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United Nations Conference on Trade and Development
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REGIONAL TRADE INTEGRATIONS:
A COMPARATIVE STUDY
THE CASES OF GAFTA, COMESA, AND SAPTA/SAFTA
Authors
Parts A and B (Comparative Analysis and GAFTA)
Talib Awad, Professor of International Economics, Faculty of Business, University of
Jordan([email protected])
Amir Bakir, Assistant Professor, Faculty of Business, University of
Jordan([email protected])
Part C (COMESA)
Rojid Sawkut, Lecturer, University of Mauritius ([email protected])
Sannassee Vinesh, Senior Lecturer, University of Mauritius ([email protected])
Seetanah Boopen, Lecturer, University of Technology of Mauritius
([email protected])
Fowdar Suraj, Lecturer, University of Mauritius ([email protected] )
Part D (SAPTA/SAFTA)
Meeta Keswani Mehra, Associate Professor, CITD/SIS, Jawaharlal Nehru University, India
Manoj Pant, Professor of Economics, CITD/SIS, Jawaharlal Nehru University, India
With research assistance from
Saptarshi Basu Roy Choudhury, M.Phil. Scholar, CITD/SIS, Jawaharlal Nehru
University, India
Amit Sadhukhan, M.Phil. Scholar, CITD/SIS, Jawaharlal Nehru University, India
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TABLE OF CONTENT
A.
COMPARATIVE ANALYSIS............................................................
I.
Introduction ..........................................................................
II.
Type and coverage of trade agreements .............................
III.
Intra-regional trade development and characteristics ..........
III.1
III.2
III.3
Intra-regional trade development ................................................ 7
Commodity structure .................................................................. 8
Trade direction .......................................................................... 8
Impact of trade agreements on intra-regional trade ............. 9
IV.
IV.1
IV.2
Revealed comparative advantage analysis .................................. 9
Partial regression analysis ......................................................... 10
Intra trade obstacles ............................................................. 11
Conclusion ........................................................................... 12
V.
VI.
B.
I.
II.
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REGIONAL TRADE INTEGRATION: THE CASE OF GAFTA . 14
Introduction .......................................................................... 14
Overview: Theoretical background ....................................... 15
II.1 Economic analysis of regional economic integration ...............................
II.2 Economic effects on member countries .................................................
II.2.1 Trade creation and diversion ........................................................
II.2.2 Scale and competition effects .......................................................
II.3 Winners and losers ..............................................................................
III.
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18
19
Regional economic integration and the Great Arab Free Trade
Area ..................................................................................... 19
III.1
Previous economic integration efforts ......................................... 19
III.2 The Greater Arab Free Trade Area ...................................................... 20
IV .
IV.1
IV.2
IV.3
V.
V.1
V.2
VI.
VII.
Trend and characteristics of intra-Arab trade ....................... 24
Growth of intra-Arab trade .......................................................... 24
Intra-Arab trade commodity structure .......................................... 25
Intra-Arab trade destination ........................................................ 26
Measuring the effect of GAFTA on intra-Arab trade ............. 26
Revealed comparative advantage ............................................... 28
Partial regression analysis ......................................................... 29
Intra-Arab trade problems and obstacles ............................. 31
Conclusion and recommendations ....................................... 34
C.
THE CASE FOR COMESA .............................................................. 38
I.
Introduction .......................................................................... 38
II.
Regional trade blocks in Africa ............................................. 38
III.
Economic structure of some COMESA Members ................ 50
IV.
Measuring the effect of COMESA on intra-COMESA trade: A
preliminary analysis ............................................................. 55
V.
The role of COMESA exports in COMESA economic growth
............................................................................................. 56
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D.
REGIONAL TRADE AGREEMENTS IN SOUTH ASIA:
PROSPECTS FOR INTRA-REGIONAL TRADE COOPERATION
............................................................................................................................................................. 65
I.
Introduction and scope ......................................................... 65
II.
Geo-political milieu of regional cooperation in South Asia ... 67
III.
SAARC Preferential Trading Arrangement (SAPTA) ........... 68
IV.
South Asia Free Trade Area (SAFTA) Agreement ............... 68
V.
Bilateral initiatives ................................................................. 70
VI.
Multilateral initiatives outside the region ............................... 72
VII.
Broad economic and trade characteristics of South Asia ..... 74
Economic characteristics of the SAARC region ............................ 74
Trade characteristics of the SAARC region .................................. 75
Assessing the scope for intra-regional trade ................................ 79
VII.1
VII.2
VII.3
VIII.
Summary and conclusions ................................................... 90
FIGURES
Figure B1: Intra Arab Trade, 1980-2005...................................................
Figure B2: Intra exports and exports with the rest of the world (US$
millions) ..................................................................................................
Figure B3: Intra imports and imports with ROW ($US million) .............
Figure D1: SAARC’s GDP (billion US$ in PPP terms) ...........................
Figure D2: Share of SAARC’s GDP in world GDP (per cent) ...............
Figure D3: Year to year growth of intra-group exports of SAARC
(per cent)................................................................................................
Figure D4: Proportion of SAARC’s intra-group trade to its aggregate
GDP (per cent) ......................................................................................
