Economic Integration In South Asia

Economic Integration

Economic Integration in South Asia

Instructor's Name: Sir Sajjad Naseer

Aisha Farrah (06U-477) and Misbah Kanwal (06U-538)

Lahore School of Economics

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Approval Page Aisha Farrah and Misbah Kanwal of the Lahore School of Economics, BSc-II, and students of Comparative Politics (Section-B) have collected the material necessary for the research project that is a requirement of the course. They request permission from their instructor, Sir Sajjad Naseer to conduct research on the topic of their choice.

--------------------Aisha Farrah and Misbah Kanwal

----------------Sir Sajjad Naseer

Economic Integration Acknowledgements The researchers would like to thank their course instructor, Sir Sajjad Naseer, whose views on world events and the nature of politics have greatly influenced his students. We would also like to thank Ms Arfa who helped us greatly through her good-natured discussions and furthered the analysis presented here through sharing opinions on the topic of the research.

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Table of Contents Abstract Chapter 1: Introduction Statement of Problem Research Questions Hypothesis Rationale for the Study Rationale for the Time Frame Methodology Chapter 2: Review of Literature Chapter 3: Research Methodology The process of integration Benefits from integration The EU model SAARC Opportunities for integration Political Constraints Results from Hypothesis testing Conclusion Recommendations End Notes References

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Abstract Economic integration has numerous benefits. It allows factors of production to freely flow through manmade borders. It is also beneficial for the region as a whole. This research paper examines whether such a process can be carried out in South Asia. The general process, the constraints, comparisons, opportunities and advantages of economic integration are studied. It is

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concluded that for the process to be possible it will have to be gradual, cautionary and not bound by time-constrained goals.

Chapter 1: Introduction Economic integration in South Asia refers to assimilation of the economies of states through integration of capital markets, labor markets, transport, infrastructure and free trade endorsement. South Asian states also possess a shared heritage and identity, infrastructure and

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institutions of governance, which would have been the greatest asset of any emerging decolonized region. Unfortunately, the region has been fragmented by politics. There are now new opportunities that point to the possibility and necessity of reclaiming some of that inheritance. Although these countries in postcolonial era have lot in common but still there are cultural, religious and ethnic diversities, which are highly prevalent and create differences. The element of nationalism that has been very prominent since the independence of these states is another factor that may dilute the concept of integration. Political disputes and tensions between and among the states are significant features that cannot be ignored while conducting a study of the South Asian region. However, there are possibilities for South Asia to overcome its regional disputes and integrate for greater interests such as that of energy needs, communication and technology. Moreover, Asia’s emergence as new global growth center and the changing international dynamics of globalization are recent developments that can have profound implications for South Asia as external factors. West Asia is one the biggest source of energy whereas East Asia is a source of Labor supply, so these regions can fulfill their mutual interest and exploit the resources to their advantage. So in this context, South Asian states have an opportunity to look upon West Asia, Southeast Asia and East Asia for regional interests. Economic integration in this region has multi faceted implications not only economically but regionally and politically as well. This will be thoroughly examined in the subsequent sections. Statement of Problem In addition to numerous benefits, there are many questions to ask and many reservations to hold about the process of regionalism. The ultimate stage of economic integration is the establishment of a supranational body that makes a country's domestic and economic policies. The paper examines whether such integration is likely in a region rich in resources yet divided and partitioned by politics. Research Questions • What is the process of economic integration and what are its various stages? •

What are the advantages of economic integration to South Asia?

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Is it possible to replicate the European Union model in South Asia?

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What has the role of SAARC been in economic integration?

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What are the opportunities for integration?

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What are the constraints?

