A Glass Half-Full: The Promise of Regional Trade in South Asia
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A Glass Half-Full: The Promise of Regional Trade in South Asia Sanjay Kathuria L e a d Ec ono mi st a n d C o o rdi nato r, Re g i ona l I nte grat i on, M a c ro eco nom i c s , Tra de a n d I nvest ment G l oba l P ra c t i c e T h e Wo r l d B a n k Colombo, October 8, 2018
Imagine #OneSouthAsia
A South Asia where one can travel seamlessly... Breakfast in Kabul Lunch in Lahore Tea in Colombo Dinner in Delhi
…enabled by frequent connections, like in ASEAN
Air Connectivity between Selected Country Pairs
in ASEAN and South Asia, 2017
No. of flights per year, one way
35,000 30914
30,000 26691
25,000
20,000
15,000
10,000 7594
5,000 3967
0
IND LKA IND BGD SGP IDN IDN MAS
Departure-destination
Source: Based on data from DIIO (Data In, Intelligence Out) (database), Diio, LLC, Reston, VA (accessed August 2017), https://www.diio.net/products/index.html.
Connectivity also means consumers enjoy goods
at the best available prices
Food prices in different cities (US$)
Eggs Potato Eggs Potato
regular,12 1 kg regular,12 1 kg
Colombo 1.23 1.03 Bangkok 1.66 1.49
Delhi 0.91 0.30 Hanoi 1.50 1.10
Dhaka 1.13 0.30 Jakarta 1.56 1.42
Islamabad 0.93 0.34 Kuala Lumpur 1.28 0.76
Kathmandu 1.44 0.38 Yangon 1.49 0.94
CV 0.20 0.67 0.09 0.27
Source: Numbeo
The Story of South Asia: The most dynamic …
South Asia: Most Rapidly Growing Region in the World
8
Growth rate, % per year
6
4
2
0
2014 2015 2016 2017e 2018f 2019f 2020f
-2
East Asia and Pacific Eastern Europe and Central Asia
Latin America and the Caribbean Middle East and North Africa
South Asia Sub-Saharan Africa
Source: World Bank 2017, 2018.
Note: e = estimate; f = forecast.
… yet the most disjointed
Intraregional Trade as a Share of Regional GDP
14
12
10
8
Percent
South Asia
6 lowest at less
4 than 1%
2
0
1990
1991
1992
1993
1995
1996
1997
1998
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
1994
1999
East Asia and Pacific Middle East and North Africa
South Asia Sub-Saharan Africa
Latin America and the Caribbean
Source: Calculations based on data from UN Comtrade through WITS and WDI
Issue: The missing potential
Barriers in trading with neighbors
Agenda for Approach of the Report
today
Analysis and recommendations
Achieving the goalIssue: The missing potential
Barriers in trading with neighbors
Agenda for Approach of the Report
today
Analysis and recommendations
Achieving the goalNeighbors trade and prosper… but not in South Asia
Intraregional Trade as a Share of Total Trade
60
50
40 South
Percent
30 Asia
20 lowest at
10 5%
0
1990
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2014
2015
1991
2002
2013
East Asia and Pacific Middle East & North Africa
South Asia Sub-Saharan Africa
Latin America and the Caribbean
Source: UN Comtrade; WITSIntraregional trade is only one third of its potential…
Intraregional Trade Potential in South Asia
$67 bn
70,000
Trade gap has been
Trade, $, millions
60,000
50,000 rising:
40,000 • 2001: US$ 7 bn
30,000
• 2015: US$ 44 bn
20,000
10,000 $23 bn
• Goods only
0 • Underestimate
2002
2003
2004
2005
2006
2007
2009
2010
2011
2012
2013
2015
2001
2008
2014
Actual trade Predicted trade
Source: Calculations based on data of CEPII Gravity Database, Centre d’Etudes Prospectives et d’Informations Internationales, Paris; WITS, World Bank... and Sri Lanka can more than double its exports to
South Asia
Export Potential of Sri Lanka to South Asia (2015) Gap = $ 1.6 bn = ~15%
of Sri Lanka’s global
3 2.8 export
US$ Billion
2 Sri Lanka significantly
1.2
1 under exporting to:
• India ($1.3bn)
0
Actual Exports to Potential Exports to
South Asia South Asia
Source: Calculations based on data of CEPII Gravity Database, Centre d’Etudes Prospectives et d’Informations
Internationales, Paris; WITS, World Bank
Ultimately, people are denied the benefits of proximity and tradeSL highest recipient of FDI within the region, but still very
low overall
Table: Intra-Regional Outward Investment in South Asia in 2015 (Million US$)
Investment Total Inv to
Total Inv to
from\Investment AFG BGD BTN IND MDV NPL PAK LKA SA/Total Inv to
SA
to World
AFG - 0.0 - 0.1 - - 0.0 - 0.2 0.0
BGD - - - 34.9 1.1 19.9 1.2 6.4 63.5 33.8
BTN - - - - - 0.0 0.0 - 0.0 0.5
IND - 140.6 19.6 20.9 131.5 - 431.4 744.0 0.9
MDV - - - - - - - 17.3 17.3 12.3