Figure D5: Proportion of SAARC’s intra-regional exports to its
exports to ROW (per cent) ..................................................................
Figure D6: Proportion of SAARC’s intra-regional imports to its
imports from ROW (per cent) .............................................................
Figure D7: Intra-group exports and SAARC’s exports to ROW
(current US$ million) ............................................................................
Figure D8: Intra-group imports and SAARC’s imports from ROW
(current US$ million) ............................................................................
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TABLES
Table A1: Type and coverage of trade agreements ...............................
Table A2: Share of exports by main products, 1985-2005 ....................
Table A3: Regression results of intra exports for GAFTA, COMESA,
and SAPTA/ SAFTA.............................................................................
Table A4: Regression results of intra imports for GAFTA, COMESA,
and SAPTA ............................................................................................
Table B1: Growth rates of intra trade during the period 1980-2004 ....
Table B2: Intra-Arab trade growth rates for selected countries (per
cent) ........................................................................................................
Table B3: Relative importance of intra-Arab exports according to
commodity groups ................................................................................
Table B4: RCA indices for GAFTA countries by broad commodity
groups (2003, 2004).............................................................................
Table B5: Estimation results for intra exports and intra imports in
logarithm form .......................................................................................
Table C1: Basic economic indicators of COMESA countries and
sectors’ share of GDP (per cent), 2002 ............................................
Table C2a: Share of exports (per cent) ....................................................
Table C2b: Share of COMESA intra exports as a percentage of
COMESA total exports ........................................................................
Table C2c: Average annual growth rate of exports and imports for
the COMESA region (per cent) ..........................................................
Table C3: Products exported as a percentage of COMESA total
intra exports...........................................................................................
Table C4: GDP (PPP) yearly growth rate (per cent, 1995 prices) .......
Table C5: GDP per capita yearly growth rate (per cent, 1995
prices).....................................................................................................
Table C6: OLS estimates in logarithm ......................................................
Table C7: Cross section and random effects estimates ........................
Table C8: Random effects panel estimates (COMESA exports to
COMESA and US and EU) .................................................................
Table C-A: RCA for selected COMESA countries in 2000 at 2 digits
SITC........................................................................................................
Table D1: Preferences under SAPTA .......................................................
Table D2: Intra-group trade of the SAARC region (US$ million) ..........
Table D3: Aggregate commodity composition of SAARC’s trade
with the world in 2005 ..........................................................................
Table D4: Commodity composition of intra-group trade for the
SAARC region in 2005 ........................................................................
Table D5: Trade Intensity Indices for intra SAARC trade, 1994/95 2004/05 ..................................................................................................
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11
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29
30
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52
52
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58
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68
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Table D6: Results of multivariate regression for intra-regional
exports....................................................................................................
Table D7: Results of multivariate regression for intra-regional
imports....................................................................................................
Table D8: Unit root tests..............................................................................
Table D9: RCA indices for SAARC countries for broad commodity
groups in 2005 ......................................................................................
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A.
COMPARATIVE ANALYSIS
By Talib Awad and Amir Bakir
I.
Introduction
Following the initiative by the UNCTAD Virtual Institute that was launched during
the second annual meeting of the participating member universities, mutual interest in
regional trade agreements was expressed by three research groups representing the
University of Jordan, the University of Mauritius and the Jawaharlal Nehru
University, India. The encouragement and coordination efforts of the Virtual Institute
team played an important role in realizing this joint research project.
This joint research covers three regional trade agreements in three different parts of
the world, the Great Arab Free Trade Area (GAFTA) in the Arab region, the Common
Market for Eastern and Southern Africa (COMESA) in the African region, and the
South Asia Preferential Trade Agreement (SAPTA) (followed by the recently
promulgated South Asia Free Trade Area) in the South Asian region. The comparative
part of the study covers the following four dimensions: type and coverage of trade
agreements, characteristics and development of intra trade, impact of trade
agreements on intra trade, and problems associated with implementing the RTAs.
II.
Type and coverage of trade agreements
As shown in Table A1 trade integration is limited to the first stage of economic
integration, as free trade area, for the GAFTA and COMESA groups, while it took the
form of preferential trade agreement for the SAPTA group, which recently culminated
in the ratification of SAFTA. The agreement coverage was extensive as it covered
most of the countries in their respective regions; seventeen countries in the Arab
group, twenty countries in South Asia and seven countries in South-East Africa.
In terms of the application of the agreements, the GAFTA was the most effective and
comprehensive. Its actual implementation started in 1998 with a clear objective of
complete elimination of non-tariff restrictions and gradual cutting of applied tariff
rates by an average of 10 per cent annually. In 2002 the zero-tariff goal was achieved
among GAFTA members, and most non-tariff restrictions were eliminated in almost
all goods. In the case of COMESA however, although the agreement calls for
elimination of all trade barriers starting 2000, it is not clear whether this objective was
actually implemented.
