People-to-people exchanges necessary to build trust - Martin Rama, Chief Economist World Bank

Martin Rama is the Chief Economist of the World Bank for the south Asia region. He was one of the panellists at the SDPI's mega conference on regional integration in Islamabad last week, where BR Research had the pleasure of learning from his experiences about SAARC and SAFTA. Below are edited transcripts of the interview.
BR Research: Regional integration in South Asia is far less than ASEAN, NAFTA, or the EU. Why? How do you see the economic loss from this lack of integration? Martin Rama: We see it as an important loss, and one area where the loss is huge is electricity trade; one of the biggest constraints to growth in South Asia is power, seen across the countries. When you think of it that way, the hydrogenation potential of South Asia is enormous. Yet, electricity trade between countries in the region is miniscule. That's a first area where there is missed opportunity.
Also, you have a geographic diversity and you have enormous complementarities, which form the grounds for trade. But this is a region that is still quite protectionist, unlike other regions where the opening up of the economy has happened. It's quite closed, both with neighbours and outsiders - more so with neighbours in fact. One could claim that the biggest gain, on a longer term horizon, is peace. This is a region of conflict. People who trade with each other, who study in each other's country, marry with each other - as you see in Europe -are at peace. So yes, I think there is much to be gained by integrating.
BRR: How is the World Bank involved in bringing peace among the South Asian countries? What are some of the programs aimed at strengthening regional integration?
MR: Regional integration is one of the pillars of the WB strategy for South Asia. We see it as a priority. Of course, it's the prerogative of sovereign countries how to go about it; we see a supporting role. We don't want to impose ourselves. Regional integration is a matter of sovereign nations.
Our support is the analytics - the studies that show how much is missed by not having integration; the investments - roads, customs, transmission lines, support to hydro modelling, etc; we also support events that bring people together.
We are involved in energy, transmission and generation projects. We are involved in transport and logistics, trade facilitation, and we have a strong program of analytics on water that we are supporting with donor funding.
BRR: What are some of the barriers to regional integration and what can be done to overcome them?
MR: In the political economy, there is an asymmetry problem - when one big country (in this case, India) is surrounded by smaller countries. This raises two challenges. Firstly, the bigger player can neglect the smaller players, and secondly, the smaller players tend to mistrust the bigger players.
To overcome this, I think several things need to happen. One that we often emphasise is people-to-people exchanges. There may be a trust deficit at the level of governments but if there is less of that trust deficit at the level of the people, and they start to know each other, it can make a difference.
If you look at the EU, there were very intense programs of exchange where kids would be sent to families on the other side - French kids would go to German families and vice versa. It was a way to build trust. There needs to be such exchanges of networks of academics, businessmen, self-employed associations, tourist exchanges, and visas for businesspeople. But there has to be enlightened leadership behind it.
BRR: Do you think the Pak-China Economic Corridor will have any spillover on the region?
MR: It all depends on how much connectivity you get. If one thinks of the corridors as transit, you don't gain a lot from it. The real impact is when you get urbanisation, jobs, and other things happening apart from the transportation.
Urbanisation results in people being together, spillovers of productivity, exchange of ideas, existence of thicker markets, and availability of your suppliers. Transport corridors can either make that happen, or they can just be something that cuts across.
BRR: But urbanisation hasn't been that productive in South Asia.
MR: Urbanisation in South Asia across the board has been quite messy, and there are a couple of reasons for this. One is that the volume of resources for public infrastructure investment is much smaller. The tax revenue to GDP ratio and the kind of revenue to support the necessary infrastructure is much higher than what South Asia has. In South Asia, the areas are densifying naturally as if the city migrates to you instead of you migrating to the city! But that creates cities that are not very functional and have a lot of congestion and transportation cost.
The other challenge is the co-ordination; you have to co-ordinate the transport with the electricity with the sanitation, and that has proven challenging in South Asia.
BRR: How can Pakistan come out of this low growth era?
MR: We have been working very closely with the government of Pakistan in two areas of reform: one has been the reform of the power sector which is an important bottleneck; the other is the broader set of economic reforms - issues such as taxation, trade policies, exemptions, SROs. We think the direction the government is taking is right to support growth.
The performance is not spectacular but if you think where Pakistan was a couple years ago, there's been enormous progress.