Study on Intraregional Trade and Investment in South Asia
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Study on Intraregional Trade and Investment in South Asia This study broadens and deepens intraregional cooperation and integration in trade and investment among South Asian countries. It showcases the benefits of regional integration and presents an array of policy recommendations to maximize and realize such gains. Three parallel initiatives are needed: first, reduce nontariff barriers to deepen the South Asian Free Trade Area (SAFTA); second, expand SAFTA’s scope to include investments and services; and third, focus on key industries to succinctly demonstrate the process and benefits of reforms. These translate into six component studies: Development Partnership Program • The Role of Trade Facilitation in South Asian Economic Integration and Investment in South Asia Study on Intraregional Trade • Country Investment Studies for Bangladesh, India, Nepal, and Sri Lanka for South Asia • Textile and Clothing Industry The study invigorates the debate and focus on South Asian integration as a means to further growth and reduce poverty. About the Asian Development Bank ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to help its developing member countries substantially reduce poverty and improve the quality of life of their people. Despite the region’s many successes, it remains home to two-thirds of the world’s poor: 1.8 billion people who live on less than $2 a day, with 903 million struggling Study on Intraregional Trade on less than $1.25 a day. ADB is committed to reducing poverty through inclusive economic growth, environmentally sustainable growth, and regional integration. Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main and Investment in South Asi a instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance. Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org ISBN 978-971-561-829-8 Publication Stock No. RPT090816 Printed in the Philippines 6th proof Intraregional Cover sp1 1 10/29/2009 10:21:59 AM Development Partnership Program for South Asia Study on Intraregional Trade and Investment in South Asia © 2009 Asian Development Bank All rights reserved. Published in 2009. Printed in the Philippines. ISBN 978-971-561-829-8 Publication Stock No. RPT090816 Cataloging-In-Publication Data Asian Development Bank. Study on intraregional trade and investment in South Asia. Mandaluyong City, Philippines: Asian Development Bank, 2009. 1. Intraregional trade. 2. Investment. South Asia. I. Asian Development Bank. The views expressed in this report are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank (ADB), its Board of Governors, or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. By making any designation of or reference to a particular territory or geographic area, or by using the term “country” in this document, ADB does not intend to make any judgments as to the legal or other status of any territory or area. ADB encourages printing or copying information exclusively for personal and noncommercial use with proper acknowledgment of ADB. Users are restricted from reselling, redistributing, or creating derivative works for commercial purposes without the express, written consent of ADB. Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines Tel +63 2 632 4444 Fax +63 2 636 2444 www.adb.org For orders, contact Department of External Relations Fax +63 2 636 2648 [email protected] Foreword It is encouraging that the Australia–Asian Development Bank South Asia Development Partnership Facility is financing this Study on Intraregional Trade and Investment in South Asia, under Regional Technical Assistance 6337: Development Partnership Program for South Asia, as its second project. The promotion of growth and the outlook for further reductions in poverty, through increased trade and investment and through deeper regional economic integration, hold much promise. South Asia is also moving with the world and is changing its perspective on globalization and is adopting a more outward economic orientation. While there is still resistance to South Asian regional cooperation because of the region’s long history of political conflict and a somewhat unyielding protectionist stance, South Asia is now more open to the policies of liberalization and openness. Reforms are under way. The establishment of the South Asian Association for Regional Cooperation in 1985 and the agreements on preferential trading (SAARC Preferential Trading Arrangement) signed in 1993 and free trade (South Asian Free Trade Area—SAFTA) signed in 2004 were serious attempts at regional cooperation. However, much more needs to be done to bring about the desired expansion in trade and investment, and to forge closer ties both within and outside the region. It is hoped that this study will generate some greater move toward these ends in its proposals on different sectors of the economy. The objective of this study is to showcase the benefits of regional integration and to present policy recommendations to realize such gains. South Asia must go beyond its history and look instead toward the immense potential of regional cooperation and integration in the areas of economic growth, employment, and development. To broaden and deepen existing cooperation and integration in regional trade and investment, three parallel initiatives are necessary: deepening SAFTA by reducing not only tariff barriers but also nontariff barriers; focusing on key industries to demonstrate the process and benefits of reforms more succinctly; and expanding the scope of SAFTA to include trade in services and investment. These are translated into six component studies (Chapters 2–3, and 5–8). While the current global financial turmoil will surely have an impact on South Asian economies, this is beyond the scope of this study. In terms of structure, Chapter 1 provides the background and context of the study, as well as its justification and objectives. The Role of Trade Facilitation in South Asian Economic Integration (Chapter 2) shows that deeper economic cooperation and integration, made through increased intraregional trade and investment, require improved trade facilitation and a reduction of nontariff barriers. Thomas Hertel, with Tasneem Mirza, wrote this chapter. The potential for intraregional trade and investment in the textiles and clothing industry in South Asia and the issues surrounding this sector are highlighted in the study by Meenu Tewari, The Textiles and Clothing Industry (Chapter 3). Study on Intraregional Trade and Investment in South Asia Four parallel selected country investment studies were undertaken to address the issues iv surrounding foreign direct investment in four South Asian countries. Chapter 4 offers an introduction to these studies citing the objectives and providing a brief review of the current literature. Addressing specific constraints and assessing the potential for foreign direct investment in each country were: Khondaker Golam Moazzem with Md. Tariqur Rahman (Bangladesh, Chapter 5), Bindhya Nath Jha (India, Chapter 6), Ramesh Chandra Chitrakar (Nepal, Chapter 7), and Dushni Weerakoon with Jayanthi Thennakoon (Sri Lanka, Chapter 8). Chapter 9 closes the volume with a summary of the policy recommendations to be undertaken at the country and regional levels. The Asian Development Bank is fortunate and honored to have gathered such a distinguished body of scholars who shared their expertise to complete the different components of this study. Their conscientious efforts are deeply appreciated. This project was initiated by the Country Coordination and Regional Cooperation Division (SAOC) of the South Asia Department under the leadership of former Director Richard W.A. Vokes. The project was approved in 2006 and prospered with the continued support of then Deputy Director General Sultan Hafeez Rahman. Director Yukiko Kojima continued to lead the project when she assumed the directorship of SAOC. The study is being concluded under the guidance of Director Bruno Carrasco. Alain Borghijs, together with Naved Hamid, launched the project as its first implementers. Shunsuke Bando and Tadateru Hayashi took over and implemented the project toward its completion, with the assistance of Alice Martha A. Lee. The Introduction and Executive Summary were written by Alice Martha A. Lee. Marissa Garcia provided the manuscript editing. Ma. Solita Mabaquiao, Aileen Pangilinan, and Mary Jane de Ocampo provided invaluable support and assistance. Colleagues from the different resident missions who provided valuable comments and inputs include Rezaul Khan (Bangladesh), Kavita S. Iyengar (India), Shreejana Rajbhandari and Paolo Spantigati (Nepal), and Johanna Boestel (Sri Lanka). Finally, we thank the Australian Government for financing this project through the Australian Agency for International Development (AusAID). Kunio Senga Director General South Asia Department Contents xii Abbreviations 1 Executive Summary 8 Chapter 1: Introduction 12 Chapter 2: The Role of Trade Facilitation in South Asian Economic Integration 12 Motivation 13 Background 13 Trade Facilitation in SAFTA 13 Trade Facilitation Defined 13 Trade Facilitation in South Asia 13 Existing Literature 14 Analytical Framework 15 Data Quality