Wednesday, June 29, 2011

Two main barriers to economic integration in South Asia

Former finance minister Rameshore Prasad Khanal argues that the two main barriers to trade integration in South Asia are poor cross-border transport and customs infrastructure, and difficulties in swapping currencies, especially for small producers. Here is my take on regional economic integration growth in Nepal.

There are two more main barriers to effective trade within the region. The cross-border transport and customs infrastructure in the region is very poor. If SAFTA is to yield any result, improvement in trade infrastructure is a must. Asian Development Bank (ADB) through South Asian Sub-Regional Economic Cooperation (SASEC) has been focusing on improvement of transport infrastructure in the quadrangle of Bhutan, Bangladesh, India and Nepal but the actual move on critical infrastructure has been slow.

The other barrier for trade between small producers in the region is currency. Trade between most of the countries are carried out in US dollars, as a result there is little preference for goods originating from within the region. A simple mechanism of currency swap would help small producers in the individual countries find market within the region. If countries agree to allow trade of up to a certain range in the currency of respective countries and central banks swap such currency reserves periodically, then the trade within the region can get a boost even without making much improvement in the other non-tariff barriers. A simple currency swap arrangement can, in course of time, lead to full convertibility of currencies in the region. If a currency swap arrangement is agreed upon by all central banks of South Asia, then currencies would not be required to move physically as most of the settlements will take place in the books. The net differentials may only be moved physically once in agreed period framework. Exchange rates between the two currencies may be allowed to move as the market conditions demand, except in cases where two currencies are pegged with each other.

Currency swap arrangement would also open up two other potential areas in the region, namely, tourism and education. If a Bangladeshi needs to cough up US dollar to come to Nepal, he/she might choose to go to Thailand in place, so does a Nepali. Many Sri Lankans would like to come to Nepal to visit Lumbini and Nepalis would just as love to go to Kandy in Sri Lanka. Many Nepalis each year travel to New Delhi but few think of going to Lahore or for that matter Karachi. Countries in South Asia have world-class educational institutions but because of currency restrictions many good Pakistani, Bangladeshi or Nepali institutions do not receive South Asian students. If one has to procure US dollars for foreign education, the natural choice would be a country outside South Asia. Currency swap arrangements would also promote students mobility in the region. Visa restrictions have not been such a problem for many in the region, but in critical cases, this has been an issue. It is reported that the recently established South Asian University, funded by all member countries on the basis of an agreed formula, has been facing difficulty receiving Pakistani students and academicians due to visa-related problems.