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Hypothesis The null hypothesis is that economic integration is possible in South Asia. The alternative hypothesis is that integration is unlikely unless in the long run. Rationale for the Study The most striking trend of the 1990s was the rise of regionalism in developed countries. This trend had a global impact. Regional blocs began to expand, spanning continents instead of countries. Now over sixty per cent of all trade occurs within the framework of a preferential trade agreement (PTA). The EU represents a striking example of the benefits of regionalism. Since the inception of SAARC, South Asia has been compared to the EU. The researchers found it was important to examine whether such comparisons were fair and what implications regionalism had for South Asia. Rationale for the Time Frame Focus has been laid upon the last two years to keep the study relevant and updated. The researchers have however dug into the past because most issues that take place in the period under study are descended from earlier issues. Methodology The research is largely qualitative and is theoretical in its orientation. The researchers have compiled what they thought was appropriate from several sources, such as newspaper articles, research papers, presentations and books.

Chapter 2: Review of Literature

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A vast amount of literature on the subject has been produced in this decade, mostly in the form of research papers because the subject has an economic dimension to it. In this section, some of the eminent works that were produced are reviewed. The research paper titled 'Regional Economic Integration in South Asia: the Way Forward' was published in the Pakistan Development Review in 20041. The paper is split into five total parts including the introduction and the conclusion. The first part of the introduction lists down some of the benefits of the integration process according to economic theory. It is stated that economic integration can have 'trade creation' and 'trade diversion' effects. Trade creation effects are beneficial whereas trade diversion effects are undesirable side effects. The writers clearly believe that the benefits outweigh the disadvantages. Next, the writers examine the difficulties that have to be overcome. These include restrictive trade policies, identical comparative advantage, lack of a coherent transport system, lack of trade complementarities and political problems, especially between India and Pakistan. Thirdly, recommendations on how to improve the process have been given. This makes up the largest part of the paper. These include reducing trade barriers, simplifying and improving the tariff structure and procedures, improving trade facilitation, promoting collectivism (at regional or international forums), minimizing trade diversion2, employing confidence building measures (especially for India and Pakistan), making the South Asian Free Trade Area (SAFTA) work and exploring potential in new areas. The conclusion summarizes the points given above. The appendix gives details on the trade policies of different countries within the region. 'The Process of Economic Integration in South Asia' 3 was written by the International Finance Division's research department at the Nepal Rastra Bank. It first introduces the general process of integration, outlining five successive stages. Next Preferential Trade Agreements (PTAs) are examined after which a detailed study of the South Asian Association of Regional Cooperation (SAARC) is presented. The objectives of SAARC are stated followed by an examination of its subsidiaries such as the SAFTA, South Asian Preferential Trading Agreement 1

Nasir, Shahbaz and Musleh-ud Din, winter 2004, Regional Economic Integration in South Asia: the Way Forward, the Pakistan Development Review 2

Trade diversion is an undesirable effect of economic integration where outputs from more efficient sources outside the economically integrated area are thwarted, reducing allocative efficiency. 3

The three research papers that will be reviewed next were published as a collection of papers on behalf on the Nepal Rastra Bank in 2005.

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(SAPTA) and SAARC Finance. The need for integration is emphasized by pointing out common problems of poverty, unemployment and illiteracy in South Asian countries in addition to shared goals of transformation from agro-based to industrial economies. 'Regional Economic Cooperation in SAARC' is written by Rajiv K. Chander4. It examines the birth of SAARC and the reasons it was established. The foremost reason was to accelerate the pace of economic growth in member countries. In subsequent sections, committees and subsidiaries of the SAARC are studied. The committee on economic cooperation (CEC), is a part of SAARC and was established to ensure that policies are implemented. The CEC has played an important role in identifying new areas of cooperation and considering reports from specially constituted groups. Its functions are to analyze the global and intraregional environments, evolve joint strategies and make recommendations at international forums. The SAPTA is studied next, from its inception in April 1993 to the functions it was supposed to perform. Advancements and agreements made at the twelfth summit at Islamabad in 2004 are described5. SAARC Finance is described next. It is a group consisting of the governors of the respective central banks and finance secretaries of countries in the SAARC. The SAFTA and the proposed South Asian Economic Union (SAEU) are outlined next and then the writer concludes. The paper is descriptive, outlining SAARC and the changes it has gone through to promote regional integration. 'Common Currency Area: Prospects for South Asia' is written by Nephil Matangi Maskay6 and studies whether or not it is possible to follow the example of the European Union (EU) in South Asia case. First, the paper explains the diversity of the members in the region. India is stated to be 'three thousand times more populous and has a GDP over eight hundred times greater than the smallest country in SAARC, Maldives'. While differences are cited in terms of size, population and GDP, similarities in terms of poverty and similar need for economic development are also mentioned. The rationale for economic integration is that integration would alleviate poverty by accelerating growth. In addition, there would be microeconomic benefits 4