Furthermore, SAPTA was a preferential trade agreement allowing members the
freedom to choose the pace, the list of commodities and the mode of trade
liberalization, resulting in limited actual tariff reductions and trade preferences among
members. By comparison, SAFTA is more comprehensive as well as it specifies a
phased reduction in tariffs for the member countries. However, the transition to
SAFTA is of recent origin and its impact on regional trade integration remains to be
seen.
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Table A1: Type and coverage of trade agreements
Title
Arabic Group
Main trade
agreement
Type of
agreement
Coverage
Starting date of
agreement
Trade
liberalization
measures
South Asian Group
GAFTA
East-South African
Group
COMESA
Free Trade Area
Free Trade Area
17 countries: Algeria,
Bahrain, Egypt, Iraq,
Jordan, Kuwait,
Lebanon, Morocco,
Oman, Palestine, Qatar,
Saudi Arabia, Sudan,
Syria, Tunisia, UAE and
Yemen.
20 countries: Djibouti,
Egypt, Kenya,
Madagascar, Malawi,
Mauritius, Sudan,
Zambia, Angola, Burundi
Comoros, D.R. Congo,
Eretria, Ethiopia,
Namibia, Rwanda,
Seychelles, Swaziland,
Tanzania, Uganda and
Zimbabwe.
October 2000
Preferential Trade
Agreement
7 countries: India,
Pakistan, Sri Lanka,
Bangladesh, Nepal,
Bhutan and Maldives.
Afghanistan slated to join
SAFTA in January 2008.
January 1998
Elimination of quotas
and other quantitative
restrictions. Reduction of
tariff rates on traded
goods by an average of
10 per cent annually.
Preferential treatment is
granted to Palestine and
Sudan.
SAPTA
Elimination of quotas
and other quantitative
restrictions. Reduction of
tariff rates on traded
goods.
December 1995/ January
2006
Gradual concession on
tariff and non-tariff
measures with provision
for special treatment for
least developed
countries. Phased
elimination of tariffs over
2006-16, with different
rates for the least
developed members.
Elimination of
quantitative restrictions.
Source: Based on the three regional studies in parts B-D of this document.
In addition to these three major trade agreements, many bilateral and multilateral free
trade agreements, either within the regions or with countries outside the region, were
signed by individual countries in each region.
III.
Intra-regional trade development and characteristics
III.1 Intra-regional trade development
Intra-regional trade (from now on intra trade) showed a modest growing trend in all
three regions. In the GAFTA group it grew at an average annual rate of 4.8 per cent
during 1980-1997. However, annual average growth rates were much higher (more
than 18 per cent) after 1998 as shown in Figure B2 of the GAFTA study. However, it
must be noted that these growth rates are nominal and most likely due to the recent
sharp increases in primary commodities especially fuel. Intra-regional exports (intra
exports) of SAARC as percentage of rest of the world exports increased from around
4 per cent over the period 1984-1994, to 5 per cent over the period 1995-2005.
Correspondingly, intra-regional imports (intra imports) grew from an average of 2.4
per cent to 4.1 per cent, respectively. The growth rate of SAARC’s intra trade
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increased from 8 per cent to 12 per cent, between the two time periods, respectively.
As far as COMESA is concerned, intra exports as percentage of total exports
increased from 4 per cent in 1980 to 4.8 per cent in 2005.
III.2 Commodity structure
In the GAFTA region more than 57 per cent of intra trade in 2005 was fuel and raw
materials, followed by food and beverages with a share of 17 per cent, chemicals (14
per cent), and manufactured goods (about 6 per cent). Trade patterns for GAFTA
shifted in favor of food and manufactured goods at the expense of fuel and raw
materials over the period of the study. In the COMESA region food and beverages
share in intra trade exceeded one third, followed by manufactured goods & chemicals
(31 per cent), and fuel and raw materials (22 per cent). The share of manufactured
goods and food in intra trade increased at the expense of minerals and raw materials
over the period of the study.
In the SAARC region manufactured goods dominated intra exports with a share of
over 52 per cent, followed by primary commodities including fuel (47 per cent). Over
the period of the study, the share of primary commodities increased (from 34 per cent
to 47 per cent) at the expense of manufactured goods (less significant decline from 59
per cent to 52per cent). Intra-group trade in textile fiber, yarn, fabrics and clothing
registered a significant decline.
Table A2: Share of exports by main products, 1985-2005
GAFTA*
96.0
1985
COMESA
43.1
SAARC***
34.0
GAFTA
57.7
Fuel and Raw
Materials
Food and
0.9
17.9
17.2
Beverages
Manufactured
2.4
20.0
59.0
20.1
Goods &
Chemicals
Source: Based on the three regional studies in parts B-D of this document.
Notes: * For 1980; ** for 2000; *** for 1995.
2005
COMESA**
21.9
SAARC
47.5
35.2
-
31.2
52.5
The above analysis shows that while intra trade in the GAFTA is dominated by fuel
and raw materials, manufactured goods play more important roles in the intra trade of
the other two regions. Over the study period GAFTA and COMESA region witnessed
a shift in the pattern of intra trade toward manufactured goods while in the SAARC
region the shift was towards primary products.
