Investing in investments

Less rhetoric; more political will.

For the past decade, South Asia has been one of the fastest-growing regions in the world. Yet, the Subcontinent remains one of the world´s poorest, with about 40 percent of its population living below the poverty line.

The acceleration of economic growth in the past 10 years is attributable primarily to sweeping reforms in economic policies. After decades of inward-looking policies, South Asian countries began reducing tariffs, removing trade barriers, and dismantling restriction on domestic and foreign private investment. This has helped stimulate growth, raise per capita income and reduce poverty.

Ever since its founding in 1985, SAARC has failed to achieve palpable results, especially in issues relating to regional trade and investment. As regards the preferential arrangement for SAARC trade, SAPTA came into force in late 1995 with the intention to substantially increase intra-regional trade. Three rounds of negotiation under SAPTA have listed almost 5400 items for trade but lack of political will, understanding of inherent benefits in larger trade, and historical enmities among major partners, are proving impediments to intra-regional trade.

Moreover, Intra-SAARC investment is low and discouraging. Intra-regional investment can play a vital role in the development of the region, especially for the least developed countries like Bhutan, Nepal and Bangladesh. Past experience of other regional arrangements in East Asia has proved that the poorest countries have been more successful in attracting FDI when they targeted co-developing countries of the region. For instance, in the early 1990s, 65 percent of all FDI inflow to China, 40 percent to Malaysia and almost 30 percent to Indonesia had their origins in the East Asian region.

In the case of SAARC countries, cross-border investment flows haven´t achieved much, except to a certain extent in the Indian case. India has invested some USD 84 million in the form of joint ventures within the region, with Nepal and Sri Lanka hosting the largest amounts of Indian investment—USD 34 million and USD 32 million respectively., while Bangladesh shows USD 16 million in Indian investments.

Intra-SAARC investment, to state the obvious, has enormous potential. Listed below are some concrete steps that have to be undertaken before intra-regional investments takes off:

• Specific legal and regulatory frameworks are needed to attract investment for major projects in South Asia, which means regional investment agreement for the promotion and protection of investments.
• A reason to promote regional investment is to remove bottlenecks in the flow of intra-regional trade. As SAARC regional trade rises in the presence of regional investment agreements, the potential for international business disputes will also arise. In such a scenario, a SAARC Arbitration Council will be needed to support the rising level of business transaction among member countries.
• Avoidance of double taxation is an issue of prime importance. At present, bilateral agreement for avoidance of double taxation are in effect among some countries such as India-Nepal, Pakistan-Bangladesh, Pakistan-Sri Lanka, etc, but these are not enough to boost regional trade. An agreement regarding avoidance of double taxation is required either at the regional level or on a bilateral basis among the seven nations of the SAARC region.
• National governments have to support a multi-motor vehicular agreement in the region, which will lead to free mobility of transport.
• Establishment of a SAARC common market is likely to have a significant impact on the region´s policy environment, thereby facilitating intra-SAARC investment.
• Lack of information about investment policies is a major impediment to intra-regional investments. To overcome this, all federations and chambers of commerce in the region should initiate a process of private sector awareness regarding possible joint ventures with regional partners.
• National governments haven´t given much attention to the role the private sector can play in the closer integration of the region. South Asia´s private sector is a major player in the region´s economy. 'Fortune 500' includes nine companies from this region. In view of this situation, it is all the more important to promote strategic partnership between governments and the private sector.
• Formation of a SAARC Investment or Development Bank would help tap regional investments, which will divert resources from the developed sector to the underdeveloped region or sector.

Growth quadrangles or triangles are not new for SAARC, but it is imperative now to highlight the importance and viability of such growth zones to improve cross-border inflows of investment. This will help investment flows at a sub-regional level. Such growth zones are viable in: i) the northeastern sub-region consisting parts of India, Bangladesh, Nepal and Bhutan; ii) southern sub-region consisting parts of India, the Maldives and Sri Lanka; and iii) northwestern sub-region consisting of parts of India and Pakistan.

There are many sectors in which investment, trade and production complementarities exist in different growth zones. For instance, Nepal has one of the world´s largest water resources. This can be converted into electricity with Indian investment. Collaboration of Nepal´s natural water resources with Indian finances and technological know-how can meet the shortage of electricity not only in the partner country but also in Bangladesh. Similarly, in the northeastern sub-region of SAARC, resources-based joint ventures could be launched in the mineral industry, wood-based products, pulp and paper products, pharmaceutical and herbal medicines, etc.

No doubt there are enormous prospects for intra-regional investments in South Asia. It only needs for the governments to move away from the usual rhetoric, and show some political will.

— Waqar A Sheikh is a programme coordionator with the SAARC Chamber of Commerce and Industry (SCCI)