NPL - 0.2 - 0.7 - - - - 0.9 1.2
PAK 9.6 22.6 - - 5.3 3.4 - 15.6 56.5 18.4
LKA - 10.2 - 30.5 53.7 0.9 - - 95.2 14.4
Total Inv from SA 9.6 173.5 19.6 66.1 81.0 155.6 1.2 470.7 977.5 1.1
Inv from SA/Inv
27.5 1.4 11.7 0.0 13.1 17.2 0.1 4.7 0.3
from World
Source: Calculations based on Coordinated Direct Investment Survey (CDIS) database, IMFIssue: The missing potential
Barriers in trading with neighbors
Agenda for Approach of the Report
today
Analysis and recommendations
Achieving the goalBoth nature and man have contrived to fragment
the region
▪ Isolated and landlocked regions
▪ High tariffs and paratariffs
▪ Disproportionately high trade costs, due to poor logistics
infrastructure and inefficient trade facilitation
▪ Complicated and non-transparent NTMs
▪ Constraints on services trade
▪ Below-potential FDI and lack of RVCs
Underlying theme in all obstacles – Lack of mutual trustSouth Asian countries discriminate against each other…
Overall trade restrictiveness index (OTRI) indicate protection greater for South Asia
imports than rest of the world
OTRIs, select countries, South Asia, 2011
Importing Origin of imports
Country South Asia Rest of world
Afghanistan 3.84 4.65
India 4.59 0.50
In Sri Lanka, the index is 3
Sri Lanka 1.01 0.33 times higher for SA imports as
compared to ROW imports
Nepal 10.59 6.87
Pakistan 3.00 0.51
Source: Calculation Kee & Nicita in 2018 based on Kee and Nicita 2017…and negate the benefit of proximity…
Average Trade costs, Intraregional and Interregional, 2010-2015
Regional trade agreements Country pairs
SAFTA 193
500
Trade agreements
386
ASEAN 160 400
Percent
300 248
210
MERCOSUR 119 200 153 135 159
NAFTA 100
47
0
0 100 200 300
Percent
Country pairs
Source: Calculations based on UNESCAP trade cost databaseIssue: The missing potential
Barriers in trading with neighbors
Agenda for Approach of the Report
today
Analysis and recommendations
Achieving the goalThe report gathered detailed on the ground
knowledge…
Surveys Focus group Stakeholder Analysis of new
discussions consultation data…and unpacked four critical barriers to deeper trade
integration in South Asia
Nontransparent and protective tariffs, especially paratariffs
▪ Analyzed in detail in 3 countries (Bangladesh, Sri Lanka, Pakistan)
Real and perceived nontariff barriers
▪ Examined through the lens of a handful of products and trading relationships
Higher costs of connectivity
▪ Investigated using India-Sri Lanka air travel agreement as a case study
Broader trust deficits in the region
▪ Draws lessons from the 4 operational Bangladesh-India border haatsIssue: The missing potential
Barriers in trading with neighbors
Agenda for Approach of the Report
today
Analysis and recommendations
Achieving the goalImport tariffs are a tax on imports
they are also tax on exports.Overall, tariffs are falling in South Asia …
Simple Average Tariffs, South Asia, 1987–2016
100
80
Percent
60
40
20
0
1987 1997 2007 2016
Year
IND PAK BGD LKA NPL BTN AFG
Source: Calculations based on data in Pursell 2011; WTO, ITC, and UNCTAD 2017.… yet it remains more restrictive than other regions
Average Tariff in 2016 (%)
16
14 13.4
12 11.4
10
8 7.3 7.4
6
4.3
4 2.7
2
0
North Europe & East Asia & Latin America Sub-Saharan South Asia
America Central Asia the Pacific & the Africa
Caribbean
Source: WB staff calculation based on WTO dataSAFTA is undermined by long sensitive lists
In 2015, almost 35 percent of intraregional trade under in South Asia was
restricted under sensitive lists
SAFTA sensitive lists
Country Products, revised list (phase II)
Afghanistan 850
Bangladesh 987 (LDCs); 993 (NLDCs)
Bhutan 156
India 25 (LDCs); 614 (NLDCs)
Maldives 154
Nepal 998 (LDCs); 1,036 (NLDCs)
Pakistan 936
Sri Lanka 837 (LDCs); 963 (NLDCs)
Sources: “Agreement on South Asian Free Trade Area (SAFTA),” SAARC, Kathmandu, http://saarc-
sec.org/assets/responsive_filemanager/source/Files%20for%20Areas%20of%20Cooperation/ETF/Agreement%20on%20South%20Asian%20Free%20Trade%20Ar
ea%20(SAFTA).docx; sensitive lists: Ministry of Commerce (Bangladesh), https://www.bangladeshtradeportal.gov.bd/?r=site/display&id=121; Ministry of
Commerce (Pakistan), http://www.commerce.gov.pk/about-us/trade-agreements/sensitive-list-of-safta-member-phase-ii/; Department of Commerce (Sri Lanka),
http://www.doc.gov.lk/index.php?option=com_content&view=article&id=56&Itemid=183&lang=en.