III.3 Trade direction
In the three regions intra trade was characterized by a high level of geographical
concentration and in most cases it was restricted between two or three neighboring
countries. For example, in the GAFTA region, Oman exported 64 per cent of intra
exports to United Arab Emirates, and Libya exported 69 per cent of its intra exports to
Tunisia, and 57 per cent of Bahrain’s intra exports were destined to Saudi Arabia, and
Iraq’s intra exports with Morocco and Jordan amounted to 47 per cent and 21 per cent
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respectively. Similarly, within the SAARC region, trade between Sri Lanka and
Maldives was the most intensive in the region, followed by India and Bhutan. In the
COMESA region, Djibouti, Ethiopia, Kenya and Uganda exported more than 90 per
cent of total intra exports in 2001. The geographical concentration clearly indicates
the importance of geographical proximity and political influence in determining the
direction of intra trade.
IV.
Impact of trade agreements on intra-regional trade
To evaluate the impact of regional trade agreements two analytical tools are
employed: revealed comparative advantage (RCA) indices and multiple regression
models. The RCA index will help identify the possibilities of intra trade expansion, a
higher than one value will indicate a revealed comparative advantage in that particular
sector. However if revealed comparative advantages are similar among countries of
the particular region then there will be limited potential for expanding intra trade
within that region.
The regression approach is intended to measure the partial impact of the agreement on
the regional intra trade. Since the three regional agreements were signed recently
(after 1995), the sample under consideration does not permit to divide the sample into
two: one before and one after the signing of agreement due to lack of degrees of
freedom. An alternative simple approach would be the use of a dummy variable that
takes the value of zero in the absence of the agreement, and of one when the
agreement is effective. Two models were employed for this purpose: the first for
modeling intra exports and the other for modeling intra imports. For the purpose of
identifying the substitution effect between intra trade and trade with the rest of the
word (ROW), exports to ROW was introduced as a an explanatory variable in the first
model, and imports from ROW was introduced as an explanatory variable in the
second model. These two variables can serve the purpose of capturing the effects of
trade agreements other than intra trade agreements. In addition, total GDP was used as
explanatory variable in each equation to capture the economic size effect in each
region. Also time was introduced in the model with the purpose of capturing the
growing trend in intra trade over time.
IV.1 Revealed comparative advantage analysis
Based on the RCA analysis for the three regions, the GAFTA countries showed a high
concentration in revealed comparative advantage in primary goods mainly fuel and
ores & metals, with almost negligible advantages in other products. This implies a
very limited potential for expanding intra trade in the region.
COMESA members have comparative advantage in quite similar products which
suggests that complementarities as a way to stimulate trade might be limited among
some COMESA members.
For the SAARC region, there is also a lack of complementarities as indicated by
similar RCA indices. This points toward a high degree of competition in export
structures, albeit at the aggregated commodity level.
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IV.2 Partial regression analysis
The above specified regression model is used to explain the effects of the trade
agreements on intra trade in the three regions. For the three regions a log linear
specification was used. While the GAFTA and SAPTA's samples cover the period
(1980-2005), the COMESA study used a slightly smaller sample covering the period
(1985-2004). The results of applying the OLS for the three regions are summarized in
Table A3:
Table A3: Regression results of intra exports for GAFTA, COMESA, and
SAPTA/ SAFTA
†
COMESA
SAPTA/ SAFTA
GAFTA
ROW exports
0.44
0.85
0.95
(4.3)**
(2.3)**
(5.3)***
Time
0.29
0.15
-0.22
(5.4)**
(1.95)*
(-3.8)***
GDP
-0.007
0.63
0.54
(-0.27)
(1.92)*
(1.7)
Trade dummy
-0.05
0.3
0.06
(-0.5)
(1.2)
(1.7)
R-square
0.83
0.91
0.99
Notes: † After correcting for first order autocorrelation. Figures in parenthesis are t-statistics. *
Significant at 10 per cent level; ** significant at 5 per cent level; *** significant at 1 per cent level.
Variable
The results of applying the OLS are satisfactory and consistent with economic theory
in all three regions. The model fit is acceptable for the three regions as evident from
the high R-squared values. As with regard to the substitution coefficient it turned out
to be positive and statistically significant at least at the 5 per cent level. The positive
sign indicates the absence of substitution effects between intra and ROW trade.
The time trend variable coefficient was significant in all three regions (of varying
degrees), indicating a positive trend in intra exports of the first two regions while it
showed a decreasing trend in the SAPTA region over the period of study. The scale
variable (GDP) was only significant (at 10 per cent level) for the COMESA region,
which indicates toward a positive effect of economic size on intra exports in that
region (This is also true for the SAARC region, although at a level of 11 per cent).
Surprisingly, the trade dummy variable came out non-significant in all three regions
indicating a negligible role of the trade agreements on intra exports of the three
regions.
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Table A4: Regression results of intra imports for GAFTA, COMESA, and
SAPTA
Variable
ROW imports
GAFTA
COMESA
SAPTA
0.91
1.53
1.9
(6.2)**
(2.3)***
(4.1)***
Time
0.16
0.45
0.26
(4.4)**
(1.86)*
(2.2)**
GDP
0.01
0.43
-1.5
(0.5)
(1.93)*
(-1.8)*
Trade dummy
0.15
0.8
0.14
(1.8)*
(0.86)
(2.3)**
R-square
0.92
0.95
0.97
Notes: Figures in parenthesis are t-statistics. * Significant at 10 per cent level; ** significant at 5 per
cent level; *** significant at 1 per cent level.
