The Asian Development Bank's (ADB) Strategy 2020 has identified regional cooperation and integration (RCI) as one of the three development agendas in its fight for alleviating poverty in the Asia and Pacific region. By 2020, about 30 percent of ADB's operations will be in RCI, which has vast potential for accelerating economic growth, reducing poverty and economic disparity, raising productivity and employment, and strengthening institutions. It can improve a poor country's possibilities for growth by expanding trade and joint investment with its neighbors, strengthening transport and information connections, and improving its information and communication technology.
The new South Asia Regional Cooperation Strategy (RCS, 2011-2015) will focus on the three priority areas of transport, energy, and trade facilitation reflecting strong country ownership as these areas have been endorsed by all the SAARC countries which participated in the Second RCI High Level Forum on Emerging Vision for Shared Prosperity: South Asia and Beyond in August 2010.
|Project Rationale and Linkage to Country/Regional Strategy
Compared with other regions, the trade performance of South Asian countries has remained relatively poor. In South Asia, trade openness as expressed by the combined import and export share as percent of gross domestic product is about 40%, compared to Southeast Asia and East Asia where the ratio is around 60%. Also, intra regional trade in South Asia is much lower at 5% compared with 50% for East Asia, and around 30% for Southeast Asia. Factoring in geographic proximity, the situation reflects significantly higher cost for trading with major partners outside the region.
Intra-regional trade barriers in South Asia are particularly significant for economies with small domestic markets, limited diversification, or poor connections to neighboring countries. Such barriers consist of high transportation costs, poor institutions, inadequate infrastructure, and other high transactions costs. Other challenges include variable logistics efficiency, cumbersome bureaucratic regulations, and low levels of firm-level technological capacity. Overcoming these regional binding constraints and promoting regional integration is important. Doing so can significantly reduce the overall costs of trading by up to 70% within five years from present levels of cost of trade, through realizing economies of scale by promoting cross border production chains, by driving down prices for consumers and businesses, by increasing the efficiency of key logistics services networks and by reducing transport and logistics costs. Complementary government policies are essential to ensure firms and individuals can overcome these challenges and take advantage of new opportunities. Supporting developing countries to build their trade capacity at all levels will help them increase their trade by allowing them to play a full role in the international trading system.
While the pace of regional cooperation and integration in South Asia region remains slow, there exist persistent efforts among the countries to achieve the goal. Hence, there is a need for continued support to address, among others, major challenges to expand and deepen cooperation and integration to address common issues of reducing poverty, accelerating prosperity, and making growth more sustainable. International trade and investment are among the most important tools in the fight against poverty - trade can stimulate growth, raise incomes and create jobs, and investment can raise overall and labor productivity as well as link domestic employers to higher value added production chains. Effective trade linkages can help to secure stable food supplies, enabling imports to meet shortfalls in local production, and can mitigate price volatility through better functioning markets.
The establishment of the proposed Economic Integration Partnership is timely as it provides a window of opportunity for the two development partners DFID and ADB to assist the South Asian countries in the effective implementation of regional economic integration projects on the ground. The very substantial economic benefits from facilitating trade and investment, developing transport and logistics corridors, and energy trading, are now better appreciated by the South Asian governments, as well as the private sector. Recent political commitment has ushered in a new era following the signing on 14 January 2010 of a Joint Communiqu by the Prime Ministers of Bangladesh and India.