Businessmen without borders

Whatever sensible economic activity you can think of, an activity that adds to the wealth of the country, there is a government rule that stifles or constrains it.

It is difficult to get any data on intra-SAARC trade flows after 1996. But from what is available we know that the share of intra-SAARC exports in total SAARC exports in 1996 was 4.25 percent, up from 3.16 percent in 1990. Similarly, intra-SAARC imports as a share of total SAARC imports was 4.06 percent in 1996, up from 1.91 percent in 1990. Our vision is to step up the share of intra-SAARC trade to 10 percent of the total SAARC trade. So, are we going to have a South Asian Free Trade Area (SAFTA) by 2001?

Compare the share of intra-SAARC exports in total exports from the SAARC region with figures from other free trade regimes. When the North American Free Trade Agreement (NAFTA) was formalised, 70 percent of Canada´s trade already took place with the United States. Ditto for Mexico. Much the same is true of the European Union (EU) and the AFTA (Asean Free Trade Area). But in the case of SAARC, over a period of six years from 1990 to 1996, when all this intensive government-level activity on SAFTA was going on, this share increased by one percentage point. That amounts to 0.2 percent a year. If this figure is to touch 10 percent, it will take us 50 years at this rate. And if this figure is to reach 70 percent, it will take us 350 years. Yet, we satisfy a critical criterion for the "success" of such arrangements by geographical contiguity and in the name of "regionalism". Unfortunately, there seems to be nothing else.

A South Asian regional study on trade, manufactures and services (TMS) completed in 1991 was supposed to be the first step towards trade and economic cooperation, highlighting the wonderful potentials for trade. The Colombo SAARC Summit in 1991 sanctioned the idea of trade liberalisation and in Dhaka in 1993, we had the SAARC Preferential Trading Arrangement (SAPTA). Three rounds of trade negotiations have been held under SAPTA (with a fourth in progress) and we may even have SAFTA.

Since 1991, there have been several seminars on the promise of intra-SAARC trade. There have been numerous papers and even   books identifying commodities that South Asian countries can import from within the region rather than from outside. Since imports from within the region are ostensibly cheaper, there can even be a saving of foreign exchange, although there are some doubts about whether there will be real savings.

It does not make sense to compare the prices of railway construction materials imported from outside with the prices of railway construction materials imported from within SAARC. Comparisons must be with comparables. Since trade data follows a digitary classification, the more disaggregated the digitary classification, the more the commodity is described in detail. For example, at gross levels of classification, I may be talking about edible oils. But in finer digitary classification, I may be talking about groundnut, coconut or mustard oil. Because of data limitations, these exercises are typically done at the 3-digit or 4-digit level, such as first foodstuff, then processed food, then edible oils, then others. For items like railway construction materials, oilseeds, crude fertilisers and rubber tyres, prices do not mean anything. After all, there are differentiated products, and there is a phenomenon known as branding, even for agro products.

Fifteen years ago, how many of us would have expected salt or wheat flour to be branded? So some of these academic exercises are meaningless. They are good for churning out PhD theses and publishing papers. They don´t determine whether the share of intra-SAARC trade in total SAARC trade will go up to 10 percent.

Banning barriers
something like SAPTA or SAFTA is referred as a trade bloc or a regional trading arrangement. Conceptually, these can be of four types. First, a free trade area, which eliminates trade barriers among members of the bloc, but does not adopt a common commercial policy vis-a-vis non-members. Second, a customs union, which goes beyond a free trade area in the sense that it also adopts a common commercial policy vis-a-vis non-members. Third, a common market, which removes barriers to cross-border movements of factors of production (labour and capital). Fourth, an economic union, which goes beyond a common market by coordinating and unifying macroeconomic policies (tax, interest and exchange rates) among members.

Free trade areas and customs unions have been around for a long time, much before GATT (General Agreement on Tariffs and trade) was set up in 1947. But they reflect a indset that, I believe, has become outdated, independent of the argument that South Asian nations have inherently complemenary economies and therefore, the prospects for trade expansion among these countries is limited.

Trade theory is about comparative costs. England will export cloth and import wine. Portugal will export wine and import cloth. India has relatively more of labour and relatively less of capital, as compared to the United States. Therefore, India will export relatively labour-intensive commodities to the United States (gems and jewellery, marine products) and import relatively capital intensive commodities from the United States (project goods, machinery and equipment). This simplistic notion of comparative advantage fails to appreciate the explosion in cross-border capital flows since the 1970s.