Table A4 shows the results for the intra imports variables. The substitution variable
turned out to be positive and significant at the 1 per cent for COMESA and SAPTA
and at the 5 per cent level in GAFTA, indicating the absence of substitution between
intra and rest of the world imports.
Similar to intra exports, the coefficients of the time variable were positive and
significant for the three regions (at 5 and 10 per cent levels) indicating an increasing
trend in intra imports during the period. Unexpectedly, the GDP coefficients were not
significant at the 5 per cent level in any of the three regions. In fact, in the SAARC
region, the sign of the coefficient of GDP was found to be negative, perhaps
indicating less reliance of members on imports from each other on account of a larger
and more diversified domestic production.
The coefficient of the trade dummy was estimated to be positive and significant for
the SAPTA region indicating a significant impact of the trade agreement on intra
imports in this region. The difference in these results and those thrown up by the RCA
analysis for SAARC, need to be resolved through a more rigorous analysis. However
the coefficient for GAFTA region is also significant but only at the 10 per cent level.
V.
Intra trade obstacles
The three regions have somewhat similar intra trade problems related to political,
economic, administrative, tariff and non-tariff, transportation and external factors.
Political factors
The most important factor is political mistrust and instability among selected
countries of the region. The three regions suffer from political deadlocks or even
unrest, either with neighboring countries or within the country itself. In addition,
special-interest politics from industry and other lobby groups play a dominant role in
determining the extent of trade relations or exchange of preferences. The stronger the
political differences in the region the weaker the possibilities of successful trade
relations. Also, mobility of labor and capital face significant degrees of friction in
terms of residence permits and transfers.
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Economic factors
The economic factors that impede intra trade in the three regions include economic
structure and policies. The countries of the respective region may or may not have
similar economic structures, but evidently, limited differences in product-wise
comparative advantage and absence of complementarities. The products that are
similar are mainly primary including fuels and fuel products, agricultural products and
raw materials, and to some extent manufactured products. Also, with the exception of
some countries such as India, most of the countries are characterized by a small
market and insignificant demand levels compared to the world market. Many of the
countries, except those oil-producing ones, suffer from heavy foreign debt burden,
poverty, low productivity, unemployment, inflation and non-competitiveness. The
economic policies that impede intra trade include monetary restrictions, exchange rate
controls and financial restrictions on across-the-border goods in the form of fees,
stamps, etc.
Administrative and technical constraints
The administrative restrictions include all forms of procedures that are attached to the
border crossing of goods such as customs documents and verifications, transit
facilities, handling and inspection. The technical constraints include the applications
of standards and specifications, health and environmental conditions, certificate of
origin and value added verification.
Transportation
The transportation of goods depends heavily on land transport which is characterized
by high costs since it relies on heavy vehicles.
Conflict resolution and information
The degree of trade conflict resolution and availability of information varies across
the regions but it is in any case not well developed.
VI.
Conclusion
Intra trade in the three regions covered by this study was of relatively small
importance in comparison to total trade of the regions. It did not exceed 10 per cent
during the study period. Intra trade showed a modestly growing trend in the three
regions over the period under study.
Trade patterns within each region showed a great degree of similarity as indicated by
the revealed comparative advantage analysis. Intra trade is dominated by primary
products in GAFTA and COMESA while manufactured goods were more prominent
in SAPTA. Fuel is more prominent than other products in GAFTA compared to the
other two regions. Manufactured goods' share in intra trade increased over the period
of the study in GAFTA and COMESA.
In all regions intra trade was characterized by a high level of geographical
concentration, mainly among neighboring countries.
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The commodity and geographical concentration of intra trade in the regions was
reflected in very similar RCAs. This suggests a very limited potential for expanding
intra trade in the three regions.
The results of the partial econometric analysis supported the above conclusion as the
coefficient measures of the trade agreement effect turned out to be statistically
insignificant in all three regions. Furthermore, the results showed absence of
crowding-out effects between intra and total trade for all regions.
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B.
REGIONAL TRADE
CASE OF GAFTA
INTEGRATION:
THE
By Talib Awad and Amir Bakir
I.
Introduction
During the last five decades most nations of the world moved toward trade
liberalization under the umbrella of the General Agreement on Trade and Tariffs
(GATT) and its later successor the World Trade Organization (WTO). WTO's
membership has been ever expanding, and now covers more than 188 countries of the
world. During the 1960s and 1970s there were a number of countries (mainly
developing countries) who adopted an inward-looking import substitution strategy
which were largely unsuccessful. By the 1980s and 1990s, most nations shifted
toward a strategy of outward-looking export-led growth and dismantled all forms of
trade barriers. These trade liberalizing trends were also accompanied by movements
of most nations toward engaging in some form of regional economic integration.
