Political economy of regional integration: Where do we stand in South Asia?

The aspiration for deeper regional integration is high on the political agenda of most of the leaders in South Asia. Since the early 1980s South Asian Association for Regional Cooperation (SAARC) has been working as an economic and geopolitical organization for South Asian countries with the aim of deeper regional integration and cooperation in areas of economic, trade and other common regional issues. Until now, there have been some achievements. Still, frustration prevails, as actual implementation of agreements often does not match the declared ambitions. The resulting implementation gap is most commonly attributed to the lack of political will and leadership, institutional weaknesses and capacity and resources constraints.

The dominant literature has looked primarily at the narrow economic factors influencing regional integration. However, to have a better and systematic assessment of the factors driving and constraining regional integration, it is important to explore the political economy dimensions. While policy makers and stakeholders are often aware of such political economy dimensions, they are generally discussed only informally or in ad hoc manner. A systematic discussion of the political economy factors around the regional integration agenda can generate a broader awareness among stakeholders that may ultimately lead to more realistic and effective regional policy design and processes.

From a political economy perspective, there could be three interconnected drivers for a deeper regional integration. These are economic drivers, political economy drivers and extra-regional drivers.

PE of regional integration

The economic drivers include four integration processes: market integration, investment integration, growth integration and policy integration. ‘Market integration’ emphasizes on the integration in trade in goods and services through the removal of tariff and non-tariff restrictions. ‘Growth integration’ is the integration of economic growth processes of the respective countries in a way that growth in one country benefits growth processes in other member countries. The ‘investment integration’ calls for promotion of regional investment and trade nexus. Finally, the ‘policy integration’ is the harmonization of economic and trade policies of the countries for a deeper regional integration.

However, the aforementioned four integration processes need favorable political economy (PE) drivers. The political-economy perspective considers how various players influence the national and regional decision-making context, and what impact their actions (or lack of action) have on the integration agenda. The first PE driver is the ‘primary institution’ which are the official institutions at the regional level and in respective countries entrusted to carry out the agenda of regional integration. In South Asia, the SAARC Secretariat and relevant ministries in the member countries are such institutions. The second PE driver is the ‘secondary institution’ which are private sectors, private sector associations, civil society organizations and media. Primary and secondary institutions are a combination of market and non-market actors that govern economic and political environments in the region. The third PE driver is the ‘regional public good’ which includes regional infrastructure and the status of regional trade facilitation. In South Asia, status of such ‘regional public good’ is very weak. ‘Structural factor’ is the fourth PE driver which includes historical processes and geographic factors that shape the types of political, economic and socio-cultural institutions. In South Asia, landlockedness of Nepal, Bhutan and Afghanistan, political rivalry between India and Pakistan, and huge differences in the sizes of the countries where India accounts for around 80% of the regional GDP, trade among the South Asian countries primarily through land borders are such structural factors. The final PE driver is the role of the ‘political elite’. Strong and visionary leaderships are needed from the political elites to eliminate any ‘trust deficit’, which can emerge as a result of a variety of the ‘structural factors’ mentioned above. In South Asia, such ‘trust deficit’ is often highlighted as one of the major barriers for a deeper regional integration. Also, there are concerns with regard to hesitant and inconsistent leaderships from the political elites of these countries, especially from India, in taking the regional integration agenda to a higher level.

Finally, the extra-regional drivers include a wide range of global economic and political factors that can have influence over the region. In South Asia, countries are at different levels and with different patterns of integration with the extra-regional drivers.

There are now convincing evidences that a deeper regional integration is needed for generating and sustaining economic growth and reducing poverty in South Asia. Intra-regional trade in South Asia has been low, but there are signs of huge potentials. For a deeper market integration in goods, full implementation of SAFTA is needed with emphasis on further liberalization of intra-SAARC tariffs, reduction in the sensitive list, and establishing effective mechanisms to deal with the NTMs/NTBs.

Intra-regional services trade and intra-regional investment are also low in South Asia. Regional and sub-regional efforts have to be promoted for different trade and transport facilitation measures, for cooperation in energy generation and transmission, and for linking energy cooperation and trade and transport facilitation to investment and growth processes of these countries. Promotion of intra-regional investments and attracting extra-regional FDIs in goods and services sectors in general, and energy and infrastructural sectors in particular will be very crucial for South Asia to integrate further. There is a continued need for a greater integration in trade, macro, financial and industrial policies in the region.

A deeper regional integration in South Asia requires clear and visible leadership from the political elites in this region, especially from India, in taking the agenda forward. The political elites have to be convinced and act accordingly to reduce the ‘trust deficit’. Regional institutions, like SAARC Secretariat, have to be institutionally reformed and reoriented with much stronger engagements from the respective ministries and relevant organizations of the member countries. Business associations, civil society organizations and media have to pursue the regional integration agenda in South Asia more pro-actively than ever.

Published at the Thinking Aloud on 1 April 2016

Published at The Daily Star on 12 April 2016


Why should Bangladesh integrate more with East and Southeast Asia?

Selim Raihan and Sunera Saba Khan

The Bangladesh economy over the past two and half decades has been experiencing steady rise in economic growth rate which has been accompanied by country’s increasing trade-GDP ratio. The economy has become more and more trade-oriented. However, when it comes to integrating with its neighboring countries, there are still large untapped potentials for Bangladesh to gain from such integration. Effective regional integration, through enhanced scope for larger economies of scale and pathway for integration with global and regional value chains, can be a critical tool for Bangladesh to boost its economic growth process. Over the past three decades, regional integration agenda for Bangladesh has focused primarily on integrating with its South Asian neighboring countries. However, there are reasons to believe that Bangladesh can also gain significantly by integrating more with the East Asian countries (China, Japan and South Korea) and Southeast Asian countries (10 ASEAN countries. i.e. Brunei, Myanmar, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam). Bangladesh government also wants to pursue the “Look East Policy”, and for this it is high time for Bangladesh to begin the quest for expanded trade and investment opportunities with these countries.

