“The real end winner of NAFTA (North American Free Trade Agreement) is going to be Mexico […]” said then Mexican president Vicente Fox, in 2001. He was referring to Mexico’s gains from trade integration with the USA through NAFTA.
Vicente Fox was right. Mexico has continued to make sustained gains in trade over a 20 year period after signing NAFTA in 1994 with the US, its much larger partner (figure 1).
Opening up trade is not easy because losses can be immediate, while gains, despite being potentially much larger and more widespread, are often dispersed over time. Producers that may sustain losses from more open imports are often well organized and can hold up reforms quite effectively. Moreover, when one of the countries involved in mutual trade liberalization is disproportionately large, it enables the smaller country lobbies to raise the specter of being swamped by imports from its larger partner.
In the case of South Asia, a history of political differences further complicates deeper trade and economic cooperation within the region. Under these circumstances, opening up trade to neighbors requires strong leadership and a bold vision about the role of trade and regional integration in economic development.
Country Partnership Strategies are a central element of the World Bank Group’s effort to act in a coordinated way to end extreme poverty and boost shared prosperity. But they can be hard for the average person to navigate—some are three-volume tomes, and others can be dense with technicalities. When we make them inaccessible to the general public, we often forgo a critical opportunity to build broad support for our work.
This year, the Bank Group’s India team decided to take a more innovative approach—one that has the potential to directly engage the public and perhaps even spur others to join us in our cause. In producing the Country Partnership Strategy for India, the team opted not to create a simple PDF for the website. Instead it produced a well-designed book, flush with easy-to-understand graphics and appealing photographs. It also produced a highly interactive web application that visualizes the strategy—and tracks the strategy’s progress towards its goals over time. The tool shows exactly how individual projects along with knowledge and advisory work line up with our twin goals, and what outcomes we expect in each instance.
Watching export growth across South Asia surge in the recent past leads one to ask the obvious but crucial question: Will this trend continue in the longer term and is South Asia on its way to become an export powerhouse, or has it just been a short term, one-off spurt provoked by external forces?
Clearly, the rupee depreciation following tapering talk in May 2013 and the recovery in the US constituted favorable tailwinds; however, our analysis in the fall 2014 edition of the South Asia Economic Focus finds that there are more permanent factors at play as well. South Asia is no exception to the trend across developing countries of increasing importance of exports for economic growth. While starting from a low base, the region saw one of the starkest increases in exports to GDP, pushing from 8.5 percent in 1990 to 23 percent in 2013.
South Asia’s Commerce Ministers meet in Thimphu on July 24. Getting there would not have been easy for many of them, with no direct flights between Thimphu and four of the seven capitals. In June, when some of us convened for a regional meeting in Kathmandu, our Pakistani colleagues had to take a 20 hour flight from Karachi to Dubai in order to get to Kathmandu! This is symptomatic of the overall state of economic engagement within South Asia—in trade in goods and services, foreign direct investment and tourism.
South Asian countries’ trade policies remain inward-looking compared to other regions, and there are even bigger barriers to trade within the region. Today, South Asia today is less economically integrated than it was 50 years ago. Figure 1 below shows that intra-regional trade in South Asia accounts for less than 5 percent of total trade, lower than any other region.
Buy a leather case for your wife’s smartphone on Amazon, select shipping from China with an estimated delivery time of 4-6 weeks, and then be pleasantly surprised when it turns up on your Virginia doorstep in 11 days. The marvels of the modern age – of technology, globalization, and shrinking distances.
Where does South Asia stand on export delivery? Figure 1 illustrates that compared to other economic units around the globe, it is a lot more difficult to trade with(in) SAFTA (South Asia Free Trade Agreement). It also shows that bureaucratic hurdles and the time it takes to trade go hand-in-hand. While the region does relatively well on trade with Europe or East Asia, intra-South Asian trade has remained low and costly. It costs South Asian countries more to trade with their immediate neighbors, compared to their costs to trade with distant Brazil (see below)! In fact, it is cheaper for South Asian countries to export to anywhere else in the world than to export to each other (Figure 3). In other words, South Asia has converted its proximity into a handicap.