Regional integration agreements, although partial and discriminatory in nature, were
seen as a first step towards more general and comprehensive trade liberalization, and
hence were encouraged by GATT/WTO. An exemption from the principle of most
favored nation (MFN) was granted to any group of countries that got involved in any
form of regional integration agreement (RIA). Since the mid-1980s there has been a
dramatic increase in regional integration activity. Of the 194 RIAs notified to
GATT/WTO at the beginning of 1999, 87 were notifications since 1990. Now almost
all countries are members of at least one RIA, and more than one third of world trade
takes place within such agreements. New developments include the expansion and
deepening of the EU; the construction of new and more open RIAs between
developing countries; and the advent of RIAs in which both high-income and
developing countries are equal partners. The latter development is lead by the North
American Free Trade Area (NAFTA) which, in 1994, extended the Canadian-USA
free trade agreement to Mexico. The following section provides a brief theoretical
economic background of RIAs.
The rest of the chapter is divided as follows: section two provides a theoretical
background for regional economic integration, section three covers previous regional
trade integration efforts among Arab countries as well as the most recent agreement
namely, the Great Arab Free Trade Area (GAFTA) , section four is devoted to the
analysis of intra Arab trade, section five attempts to evaluate the impact of GAFTA
on intra Arab trade, section six highlights obstacles to intra Arab trade, and
conclusions and recommendations are presented in the last section.
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II.
Overview: Theoretical background
II.1
Economic analysis of regional economic integration
Regional integration agreements are groupings of countries formed with the objective
of reducing barriers to trade between members. In theory, there are several types of
regional economic integration schemes. The simplest is a free trade area (FTA) that
eliminates tariffs on goods among the member countries, while leaving national tariffs
against non-member countries unchanged. Beyond this there is a wide range of policy
options open to countries considering integration, many of which turn on the `depth'
of integration sought by member countries ranging from modest trade liberalization,
through full economic integration, to the formation of shared institutions.
In comparison to a free trade area, a customs union, in which a common external tariff
is set, involves greater sharing of sovereignty and requires establishing procedures for
revenue sharing, but in return can yield much greater market integration. In a free
trade area where countries set different external tariffs the free internal circulation of
goods is impossible; border formalities have to be maintained to ensure that external
imports do not all enter through the member with the lowest external tariff, for reexport to other member countries. Since these imports include intermediate goods that
are further processed in member countries, in practice this involves enforcing
complicated `rules of origin' governing trade flows within the RIA.
It is increasingly recognized that tariffs and quotas alone may be just a small part of
the overall barriers to trade created by an international border. Rules of origin create
restrictions, and so do measures such as anti-dumping rules, duplicative customs
procedures, differing national product standards, and simple border red tape.
II.2
Economic effects on member countries
When analyzing the economic effects of such agreements, economists usually
distinguish between effects on member countries and on the world trading system.
Effects on member countries include the benefits and costs of trade creation and trade
diversion, as well as gains from increased scale and competition. `Deeper' integration
can be pursued by going beyond abolition of import tariffs and quotas, to further
measures to remove market segmentation and promote integration. Effects on the
world trading system are not clear-cut. There is little evidence that regionalism has
retarded multilateral liberalization, but neither is there support for the view that
continuing expansion of regional agreements will obviate the need for multilateral
liberalization efforts. Our analysis will focus on the first group of effects.
II.2.1 Trade creation and diversion
The modern analysis of RIAs is mainly based on Viner's (1950) distinction between
trade-creating and trade-diverting effects of RIAs. The classical source of gains from
trade is that global free trade allows consumers and firms to purchase from the
cheapest source of supply, hence ensuring that production is located according to
comparative advantage. In contrast, trade barriers discriminate against foreign supply,
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inducing domestic import competing producers to expand even though they have
higher costs than imports. This in turn starves domestic export sectors of resources
and causes them to be smaller than they otherwise would be. Since a RIA liberalizes
trade, reducing at least some of the barriers, doesn't it follow that it too will generate
gains from trade? Viner's contribution was to show that the answer is "not
necessarily". The gains-from-trade argument applies if all trade barriers are reduced,
but need not apply to a partial and discriminatory reduction in barriers, as in a RIA.
This is because discrimination between sources of supply is not eliminated, it is just
shifted. If partner country production displaces higher cost domestic production then
there will be gains from trade creation. But it is possible that partner country
production may displace lower cost imports from the rest of the world, and this is
welfare reducing trade diversion.
The analysis of trade creation and trade diversion constitutes one of the first formal
analyses of the more general problem of 'second-best welfare economics'. Given that
distortions remain in place in some activities in the economy, it is not necessarily the
case that removing just some of the distortions (e.g. eliminating trade barriers on
partner countries and leaving them in place on external countries) is welfare
enhancing. In the literature on regional integration the response to the fundamental
ambiguity created by the second-best took three main forms.
First, authors established circumstances under which there is no interaction between
formation of the RIA and external trade flows, so no possibility of trade diversion.
Meade (1955) pointed out that if trade barriers with non-members take the form of
fixed quantitative restrictions, then a RIA must raise the total welfare of member
countries since there is no possibility that imports from the rest of the world are
displaced. Ohyama (1972) and Kemp and Wan (1976) showed how, when external
trade barriers take the form of tariffs, it is possible to adjust these to hold external
trade volumes constant, so preventing trade diversion from occurring.