Chander, Rajiv K., April 2005, Regional Economic Cooperation in SAARC, Economic Integration in South Asia, Nepal Rastra Bank 5

The agreements made include the agreement an promotion and protection of investment, establishment of a SAARC arbitration council and a multilateral tax treaty with regard to avoidance of double taxation. 6

Maskay, Nephil Matangi, April 2005, Common Currency Area: Prospects for South Asia, Economic Integration in South Asia, Nepal Rastra Bank

Economic Integration 10 like allocative efficiency of goods, services and capital. However, for the process of economic integration to be achieved it is important to coordinate policies and ensure capital mobility. The need for greater monetary cooperation has been acknowledged, an idea that would culminate in the form of a common currency area like that of the EU. For a region to be a common currency area, the economies of the candidate countries need to experience the same shocks over time. To test whether South Asia is a common currency area or not, an econometric test is applied. The test proves that the region is not a common currency area. The writer then states that it is possible for it to become so if sequential steps are followed for its achievement. In the final recommendations, the writer suggests that the pace of the integration should be cautious and regulated, given the political situation of member countries. Rehman Sobhan in “The Need for Economic Integration” has stated that South Asia as a region has opportunities and capabilities to integrate and emerge as strong regional entity. South Asia has inherited a shared identity, infrastructure and institutions of governance which would have been the greatest asset of any emerging decolonized region but unfortunately has been fragmented by politics. Moreover, Asia’s emergence as new global growth center has also been highlighted with China the leading economy and India being another fast pace developing state. Change in the international dynamic is that the world looked upon west as center of growth and development but now 75 percent of foreign currency reserves of global economy are located in Asian states. Other than capital markets South Asian states have opportunities to trade freely and fulfill mutual needs through agreements like (FTAs) Free Trade Agreements already signed between India and Sri Lanka, Nepal and Bhutan. South Asian Association for regional Cooperation (SAARC) has to be more active and fluid in its conceptualizations. Furthermore Labor markets and Infrastructure developments are to be taken into account such as communication and Transportation which can facilitate strong regional network. West Asia is one the biggest source of energy whereas East Asia is source of Labor supply, so these regions can fulfill their mutual interest and exploit the resources to their advantage. The problem for exploiting these opportunities with South Asian states is that they are indulged in internal political problems individually as well as at the regional level. Bilateral political problems such as that of India and Pakistan also need to be resolved in order to progress and integrate regionally.South Asian states should take advantage of the new emerging opportunities