Take global trade flows today. Two-thirds of trade flows are intra-industry flows. If you leave out monoculture economies you will find the same country exporting and importing steel. You will find the same country exporting and importing cars or rice. India can export Darjeeling tea and import tea from Sri Lanka or Kenya. India can export basmati rice and import rice from Thailand. What is more, a large chunk of trade flows is in the form of intra-firm flows trade flows between a parent company located in one country and a subsidiary located in another.

In the altered global environment, you can´t boost trade without increasing and encouraging crossborder investments. If we are serious about doing something within the SAARC region, let us forget free trade areas and customs unions and head straight into a common market. Remember, this means eliminating barriers to cross-border movements of factors of production. Economists typically classify factors of production into four categories: land, labour, capital and entrepreneurship. Under normal circumstances, land does not move across borders. Labour and capital do. Entrepreneurship is probably the factor of production economists understand the least and have not paid much attention to.

However, entrepreneurship moves with labour and/or capital and we must target their free movement. In most countries within the SAARC region, there has been some unilateral liberalisation since the 1980s. (Sri Lanka started liberalisation in the mid-1970s.) In halting steps, these have involved liberalisation of cross-border capital movements, despite apprehensions and faulty understanding of what happened in South East Asia. These movements will continue. Five of the SAARC countries are members of the World Trade Organisation (WTO) and Nepal will soon become one. Once the trade-related investment measures (TRIMs) agreement of the WTO is broadened, these countries will be forced to liberalise crossborder capital movements by the scruffs of their necks.

We don´t need to do anything special for capital. Cross-border movements will be liberalised for all WTO members and thus automatically, for SAARC members. Cross-border movements of labour is a different matter—it will not happen automatically unless stimulated by policy action. Within SAARC, if we remove these barriers, you will find that intra-SAARC trade will automatically explode as investments between South Asian countries take off.

Examine the Indian case. We already have free labour movements with Nepal. If we allow it with the other countries, will we have significant labour movements from Bhutan, Maldives, Pakistan or Sri Lanka? Not very likely. We will have some from Bangladesh. But that probably happens in any case, illegally. Let´s legalise it. Inevitably, arguments concerning security will be typically advanced by governments.

This argument is nonsensical and governments are part of the problem. Show me one example of a trading bloc that has worked because of government mandates. Economically or commercially, the bloc phenomenon was already happening on the ground. And the governmental announcement merely formalised and sanctioned it.

Less of government
One of the problems with SAFTA is that we have left it to governments to work it out. Will commercial transactions between two corporate entities be postponed because one´s CEO has been changed? In a welfare sense, if cross-border movements of labour are allowed, it is perfectly possible that India might not gain much. Welfare gains will generally accrue to relatively smaller countries. In a way, the larger country has to subsidise the process of bloc formation. Despite opposition from domestic labour, the Americans went ahead and did it for NAFTA. If India wants a permanent seat in the Security Council or wants an Indian to be the managing director of the IMF, this is the kind of vision India should have.

Instead, Indians will prefer to haggle with the US about more Hl-B visas (for skilled labour), and will be terribly upset if Americans advance a general argument (against Hl-B) that unskilled labour movements have a disruptive influence on American society and American culture, whatever American culture might mean. Yet, within India, identical arguments will be forwarded about immigrant labour from Bangladesh. All geographical boundaries of nation states are meaningless from the point of view of resource allocation. We should not allow governments to impose a sanctity to them that is more than that of passports and visas.

Regardless of what is happening in the political domain, there has to be a greater economic area within the Subcontinent Pakistan will have closer economic ties with North and West India, Sri Lanka and Maldives with South India and Bhutan, Bangladesh and Nepal with East India. That will automatically happen (if governments allow it) because of commercial principles. But the surest way of ensuring that it doesn´t happen is to allow governments to plan for such a development, particularly when this planning is done at the level of national boundaries. For instance, how does Pakistan´s economic relationships with Northeast India make any economic sense? Instead, let us remove government intervention and government-induced distortions.

In studies on constraints to intra-SAARC trade, one invariably comes across the phrase non-tariff barriers (NTBs). Scrutinise the details, and one comes across government procedures and red tape erected by petty government functionaries. In India, the British left us a bureaucracy which has been perfected by us over the years. Whatever sensible economic activity you can think of, an activity that adds to the wealth of the country, there is a governmental rule that stifles or constrains it. The information technology (IT) sector in India grew because no government policy determined its growth. (Unfortunately, there is a now a new ministry of information technology.)

The South Asian region is capable of clocking a real GNP (gross national product) growth rate of 7 percent over the next 20 years. Plug in a population growth rate of 2 percent and you have a real per capita GNP growth rate of 5 percent. This growth was never achieved in the last 50 years, and, if accomplished, it can transform the face of South Asia.