No clear guideline for phasing out sensitive listsSensitive lists cover a large proportion of Sri
Lanka’s import
44% of
Sri Lanka’s imports from
South Asia
23% of
Sri Lanka’s exports to
South AsiaSAFTA is significantly diluted by paratariffs, which are
not a part of trade concessions
Bangladesh (%, FY17) Pakistan (%, FY17) Sri Lanka (%, 2016)
30 30 30
25.6
25 25 25 22.4
20 20 20
15.3
15 13.3 15 13.1 15
10.8
10 10 10
5 5 5
0 0 0
Average import Average tariff Average import Average tariff Average import Average tariff
tariff including para tariff including para tariff including para
tariff tariff tariff
Source: Calculation from National Board of Revenue ( Bangladesh), Federal Bureau of Revenue ( Pakistan) and Sri Lanka Customs .How can SAFTA be made more meaningful?
South Asian countries need to agree on an accelerated, time-bound schedule
for elimination of sensitive lists
▪ Particularly for Bangladesh and Sri Lanka
Problem of paratariff needs to be squarely addressed
▪ Important for Bangladesh, Pakistan and Sri Lanka
▪ Sri Lanka has already taken some steps
SAFTA members should continue their tariff elimination efforts for their non-
sensitive lists
▪ For all countriesAs tariffs have gone down, countries have tended to substitute them with non-tariff measures.
Unpackaging the black box of NTMs Study examines NTMs in bilateral trade between Bangladesh and India and between India and Nepal in selected products of significance Focuses on SPS and TBT measures – account for majority of NTMs in South Asia Distinguishes between real and perceived issues by triangulating survey information with examination of regulations and consultations with regulators in the 3 focus countries
‘Real’ and ‘perceived’ non-tariff barriers add to the
‘noise’ and trust deficit
Inadequate capacity
Information asymmetries
Exporting countries lack
Lack of awareness among
accredited capacity for testing and
exporters about partner country’s
Perceived requirements on regulations and
certification to meet standards,
and have to rely on partner
standards
country infrastructure
Border infrastructure
Very few border points have
Procedures
Real Electronic Data Interchange (EDI), Cumbersome procedures in
Risk Management System (RMS), product registration and renewal
and Single WindowRemoving non tariff barriers requires persistent
coordination
Information flows
▪ Explore a non-tariff barrier resolution mechanism for South Asia.
▪ Increase awareness of exporters through campaigns and workshops about
importing country standards.
Infrastructure
▪ EDI, RMS, and single window at border points
Procedures & capacity building
▪ Bilateral mechanism to coordinate and expedite accreditation
These steps can be seen as confidence-building measures for eventual mutual
recognition agreementsConnectivity is the nuts and bolts of international trade.
Regional air connectivity in South Asia is poor
even between capitals
Bilateral Connectivity in South Asia, by Number of Flights per Week
.