Second, researchers identified conditions, in terms of changes in endogenous
variables, for welfare gain. For example, welfare increases if the initial tariff-weighted
change in trade volume is positive (Meade 1955). If internal tariffs are close to zero,
then reducing them to zero raises welfare if it increases tariff revenues earned on
external trade (Ethier and Horn 1984).
The third approach is to identify features of economies (in terms of their underlying
exogenous characteristics) under which they are more or less likely to gain or lose
from RIA membership. Lipsey (1957) argued that joining with countries that are
already one's largest trading partners is unlikely to lead to diversion, since the fact that
the countries were originally the largest trading partners suggests that they are the
lowest cost source of supply. Similar reasoning, including transport costs in the costs
of supply, leads to the 'natural trading bloc' argument (Wonnacott and Lutz 1989,
Summers 1991).
Venables (2000) shows that those members of an RIA with comparative advantage
most different from the world average are most likely to lose from trade diversion, as
their trade is diverted to partner countries with comparative costs between theirs and
the world average.
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Empirical work on trade creation and trade diversion has taken two main forms;
econometric studies of changes in trade flows, and simulation studies of the full
general equilibrium effects of RIA membership.
Econometric studies seek to quantify the changes in trade flows attributable to
membership of a RIA, and thereby identify trade creation and diversion. A variety of
different econometric models have been developed, the most common being based on
the gravity model which estimates bilateral trade between countries as a function of
their GDPs, populations, the distance between them, and physical factors such as
sharing a land border, and being landlocked or an island. Dummy variables capture
whether or not countries are in a particular RIA, their estimated effect indicating
whether countries in a RIA trade more or less than would otherwise be expected.
Using this technique, Bayoumi and Eichengreen (1997) found that the formation of
the European Economic Community EEC reduced the annual growth of member trade
with other industrial countries by 1.7 percentage points, with the major attenuation
occurring over 1959-61, just as trade preferences were phased in. Soloaga and
Winters (2001) looked at a wide range of RIAs, producing a mixed picture with little
evidence of widespread trade diversion. Overall, there appears to be weak evidence
that external trade is smaller than it otherwise might have been in at least some of the
blocs that have been researched, but the picture is sufficiently mixed that it is not
possible to conclude that trade diversion has been a major problem. Furthermore, it
cannot be inferred that trade diversion has been economically damaging without
information on relative costs and tariff structures, variables that are not revealed in
this sort of aggregate exercise.
The second empirical approach is based on computable equilibrium modeling. This
involves construction of a full computer model of the economies under study which
simulates the effects of the policy changes associated with the RIA. Such a model
typically contains a great deal of microeconomic detail, so it can be used to predict
changes in production in each sector, and changes in factor prices and real incomes. In
models that assume a perfectly competitive environment, the combined effects of
trade diversion and trade creation typically give very small welfare gains – just a
fraction of 1 per cent of GDP (see Baldwin and Venables 1997 for a survey). The
strength of these models is that they have sufficient microeconomic structure for the
effects of a policy change to be traced out in detail, and its real income effects to be
calculated. They are also often used for prediction to estimate the likely effects of a
policy change before it is implemented. But they have the major weakness that they
are not usually fitted to data as carefully, or subject to the same statistical testing, as
econometric models. The cost of the microeconomic detail is a complexity that makes
rigorous econometric estimation impossible.
Although the focus of the trade creation and diversion literature has been on the
changes in trade flows induced by regional integration, two consequent effects are
important. The first is that changes in trade flows may change world prices, possibly
improving the terms of trade of member countries, although this gain arises at the
expense of outside countries. For example, if trade diversion occurs then RIA imports
from outside countries are reduced, and any reduction in import prices that this causes
is a terms of trade gain. Empirical work on this issue by Winters and Chang (2000)
shows that Brazil's membership in Mercosur has been accompanied by a significant
decline in the relative prices of imports from non-member countries.
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The second is that changes in tariffs and trade volumes will lead to loss of
government tariff revenue. This can occur directly (as intra-RIA tariffs are cut) and as
a consequence of trade diversion (as imports are diverted away from external, tariff
inclusive, sources of supply). Its cost depends on the social cost of raising funds by
alternative means, and can be severe in some developing countries. For example
Cambodia derived 56 per cent of its total tax revenues from customs duties prior to its
entry into the Association of South East Asian Nations (ASEAN), and Fukase and
Martin (1999) argue that entry into ASEAN provided a powerful stimulus for the
introduction of a value added tax.
Finally, it is generally accepted that RIAs have a better chance of being net tradecreating if they meet certain basic criteria, including the following; (i) relatively high
initial tariff barriers among potential members; (ii) geographic contiguity; (iii) broadly
similar stages of overall economic development; but (iv) varied national production
structures. According to these criteria, the Arab countries of the Middle East and
North Africa should be good candidates for the formation of an effective RIA. In
practice, this has not yet happened, despite a plethora of multilateral and bilateral
agreements designed to reduce trade barriers.
