the region, both in South and East Asia, including China, in the years to come.
The author is co-chairman of Rastriya Janasakti Party
prakash_dr@hotmail.com
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