Regional cooperation and integration: $0.75 million ADB grant to help expand policy reforms

The Asian Development Bank (ADB) is supporting closer regional co-operation and integration (RCI) in South Asia through the grant designed to help strengthen and expand policy reforms in two key nations, India and Pakistan. ADB will provide technical assistance of $750,000 for the South Asian Regional Co-operation (SARC) in 2030 project.
The grant will identify constraints and promote policy reforms and other strategies needed to overcome the barriers to co-operation and integration in South Asia. The grant is focused on India and Pakistan because they are the region's two largest economies and both have been taking steps to promote stronger RCI.
"India and Pakistan could potentially play a pivotal role in advancing wider Asian integration, as well as catalysing South Asian regional co-operation," said Jayant Menon, Principal Economist with ADB's Office of Regional Economic Integration.
In the past, progress on co-operation has been slow and South Asia remains the least integrated region in the world with intra-regional trade, for example, accounting for just 2% of gross domestic product, compared to 20% in East Asia. Challenges to closer ties include persistent poverty, rising inequality, civil conflict and at times, tense political relations. High levels of trade protectionism also persist despite the establishment of the South Asian Free Trade Area.
However, there has been progress in recent years with a pickup in the level and pace of domestic policy reforms across South Asia; improved relations and increased levels of trade between India and Pakistan; and a greater opening up of South Asian economies to other regions and the world.
The grant will seek to support and accelerate domestic policy reforms that have begun in India and Pakistan, and to identify long-term strategies for closer regional co-operation that could maximise gains from the policy changes. Two country studies will be carried out and an international conference is planned for October 2009 where the findings will be discussed and disseminated.
Another phase may be carried out examining similar issues in other South Asian countries, starting with Bangladesh, then Sri Lanka and Maldives, followed by Nepal, Bhutan and Afghanistan.
In an update project study report, nationally, obstacles to regional co-operation stem in part from the need to address longstanding development challenges-such as persistent poverty, rising inequality, and continued civil conflict-which have necessarily taken precedence over regional concerns.
In addition, many of the domestic policies, institutions, and capabilities required to pursue successful regional co-operation are either missing or inadequate, as many South Asian countries only recently began liberalising their economies (in the late 1980s or early 1990s).
Political exigencies and relations between South Asian countries have inhibited greater economic co-operation in the region since it remains caught up with historical factors. As a result, geopolitical and security issues continue to drive the regional policy landscape, thus weakening any economic initiative for co-operation.
Countries in South Asia have similar resource endowments, meaning trade within the region has been generally competitive rather than complementary. Not surprisingly, trade liberalisation within the region-an initiative which could have paved the way for co-operation in areas such as regional public goods-has failed to demonstrate sufficient economic gains.
Even recent initiatives such as the establishment of the South Asian Free Trade Area have given little cause for optimism, as levels of protection within the region remain higher than the rest of the world. Although Pakistan has steadily expanded the list of goods that may be legally imported from India.
The fact that comprehensive most-favoured nation treatment denied to a fellow member of the World Trade Organisation and regional partner in the South Asian Free Trade Area is startling. As a result, informal trade between India and Pakistan has been considerable-conservative estimates place the amount at around $550 million-resulting in massive transaction costs and unnecessary inefficiencies.