The Bangladesh economy is now at a cross-road. Further growth acceleration is essential to make a transition to a higher growth path in order to obtain the upper-middle income country status. The country needs to promote economic diversification, with a simultaneous diversification of the export basket, in order to boost its growth rate. When it comes to export diversification, in terms of both product and destination, integration with East and Southeast Asian countries is very important for Bangladesh. A major reason why integration with East and Southeast Asia will prove to be beneficial for Bangladesh is because East and Southeast Asia are essentially integrated with the Global Value Chains (GVCs) in a number of manufacturing products. Thus, such integration will pave the way for linking Bangladesh with wider GVCs and in diversifying its export basket. In addition, flows of Foreign Direct Investment (FDI) from these countries to Bangladesh will be beneficial for the economy. Among the Southeast Asian countries Indonesia, Malaysia and Vietnam are large exporters of electronics, machinery and leather goods, primarily driven by the leading multinational companies in the world. Therefore, integration will lead to a number of multinational companies specialized in electronics, machinery and leather goods investing in Bangladesh, thus generating large spill-over benefits to the domestic economy.

However, Bangladesh’s level of integration with East and Southeast Asian countries is mixed. Table 1 clearly depicts that Bangladesh’s imports from East and Southeast Asia are significantly higher compared to exports to these regions. With a share of around 30% of total import, China in 2014 was the major source of import for Bangladesh. Singapore also had more than 8% share. Except Philippines, Thailand and Vietnam, all other countries accounted for more than 1 billion US$ import for Bangladesh. In contrast, Bangladesh’s exports to most of these countries were very low. The largest export was to Japan, which was close to 1 billion US$, followed by export to China by 760 million US$. The lowest export was to the Philippines with an amount of only 21.4 million US$.

Figure 1_east asia

The current scenario clearly portrays that Bangladesh’s exports to East and Southeast Asia are significantly low and immediate initiatives need to be adopted in order to raise export levels. Product diversification followed by market and need assessments in those countries will help Bangladesh accelerate the desired integration process. Bangladesh’s exports to these countries can be improved if Bangladesh engages in exports of non-traditional goods. Bangladesh should actively pursue the agenda of free trade agreements (FTAs) with these countries, either bilaterally or with the region as a whole (i.e. with ASEAN). In this context, it is important to mention that four Southeast Asian countries (Brunei Darussalam, Malaysia, Singapore and Vietnam) are part of the recently signed Trans-Pacific Partnership Agreement (TPP), which is a free trade agreement among nine countries. The other countries are the United States, Australia, Chile, New Zealand and Peru. Furthermore, all 10 ASEAN countries are part of the proposed Regional Comprehensive Economic Partnership (RCEP), which is a free trade agreement (FTA) between these ten countries and the six states with which ASEAN has existing FTAs (Australia, China, India, Japan, South Korea and New Zealand). With the emergence of these mega FTAs, where a large number of East and Southeast Asian countries are involved, there are risks of negative impacts on Bangladesh as Bangladesh is not part of these FTAs. Therefore, it is imperative for Bangladesh to proactively take up the FTA agenda with the East and Southeast Asian countries. At this moment, Bangladesh is part of BIMSTEC, where two of the Southeast Asian countries (Thailand and Myanmar) are members. However, the BIMSTEC FTA is yet to be implemented.

Table 2 presents the results from simulations using the GTAP model, where we have explored hypothetical scenarios of FTAs between Bangladesh and East and Southeast Asian countries. Under certain assumptions, Bangladesh stands to gain from these FTAs. The largest gain seems to appear from the FTA with both East and Southeast Asian countries.

Figure 2_east asia

As far as Bangladesh’s imports from these countries are concerned a major chunk of the imports are used as raw materials and capital machineries in the export industry as well as in the domestic industrial sector. Being the dominant export sector, until now the benefits from such imports have largely been enjoyed by the RMG sector in Bangladesh. However, the non-RMG export sectors and domestic manufacturing sectors have not been able to benefit much from such imports. In addition, there are a number of policy-induced and supply-side constraints for these non-RMG sectors which constrict their expansion. Sector specific infrastructural problems, poor overall physical infrastructure, lack of investment fund and working capital, high interest rate, shortage of skilled workers, invisible costs of doing business, etc. are major impediments to export prospects and export diversification. Therefore, while pursuing the deeper integration agenda, it is also imperative to address these supply side constraints; otherwise the country will not be able to make much progress towards export diversification and will fail to reap the benefit from such integration.

Figure 3_east asia

Bangladesh should also invite much larger FDIs from East and Southeast Asian countries. The current level of total FDI in Bangladesh is very low, and Table 3 shows that FDI inflows from East and Southeast Asia are also low. Bangladesh can immensely benefit from higher FDI inflows from these countries in terms of export diversification and large employment generation. The government’s initiative of setting up special economic zones should give priorities to the leading investors from East and Southeast Asian countries targeting electronics, leather and different processing industries. Finally, enhanced connectivity with China and other Southeast Asian countries through BCIM, Asian highway and Trans-Asian Railway network should be accentuated.

Published at the Thinking Aloud on 1 April 2016

Published at The Financial Express on 10 April, 2016