India’s performance will impact LDC members

Published in the Indian Financial Express on 11 January 2006

Not many games exist in the game-theory literatures that illustrate a perfect game which can come up with a win-win result for all its players. Aiming such an intricate target, the seven members of the Saarc family have launched a Safta-era, to be fully operational by the next decade. This is the second step towards a South Asian economic union. The first step, which was to create a preferential trading arrangement under Sapta, was a frustrating experience with its protracted mechanism.

If a right trajectory is set for Safta, this can subsequently lead to a South Asian customs union, move forward to a common market and then reach the final destination of a South Asian economic union. A free interaction will not be an easy task since member-countries of Saarc are at various stages of development. Given its sheer size, momentum of growth and competitive strength, India will have significant repercussions on its low-income neighbours.

The first and obvious issue to be examined is whether increases in developing members’ exports reduce exports of low-income economies. This will hold true for high-value items where countries like India have a comparative advantage due to its skilled labour force and advanced technologies. However, the situation may not be the same in case of intra-regional exports, where the demand for low value and low-priced items can be matched with the supply side capacity of low-income members.

But to what extent will the least developed members benefit from the complementarities of imports of developing members? Since capital goods are their major imports, least developed members who do not produce capital goods may not get equal benefit from the regional growth collaboration.

Therefore, the major alternative for least developed members is to tap the market for consumer products in developing countries where they may gain some comparative and competitive advantages. Thus, countries facing a third-market effect, i.e. decline in export owing to export competitiveness of more developed nations, may be compensated by the growing import need of these countries from neighbouring economies.

One also needs to examine how less developed economies will benefit if they get integrated into a regional supply chain. Theoretically, there is no denying the existence of a complementary supply cycle through which an increase in developing members’ export subsequently increases their import demand from neighbouring low-income economies which again increases their export capacity.

There are counter-arguments that the cycle often negatively affects the exports of less-developed countries that do not have the capacity to produce high-value products. However, in the supply chain, less developed economies can gain from the lower price of products offered by the developing members. By importing low-priced intermediate products low-income countries will be able to produce price-competitive products for the third market. These countries will also gain in the domestic market as low-priced import will increase their factor returns.

The final issue relates to the apprehension that rapid expansion in India may deprive their low-income neighbours by redirecting both intra-Asian foreign direct investment (FDI) and FDI from other parts of the world to its direction. However, in reality, the growth of trade and investment capacities of India may lead to Indian FDI outflow to neighbouring countries.

For instance, Bangladesh is currently negotiating a $20-billion FDI deal with India’s TATA group. With the industrial transformation of developed countries towards a capital-intensive economy, FDI may flow from these countries to their labour-intensive low- income neighbours following the flying geese pattern. It is also mandatory to strengthen regional economic groupings to get the maximum benefit from the WTO system. Both the complementary and competitive perspectives of Safta thus need to be cautiously examined with a view to finding new avenues of trade which may turn the threats of free trade into opportunities for everyone.

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