Blazing fire in the Neighbourhood

http://archive.gulfnews.com/articles/07/04/09/10116867.html

By Jo Johnson, Financial Times

As host of a lacklustre annual summit of the South Asian Association for Regional Co-operation, which ended last week, India demonstrated it still has much to learn from China's deft economic diplomacy. While Beijing has sought to create interdependencies with its rivals, in support of its stated ambitions for a "peaceful rise", New Delhi appears complacent about the fact that it presides over the least economically integrated region in the world.

Good fences make good neighbours, but India has taken the saying too literally. Intra-regional trade is less than two per cent of south Asian gross domestic product, according to the World Bank, compared with more than 20 per cent in east Asia. There is little cross-border investment and the flow of people and ideas, despite a shared taste for Bollywood, is a trickle.

Only 7 per cent of international telephone calls are to other countries within the region, for example, compared with 71 per cent for east Asia.

As an aspiring global power, India has recently concentrated on cultivating the US and improving relations with China, but has failed to bring stability and democracy to its own region. Its fellow members of Saarc, a dysfunctional organisation that has been stymied by the existential conflict between India and Pakistan, are all either under autocratic rule, slowly emerging from civil war or rapidly heading back into one. The list of failed states in India's back yard is lengthening.

Democracy is in peril in Bangladesh, following the cancellation of elections and declaration of a state of emergency in January. Its army chief last week rejected a return to "elective democracy".

Nuclear-armed Pakistan's future looks grim, as blowback from Afghanistan foments extremism, vestigial democratic institutions crumble and the unity of the state comes under renewed threat from separatists in Balochistan hoping to split the country, again, to create a "second Bangladesh".

Sri Lanka's ethno-religious civil war is worsening by the day: insurgents fighting for a separate Tamil homeland two weeks ago brazenly showed off their new air wing by flying 400km to bomb an airbase near Colombo's international airport.

The peace process in Nepal, emerging from a decade-long Maoist insurrection, is in real trouble. Only xenophobic and autocratic Bhutan, a microstate of about one million people in a region of 1.5 billion, is making superficial progress towards democracy.

Responsibilities

South Asia, then, is a low-rent neighbourhood. But it would be in India's interests to try harder to gentrify it by spreading the benefits of its own growth. As the dominant regional economy, accounting for over 75 per cent of south Asian GDP, the onus is on India to make the moves. Manmohan Singh, India's prime minister, last week acknowledged New Delhi's "asymmetrical responsibilities" to open the Indian market to south Asian neighbours without insisting on reciprocity.

But his offer of duty-free access for the "least developed countries" in Saarc by the end of the year will have little practical benefit as long as exporters continue to face horrendous non-tariff barriers in the form of inspections, arcane customs procedures at Indian borders and long "sensitive lists" of non-tradable items. Trucks, for example, are not allowed to cross Indian borders to deliver cargo to or from any Saarc country except Nepal and even these have to return within 72 hours.

As a relative latecomer to liberalisation, with a trade to GDP ratio lower than the world average, south Asia remains less open than most other regions. Economists worry that deepening preferential arrangements such as the South Asian Free Trade Area will divert trade from more competitive third countries and become a drag on south Asian growth. That would happen, for example, if Indian DVD players sold duty-free in Bangladesh displaced more efficient Taiwanese ones subject to duties.

Rather than adding to the trade-diversionary spaghetti bowl of sub-regional bilateral trade agreements, the best move India could make would be simply to let geography work and apply itself to the task of reducing the welter of non-tariff barriers to regional trade.

Dubai route

The World Bank estimates that today's $1 billion annual trade between India and Pakistan, for example, most of which is routed through Dubai, could be nine times higher if such barriers were removed.

Connecting national energy systems should be another priority for power-starved India. Energy trade in the region is small, despite complementarities between energy deficit countries, such as India and Pakistan, and energy surplus states, such as Nepal and Bhutan.

There are no gas pipelines across national borders, despite the fact that Bangladesh is endowed with huge natural gas reserves and despite Pakistan and Afghanistan's ability to connect India to central Asian energy.

Such ties would help erode the lack of trust that sours relations between India and its neighbours and pushes up defence spending across the region.

Trade on its own is unlikely to solve intractable conflicts, such as that over Kashmir, but could, in time, help create the conditions for a substantial peace dividend and free up resources for greater investment in education, health and infrastructure.

In its haste to become a global power, India is in danger of neglecting the fires blazing in its back yard.