Economic Integration 11 for cooperation with West Asia, Southeast Asia and East Asia and overcome conflicts and disputes for greater interests as region. Poonam Baru in “Economic diplomacy in South Asia: Priorities and stake holders in new economy” has stated that economic diplomacy has always been good tool to conduct international relations and build relations at national, regional and global level. This tool has been used successfully earlier such as in integration of (EU) European Union and authorization of (SAARC) South Asian Association for regional Cooperation. Future economic scenario and success of new business will be defined by new variables such as best business practices, innovation, R&D7 and cross-cultural skills that will facilitate new stakeholders in various areas of cooperation. Furthermore there are new set of random variables namely International security, geo-politics and threat of terrorism that will affect future economic prospects. The South Asia and world economic community seems to be analyzing series of myths about Indo-Pak relations, which are incoherent with the existing evidence. Although the trade volume in intra-SAARC countries as well Indo-Pakistan is very low as compare to EU and other unions but still there are opportunities and common interest areas between and among these nations. The South Asian business community has always been at the forefront of its governments in supporting and encouraging economic measures and profit seeking opportunities. Lastly, there is growing tendency among general public towards business community and corporate sector for leadership and social concerns. Corporate sector should realize that reducing political tensions and security risks in the region have profound long-term implications for their business. The route to involve corporate sector in peace building role will be a positive step towards economic integration, whereas Ideologues and fundamentalists factors will have a negative impact and in economic progress and social stability. Javid Hussain in “Limitations of SAARC” stated that recently held 14th SAARC summit emphasized on roadmap for South Asian Customs Union and South Asian Economic Union. South Asian Union if formed will have deep implications for Pakistan regarding politics, economy and the decision making process. Comparison with (EU) European Union has been done where there is merger of economies and coordination in fiscal, monetary and trade policies. There are certain factors such as cultural affinities and economic complementarities that either facilitate or hinder the formation of economic union. In case of South Asian Union, people 7

R&D: Research and Development

Economic Integration 12 belong to two different civilizations Hinduism and Islam that creates differences and political tensions especially between India and Pakistan. Another factor is the apprehension about India’s ambition of becoming regional hegemon. There are less possibilities for South Asia to integrate economically however SAARC can play its role in promoting trade and encourage cooperation in areas such transport, communication environment and energy. SAARC still has limitations as organization and is not appropriate for Pakistan to establish economic union. Pakistan will either be frustrated or loose its identity in huge Indian mass in case of this economic union but should grasp other suitable opportunities such platform of ECO where it has much favorable environment economically and politically. Eric Gonslaves in “Regional Cooperation in South Asia” has stated that regional cooperation has succeeded and accepted universally. It is because of the fact that world is interdependent for its needs and fast pace globalization is taking place. General perception that people and governments have is that they have to compromise and adjust; force cannot resolve bilateral and regional disputes. South Asian cooperation has been at unviable proposition as compare to other regional unions such as EU and ASEAN8 that are far ahead in regional and economic terms. SAARC has not been able to achieve its goals and has proved ineffective. One of the reasons is that of Indo-Pakistan disputes mainly Kashmir issue that hinders regional cooperation. Indian economy is growing at fast pace and is moving forward to join world economy so its neighbors including Pakistan must take advantage and benefit from the opportunity of economic cooperation. Bhutan, Maldives and Sri Lanka have benefited economically due their positive approach and improved bilateral relations with India. Even India-Pakistan cooperation and improved bilateral relations can bring economic progress and regional integration and still opportunities are lying ahead. It is essential for South Asian states to change their negative approach and overcome disputes or they lag behind in process of globalization.

Chapter 3: Research Methodology 8

ASEAN: Association of Southeast Asian Nations

Economic Integration 13 This paper is primarily an analysis of what the researchers have gathered from different books, papers and articles. The approach was analytical and an attempt has been made to fully comprehend the situation. The readers are familiarized with the process and then detailed answers are given for questions exploring whether integration is possible. It should be noted, however, that the research is largely theoretical in its orientation and nothing should be expected to be proved or disproved conclusively. What is the process of economic integration and what are its various stages? Economic integration is a sequential process whereby 'the discriminations which occur at borders'9 are removed. Discrimination, in simpler terms, is the hindrance to the free flow of factors of production. The aim of the process is to integrate economies so that there is allocative efficiency within a region. Increased economic integration leads to decreased trade barriers within markets10. The theory is founded on the work of a Hungarian economist, Bela Balassa and dates back to 1960. There are generally six (five in some places) stages to economic integration. The highest stage is total economic integration and demands some form of supranational body to sustain itself. The first stage is the establishment of a preferential trade area (PTA). A PTA is established through a trade pact that reduces tariffs (but does not abolish them) and thereby grants 'preferential access'11 to factors of production from a particular region. The second stage of regional integration is a free trade area (FTA). This implies an area where tariffs and quotas are abolished to facilitate the movement of factors of production across borders. Countries within an FTA will however maintain tariffs against countries outside it. Different countries within the FTA have the right to set their own tariffs against third parties. Examples of FTAs are the Association of South East Nations (ASEAN) and the North American Free Trade Area. The third stage is the formation of a customs union. A customs union is like an FTA where member countries set the same tariffs for non-members. Examples of such a union are the European Economic Community since 1968 and the southern common market MERCOSUR (Argentina, Brazil, Uruguay, and Paraguay).