Country Sri Lanka India Pakistan Bangladesh Maldives Nepal Afghanistan Bhutan
Sri Lanka 147 10 6 30 0 0 0
India 147 6 67 32 71 22 23
Pakistan 10 6 10 0 1 6 0
Bangladesh 6 67 10 1 5 0 2
Maldives 30 32 0 1 0 0 0
Nepal 0 71 1 5 0 0 14
Afghanistan 0 22 6 0 0 0 0
Bhutan 0 23 0 2 0 14 0
Source: Compiled using data obtained from the websites of various South Asian airlines, June 2015.Efficiency of air travel services is an important determinant of trade costs Impact on trade in goods ▪ High value, low volume goods Impact on services trade ▪ Tourism, education Impact on FDI Study focuses on India-Sri Lanka air services liberalization focusing on 2003 and 2011 amendments ▪ Stakeholder consultation ▪ Econometric analysis
The liberalization episodes resulted in improved connectivity,
reduced prices, and increased air traffic
Growth in airline flights between India and selected
countries, 2004–17
2011 amendments: 8000
▪ increase of 16 flights per week 7000
▪ 2442 seats per week 6000
5000
Flights
4000
3000
Prices fell by 20-40% on 2000
routes with competition 1000
0
From India From India From India From From Nepal From Sri
to to Nepal to Sri Lanka Bangladesh to India Lanka to
Bangladesh to India India
2004 2010 2017
Source: Based on data from DIIO (Data In, Intelligence Out) (database), Diio, LLC,
Reston, VA (accessed August 2017), https://www.diio.net/products/index.html.Economic impact of liberalization went beyond
aviation: tourism key example
Arrival Statistics by Purpose of Travel, Indian Visitors Arrival Statistics by Purpose of Travel, Sri Lankan Visitors
to Sri Lanka to India
350,000
400,000
350,000 300,000
300,000 250,000
Tourists
250,000 200,000
Tourists
200,000 150,000
150,000
100,000 100,000
50,000 50,000
0 0
2000 2002 2004 2006 2008 2010 2012 2014 2016
Pleasure Business Others Total Tourism and others Business/Professional Total
Source: Compiled from Market Research and Statistics (database), Ministry of Source: Compiled from Market Research and Statistics (database), Ministry of
Tourism, New Delhi, http://tourism.gov.in/market-research-and-statistics. Tourism, New Delhi, http://tourism.gov.in/market-research-and-statistics.
Since 2005, India is the biggest source of tourist arrivals in Sri Lanka
Since 2003, there has also been a steady growth in Sri Lankan tourist arrivals in IndiaSouth Asia can learn from India-Sri Lanka air
liberalization experience
Gold standard of open skies agreement not necessary to begin liberalization
▪ Incremental approach adopted by India-Sri Lanka offers an alternative
▪ Tourism from countries such as Bangladesh can increase because of growing middle class
Gains can be more if accompanied by other supporting reforms
▪ Sri Lanka’s authorization of visa-on-arrival for expansion
Structural weakness of the industry needs to be addressed to amplify benefits
▪ Inherent structural weakness of the airline industry in both countries reduced impact of
liberalization
Policy persistence pays offCross-country studies show that nations in
which there is a lot of trust among people
do well economically.
- Kaushik BasuTrust is a fragile commodity in South Asia The virtuous circle between trade and trust is broken in South Asia. However, Bangladesh-India border haats are helping bridge trust deficit by promoting people-to-people interaction Study examined functioning of 4 operational border haats through detailed fieldwork
Border haats have had significant positive welfare impact
on all stakeholders especially on women
I am a housewife, but I
make 30,000 BDT every
Tuesday because of the
border haat.The welfare impact of border haats can be further
strengthened
Border haat initiative should be scaled up
▪ Does not detract from formal trade.
Larger gains possible by streamlining procedures, improving facilities, and
enhancing use of technology.
▪ Vendor selection, electricity and sanitation, prevention of theft.
Focus on value limits instead of limitations on products would be more
meaningful.
▪ Expand product list
Female participation in haats can be boosted.
▪ Improved sanitary facilities, quota for women vendor.Issue: The missing potential
Barriers in trading with neighbors
Agenda for Approach of the Report
today
Analysis and recommendations
Achieving the goalHow do we get there?
Sri Lanka’s own role is crucial in realizing regional economic benefits Liberalizing trade within South Asia ▪ Reducing paratariffs – Sri Lanka already taking steps ▪ Reducing tariffs and sensitive lists Build awareness, capacity and infrastructure to reduce problems arising from NTMs ▪ Focus on partner country standards and related capacity building ▪ Accredited laboratories for testing ▪ Electronic data interchange with partner countries ▪ But also streamline own SPS and TBT measures (part of anti-export bias story) Accelerate connectivity agenda with neighbors ▪ Air connectivity with Pakistan, Bangladesh Take initiatives of trust building activities through people to people contact ▪ Encourage tourism from other South Asian countries
Unlocking the potential through targeted reforms and
their careful management…
Incremental yet concrete steps needed to tap potential
Effective SAFTA
Chip away at real and perceived NTBs
Improve connectivity
This will also help to open up regional value chains, critical to trade
dynamism
Open regionalism
Trust deficit should be addressed in conjunction with other reform
Careful management of implementation, addressing winners and losersLinks and Hashtags #OneSouthAsia #AGlassHalfFull World Bank website: http://worldbank.org/onesouthasia Social Media: https://twitter.com/WorldBankSAsia https://twitter.com/WorldBankIndia https://twitter.com/Sanjay_1818
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