Saarc – what it must focus on

While addressing the concluding session of the 8th meeting of the Finance Ministers of South Asian Association for Regional Cooperation (Saarc) Pakistan’s Finance Minister referred to the trade-limiting policies of the member states – tariff and non-tariff barriers – and regretted the slow implementation of the three decades-old South Asian Free Trade Agreement (Safta).

His observation pointed to a slow trend that needs speeding-up for the collective good of the South Asian states because slow implementation of Safta is preventing the crystallization of member countries’ economic union manifested by the fact that trade between member countries represents just about five percent of their total foreign trade.

The positive outcome of this conference was that the Saarc Finance Ministers agreed on ten reforms aimed at increasing regional trade including agreements on Promotion & Protection of Investments, Avoidance of Double Taxation, Mutual Administrative Assistance, and on transportation of goods, and the setup of Saarc Development Fund and the South Asian Economic Union.

These reforms aim at lowering the current barriers to trade but a crucial initiative is the setup of a research unit in the Saarc Secretariat for monitoring trade between member states. While the mandate of this unit is unclear, it could highlight a critical aspect – comparative advantages member states have in different sectors, which could be capitalized on for regional benefit.

What Saarc member countries must accept is that “globalization of trade” has been a failed experiment; the recessions it triggered beginning 2001 and 2008 have proved that beyond doubt. The world was destined to bask in the glory of globalization of trade but by creating over-dependence and excessive industrial capacities, it pumped-up “bubbles” that eventually burst.

Using traditional technologies, developing countries began producing exportable surpluses of manufactured goods at prices much lower than developed countries’, while huge surplus capacity existed in the developed countries in those technologies. The impact this development had on the trade potential of the developing countries was bound to trigger a rash reaction of the developed countries.

The speed with which the ‘indirect-foreign-investment rug’ was pulled from underneath the feet of emerging Asian economies proved that developed countries placed their bets on horses that went berserk pursuing the objective of earning windfalls, and Western economies’ strategy of using the WTO to bring down import tariffs in Asian economies couldn’t open the gates for Western exports.

The fallout from destabilization of Asian and Latin American economies, and the recession-inflicted drop in demand in developed countries, forced a recession that seems unmanageable for governments everywhere, the IMF, and the World Bank. To make things worse, leadership of the developing countries remained fragmented as long as they were doing well, despite the trade inequalities foisted by WTO.

The way South Asian countries’ leadership sought to resolve the current economic crisis aimed more at gaining cheap popularity among the electorate, especially advocates of the concepts of globalisation and marginalization of the State, but now they know fairly well that the globalisation “trick” has backfired because they allowed it to be spearheaded by speculators.

It is now crystal-clear that the craving for profit by producing virtually everything (irrespective of enjoying a cost advantage therein) was a flawed tendency. This is the age of specialisation, of producing quality at the lowest price, which implies focusing on sectors wherein comparative advantages offered by domestic raw material and economies of scale can be optimized.

It calls for agreement between Saarc member states on who should produce what based on a fair assessment of comparative advantage, and then sticking to that agreement. This is the route to maximizing the benefits of economic activity – cutting the cost of production and creating ever-higher employment – to spread prosperity in the region.

This objective mandates a resolve to rationalize regional relations on the issue of comparative advantage, not taking unfair advantage of each other. The strategy should be a jointly planned honest rationalization of national industrial bases using the yardstick of comparative advantage to maximize the benefits offered by domestic raw materials, worker skills, and production capacity.

Admittedly, it is a painful process because it may require flogging some parts of the industrial base at throwaway prices and expanding others, and re-training large chunks of national workforces, but it is a process that will steadily stabilize the national economies for longer terms to permit confident future planning by businesses and assuring investors about stable earnings.

This also implies expanding new sectors to create fresh opportunities in support sectors – actions that entail pain in the short-term but rational choices and realistic time frames for phasing out marginally profitable industries could eventually ensure fairer pricing of raw materials, trading in cost-effective lots, and capacity utilization by domestic advantage-based industries.

To materialize this challenging switch-over, the IMF and the WB must commit to help contain the pain in the transition stage so that resulting economic disruption doesn’t reach alarming proportions and destabilize states that adopt this route to economic rationality that in the long-run would help cut waste, and conserve resources to banish unemployment, poverty, malnutrition and bad labour practices.

Embarking on this process consciously and systematically(rather than unplanned closure of traditional industries with unmanageable social consequences) would be the right strategy, which implies that the State plays a far more responsible role than the one it got used to playing, courtesy vociferous demands for its diminution by promoters of the” globalization of trade.”

The focus should be on definite and credible improvement in governance of the ‘State’, not diminution of its role. In the Saarc countries (still stigmatized by high levels of poverty), regional countries should be the preferred destinations for export of food and consumer item surpluses to contain hunger and poverty; lowest transportation cost could make the items even cheaper for the poverty-stricken masses.

The most important contribution the State can make is speedy expansion of the physical infrastructure, especially the power, energy, and transport sectors (often the victim of corruption and resource waste), support services, and finance and support sector-specific focused research. Above all, to avoid imposition of any restrictions on foreign trade, it must impose regulatory disciplines to eliminate the violation of global standards.

Put on the right track and closely monitored for delivering, State is the institution that can lay the foundations whereon rest the hopes of economic growth, and ensure equity in distribution of resources to all sections of society to pursue socially acceptable objectives, not just profit – an aim whose blind pursuit is blocked by a responsibility-conscious State.

Finally, profiting via speculative rather than real economic activity that enriches few at the cost of millions triggers a chaos that defies reversal, needs containment within tolerable limits.