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The Process of Economic Integration, International Finance Division, Research Department, Nepal Rastra Bank Economic Integration, Wikipedia, http://en.wikipedia.org/wiki/Economic_integration 11 Preferential Trading Area, Wikipedia, http://en.wikipedia.org/wiki/Preferential_trading_area 10

Economic Integration 14 The fourth stage is a customs market (CM). In a CM, member countries abolish their non-tariff barriers to factors of production and service markets. An example of this is the European community since 1993, the European Single Market. The fifth stage is the establishment of an economic union (EUN). This is an advanced stage of a customs market where there is coordination between members in setting their national economic policies and domestic laws. An example of this is the European Union nowadays. The sixth and final stage is total economic integration. A supranational body sets economic policies applicable to all members. This means that the supranational body needs to have a considerable degree of power to pass laws and make policies. The implications for South Asia when following this model are important to take into account as will be done in subsequent questions. What are the advantages of economic integration to South Asia? Theories on economic integration are based on works by Viner, Mende and Lipsey. According to them, economic integration produces two opposite results: trade creation and trade diversion. Trade creation is when ‘low cost producers have free access to the domestic market’12, lowering the cost of production, producing allocative efficiency, increasing competition, ‘displacing high cost producers’13 and allowing industries to specialize. Trade diversion effects are produced when efficient third parties (countries outside a regional trade agreement) are barred from supplying better factors of production. In general, the benefits of economic integration should outweigh the disadvantages. This means, trade creation effects should outweigh trade creation effects. The benefits of trade creation are numerous. Firstly, it increases competition in the domestic economies. This would, as a matter of speaking, result in lowering costs and increasing quality as producers are pushed to capture the market; there is more reason to innovate and diversify (produce a greater variety of products). Secondly, because it promotes efficient allocation of resources it increases living standards, the long run growth of the economy and productivity. Besides the advantages proposed in theory, there are other arguments in integration’s favor. Increased economic integration tends to create a stable investment environment by 12 13

Din and Nasir, Regional Economic Integration, Pakistan Development Review, 2004 Din and Nasir, Regional Economic Integration, Pakistan Development Review, 2004

Economic Integration 15 regulating economic and trade policies. A great degree of integration would imply that member states find it difficult to reverse policies without the consent of other members. A regional trade organization may also provide member states with a valuable experience of trade liberalization on a small, experimental stage. In addition to that, economic integration may also lead to greater regional security by creating stakeholders and reducing the risk of conflict14. All these benefits become particularly applicable to South Asia when ‘geographical proximity’, similar cultures and economies are considered. Is it possible to replicate the European Union model in South Asia? The European Union has followed the sequential steps in economic integration successfully to arrive at the stage of an economic union. Tariffs between member states have been abolished, tariffs against member states are decided collectively, there is a common currency and a reasonable degree of harmonization of economic policies. The EU's GDP is two hundred billion dollars higher than it would have been without integration. There has been a sharp appreciation of the Euro against other currencies. The economic strength has won an important place in world affairs for the EU. In addition, there has been development that is more equitable as poorer countries such as Spain and Portugal have been beneficiaries. The EU example represents a much-coveted possibility for South Asia. The realities however place serious constraints on such wishful thinking. The European community even when it was at the stage of a common market had a regional trade of 50 percent. Intra-SAARC trade on the other hand has been only 4 or 5 percent in the last decade. This means that following the EU model, or the path to economic integration, is going to be a long and difficult process for South Asia. Researchers such as Dr. Maskay, at the Nepal Rastra Bank15 recommend that the speed of economic integration in the region be slow and cautionary. The process took half a century in Europe and the present situation in South Asia hints that the process will take even longer. The European community has a cultural affinity, similar politics and similar economies. South Asian political realities are, however, explosive. As a result ‘rigid, time bound’ targets are not advisable. Unfulfilled targets would reduce the credibility and influence of policy makers in

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Din and Nasir, Regional Economic Integration, Pakistan Development Review, 2004 Common Currency Area: prospects for South Asia, Economic Integration in South Asia, Nepal Rastra Bank

Economic Integration 16 addition to making further attempts more costly. A reasonable degree of flexibility is recommended at such an initial stage. The ‘critical ingredient’ for a lasting economic integration is political solidarity16. Political tensions, especially between India and Pakistan, make the possibility remote. A lack of political commitment would mean a subsequent divergence in economic policies or increased and undesirable competitiveness. If South Asia was to follow in the footsteps of the EU, it will have to be a gradual movement. Meanwhile, the possibility of a total economic integration remains a remote and distant possibility. What has the role of SAARC been in economic integration? The South Asian Association for Regional cooperation (SAARC) is an economic and political organization established in 1985, comprising of eight countries in Southern Asia. Initially the consensus was to cooperate in five areas namely agriculture, science, health, transportation and human resource. Regional trade is an issue of great significance for this region but SAARC has not yet been able to deal effectively with it. Although India has several trade pacts with small South Asian states17, similar trade agreements with Pakistan and Bangladesh have been stalled due to political and economic concerns on both sides. Intra -SAARC trade18 has been bleak 3percent for the past decade as compare to EU regional trade which stands for nearly 65percent and intra-ASEAN trade which stands for 35percent. Another area which has been ignored by SAARC is the integration of capital markets which has been underway for long time but is still operated informally. SAARC has not laid stress internationally on decisive issues like Kashmir dispute and Sri Lankan Civil war. However political dialogue is often conducted on margin of SAARC meetings and during 12th and 13th summits 19extreme emphasis was laid upon greater corporation between the SAARC members to fight terrorism. SAARC’s inability to play crucial role in integrating South Asia is often credited to the rivalry between India and Pakistan. It is due to the economic, political and territorial disputes that South Asian nations have not been able to exploit the benefits of a Unified economy. Over the years SAARC’s role in South Asia has been greatly diminished and is now used as a mere platform for annual talks and summits. 16

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Common Currency Area: prospects for South Asia, Economic Integration in South Asia, Nepal Rastra Bank

Small South Asian States namely: Maldives, Nepal, Bhutan and Sri Lanka Economic diplomacy in South Asia: Priorities and stake holders in new economy, Poonam Baru, Foreign affairs 19 www.wikipedia.com 18

Economic Integration 17 However on the optimistic side SAARC can still play its role in boosting regional trade, water management, environment, energy, diseases and terrorism which have profound implications for every member state and cannot be handled purely at national level and thus require regional cooperation. What are the opportunities for integration? South Asian states have wide range of opportunities to integrate economically and emerge as a strong regional and economic entity. South Asia can have free trade and free market policies which will pave the way for economic union. Free trade will enable these countries to have common external tariff keeping in view the interests of small nations regarding their tariff revenues. Free market will facilitate the mobility of capital and labor across borders that enhance the capabilities of South Asia to integrate its capital and labor markets. South Asian countries especially India, Pakistan and Bangladesh can work on common interest areas such as Infrastructure, technology, telecommunication, transportation and energy. Special emphasis should be laid to build road networks that can facilitate mobility and generate revenue. India is a major stakeholder in this region and can exploit its neighbor countries to fulfill its energy needs. In return, India can help Pakistan and Bangladesh in sectors such as software and Information technology in which it is highly advanced. Another opportunity seems to have generously opened to India and Pakistan which is (IP I) Iran, Pakistan and India gas pipeline. Most recently Pakistani foreign minister Shah Mahmood Qureshi visited New Delhi where the modalities of this gas pipeline have almost been finalized .This is a positive step towards improving bilateral relations, diffusing tensions and fulfillment of mutual needs. Other than that, a regional economic organization also enables the member-states to tackle issues more effectively such as water management, environment, energy and trans-border crimes and diseases that cannot be handled at a purely national level and that, therefore, require regional cooperation. As member-states engage in regional cooperation, they establish positive linkages amongst themselves thus producing a ‘peace dividend’20. This has been an important outcome of the process of economic integration that has taken place in Europe in the form of the European Union. What are the constraints? 20

Limitations of SAARC, Javid Hussain, Friday,20 April 2007,www.dawn.com.pk

Economic Integration 18 South Asian countries have potential to integrate economically and regionally and these countries are also members of a regional cooperation group SAARC21. Since economic decisions cannot be alienated from political issues, various political tensions and constraints are source of hindrance in South Asia’s economic integration. There are internal political conflicts in countries individually as well as at the regional level. Bilateral political problems such as that of India and Pakistan is one the major hurdles in formation of this union. Kashmir issue which is considered to the apple of discord between two states remains unsolved since 1947. One opinion22 in Pakistan is that unless Kashmir issue is resolved no other development including economic progress can take place deterministically. There are certain norms which formulate economic union such as preferential trade agreements, free trade agreements, customs unions and free markets where labor and capital can freely move. Although preferential trade agreement is there between these states but there are serious objections for FTA even with small states due to loss of tariff revenues. Formulation of Customs unions and free markets also seems to be very difficult in near future. South Asian Union if formed will have deep consequences for Pakistan regarding politics, economy and decision makes process. There are certain factors such as cultural affinities and economic complementarities which either facilitate or hinder the formation of economic union. In case of South Asian Union people belong to two different civilizations Hinduism and Islam which creates differences especially between India and Pakistan. Another factor being the apprehension about India’s ambition of becoming regional hegemon and significant trade imbalances in favor of India remains issue of concern even for smaller South Asian states. One opinion is that Pakistan should join ECO23 as forum for establishing Economic Union because of advantage of cultural affinities, absence of serious disputes and non-existence of hegemonic ambitions on the part of ECO member states. Furthermore analysis of EU model which is an established union suggests that there are ongoing debates on issues such as security policies and EU constitution which are indeed political in nature, whereas in the case of South Asia issues are far more sensitive and complicated in nature. Results from Hypothesis testing 21

SAARC: South Asian Association for regional Cooperation Economic diplomacy in South Asia: Priorities and stake holders in new economy, Poonam Baru, Foreign affairs 23 ECO: Economic Cooperation Organization 22

Economic Integration 19 We reject the null hypothesis. The process of regional integration is going to be a gradual one as political limitations do not allow to be rapid.

Conclusion

Economic Integration 20 The South Asian region is considered the next major economic development center. The region has a similar culture, a similar history of colonialism and is beset by similar problems of poverty and inequality. The researchers conclude that much is to be gained if the region's resources are fully mobilized. Removing discriminatory practices from national borders would achieve that kind of mobilization. However, the region is politically divided which hinders any such practice. Political division, especially between India and Pakistan, poses a problem to regional integration. It is the major reason why the SAARC has performed poorly and why the EU model cannot be followed. Statistics indicate that there is very little comparison between South Asia and the pre-integration European community.

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Recommendations The researchers believe that South Asian Countries should bring change in their mindsets and traditional approach of resolving issues, thus rise above the concept of nationalism to regionalism for achievement of greater interests and changing world dynamics of regarding globalization. The researchers present the following points that they believe to be useful: Firstly, South Asian states should facilitate each and other and at least try to emerge as an economic union if a regional or a custom union is not possible in near future. Secondly, they should follow the example of EU and ASEAN union which are well-established regional and economic unions and have gained from their togetherness. Thirdly, South Asia should use economic diplomacy to resolve political and regional disputes which is considered to be a prerequisite of political integration. In order to make SAARC a practical platform of economic integration, collective effort of all nation-states should be made. Pakistan should not completely depend on SAARC or South Asian economic union for its economic development and must keep its options open for other economic forums as ECO where it has much stronger cultural and religious affinities.

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i End Notes 1. Nasir, Shahbaz and Musleh-ud Din, winter 2004, Regional Economic Integration in South Asia: the Way Forward, the Pakistan Development Review 2. Trade diversion is an undesirable effect of economic integration where outputs from more efficient sources outside the economically integrated area are thwarted, reducing allocative efficiency. 3. The three research papers that will be reviewed next were published as a collection of papers on behalf on the Nepal Rastra Bank in 2005. 4. Chander, Rajiv K., April 2005, Regional Economic Cooperation in SAARC, Economic Integration in South Asia, Nepal Rastra Bank 5. The agreements made include the agreement an promotion and protection of investment, establishment of a SAARC arbitration council and a multilateral tax treaty with regard to avoidance of double taxation. 6. Maskay, Nephil Matangi, April 2005, Common Currency Area: Prospects for South Asia, Economic Integration in South Asia, Nepal Rastra Bank 7. R&D:Research and Development 8. ASEAN: Association of Southeast Asian Nations 9. The Process of Economic Integration, International Finance Division, Research Department, Nepal Rastra Bank 10.

Economic Integration, Wikipedia, http://en.wikipedia.org/wiki/Economic_integration

Economic Integration 23 11.

Preferential Trading Area, Wikipedia, http://en.wikipedia.org/wiki/Preferential_trading_area

12. Din and Nasir, Regional Economic Integration, Pakistan Development Review, 2004 13. Din and Nasir, Regional Economic Integration, Pakistan Development Review, 2004 14. Din and Nasir, Regional Economic Integration, Pakistan Development Review, 2004 15. Common Currency Area: prospects for South Asia, Economic Integration in South Asia, Nepal Rastra Bank 16. Common Currency Area: prospects for South Asia, Economic Integration in South Asia, ii Nepal Rastra Bank 17. Small South Asian States namely: Maldives, Nepal, Bhutan and Sri Lanka 18. Economic diplomacy in South Asia: Priorities and stake holders in new economy, Poonam Baru, Foreign affairs 19. www.wikipedia.com 20.

Limitations of SAARC, Javid Hussain, Friday,20 April 2007,www.dawn.com.pk

21. SAARC: South Asian Association for regional Cooperation 22. Economic diplomacy in South Asia: Priorities and stake holders in new economy, Poonam Baru, Foreign affairs 23. ECO: Economic Cooperation Organization

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iii References Baral, Lok Raj, November 2007, Cooperation with Realism: the Future of South Asian Regionalism, Current Affairs Barua, Poonam, July 2007, Economic Diplomacy in South Asia: Priorities and Stakeholders in the New Economy, Current Affairs Chander, Rajiv K., April 2005, Regional Economic Cooperation in SAARC, Economic Integration in South Asia, Nepal Rastra Bank Chibber, Bharti, June 2007, Environmental Dimension of Regional Security: a Comparative Study of ASEAN and SAARC, Current Affairs International Finance Division, Research Department, April 2005, the Process of Economic Integration in South Asia, Economic Integration in South Asia, Nepal Rastra Bank Kemal, A. R., April 2007, Macroeconomic Policies in South Asia, Current Affairs Maskay, Nephil Matangi, April 2005, Common Currency Area: Prospects for South Asia, Economic Integration in South Asia, Nepal Rastra Bank Nasir, Shahbaz and Musleh-ud Din, winter 2004, Regional Economic Integration in South Asia: the Way Forward, the Pakistan Development Review Sobhan, Rehman, December 2007, the Need for Economic Integration, Current Affairs

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