II.2.2 Scale and competition effects
A second mechanism through which member countries are affected by RIA
membership derives from the fact that countries may be too small to support,
separately, activities that are subject to large economies of scale. Regional
cooperation offers a route to overcome the disadvantages of smallness, by pooling
resources or combining markets.
These scale benefits can arise in public projects (see World Bank 2000) and also at
the level of the private firm, which typically interact in imperfectly competitive
market structures. These considerations are absent from the trade creation and trade
diversion approach outlined above, which is based on the perfect competition and
constant returns to scale paradigm of traditional trade theory. It was only in the 1970s
and 1980s that formal analysis of the interaction between trade, economies of scale
and imperfect competition began with the 'new trade theory', and these techniques
have now been applied extensively to regional integration. The basic argument is that
there is a trade-off between the extent to which firms can achieve economies of scale,
and the intensity of competition in the market. For a given size market, larger firms
means fewer firms and hence more monopolistic outcomes. If regional integration
combines markets, then it shifts this trade-off, potentially allowing firms to be bigger
and markets to be more competitive (Smith and Venables 1988).
For example, there might be an initial situation in which two economies each have
two firms in a particular industry, and these firms exploit their 'duopoly' power,
setting prices well above marginal cost. After formation of the RIA this becomes four
firms in one combined RIA market. This increases the intensity of competition, and
possibly induces merger (or bankruptcy), perhaps leaving only the three most efficient
firms. The net effect is increased competition, increased firm scale, and lower costs.
Oligopoly competition is likely to be more intense than the original duopolies, and
surviving firms are larger and more efficient, so they can better exploit economies of
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scale. A further source of gains comes from possible reductions in internal
inefficiencies that firms are induced to make. If the RIA increases the intensity of
competition, it may induce firms to eliminate internal inefficiencies (X-inefficiency)
and raise productivity. Since competition raises the probability of bankruptcy and
hence layoffs, it also generates stronger incentives for workers to improve
productivity, and increases labor turnover across firms within sectors.
II.3
Winners and losers
Another concern accompany RIAs is about the distribution of its costs and benefits
between member countries. Do central regions gain at the expense of peripheral ones,
and do poor countries tend to catch up or get left behind? The evidence is, broadly
speaking, that RIAs composed of developed countries tend to show convergence (for
example the narrowing of per capita income differentials observed in the EU, see
Ben- David 1993). However, the picture for RIAs composed of developing countries
is more mixed, with some examples of divergent performance (World Bank 2000).
The analytical literature on these questions is quite sparse, but provides several clues
why this might occur. First, as mentioned above, trade diversion is more likely for
countries with 'extreme' comparative advantage, suggesting that in a RIA amongst
developing countries it might be the lowest income countries that experience
diversion. For example, their imports of manufactures might be diverted from nonmember countries to a partner that has a comparative advantage in manufactures
within the RIA, but not relative to the world at large. Second, industries might tend to
cluster in locations that have relatively good market access, or that are well supplied
with business services or provision of other intermediate goods. This is more likely to
occur in developing countries than in developed ones, partly because of their sparser
provision of business infrastructure, and partly because the small size of their
manufacturing sectors means that clustering is less likely to run into congestion and
other sources of diminishing returns. The clustering may lead to wages being bid up
in one member country at the expense of others.
III.
Regional economic integration and the Great Arab Free
Trade Area
III.1 Previous economic integration efforts
Soon after most Arab countries obtained their independence from British and French
colonialism, efforts were initiated at the formal level to move toward both economic
and political integration in the Arab region. As early as 1950, a Treaty for Joint
Defense and Economic Cooperation was signed by Egypt, Jordan, Lebanon, Saudi
Arabia, Syria and Yemen at the meeting of the Arab League's Economic Council. Its
main economic objectives were tariff reduction and liberalization of capital and labor
flows. It was followed up in 1953 by the Convention for Facilitating Trade and
Regulating Transit, which aimed at eliminating barriers to trade in agricultural goods
and minerals. Efforts to lower tariffs on manufactures were largely thwarted by Iraq,
Saudi Arabia and Yemen, which relied heavily for revenue on import duties (Awad
1995).
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The next move towards integration, involving efforts to create an Arab Common
Market, began in the late 1950s, when Egypt, Jordan, Morocco, Syria and Kuwait
agreed in principle to unify economic policies and legislation. The five states ratified
this proposal in 1964, but the intention of effectively abolishing duties and
quantitative restrictions over a 10-year period was undermined by four rounds of
negotiations on exemptions. Attempts to establish a common external tariff were
finally abandoned in 1971.
Another attempt to promote regional integration was the 1981 Arab League-sponsored
Agreement for the Facilitation and Promotion of intra-Arab Trade. The agreement
represented a declaration of intent to negotiate full exemption from tariffs and nontariff restrictions for manufactured and semi-manufactured goods. As with previous
agreements, the 1981 effort had little effect on formal trade liberalization or actual
trade. It lacked binding commitment to its terms and a timetable for implementation,
and featured a "positive list" approach, whereby specific products for liberalization
must be listed (as opposed to the "negative list" approach, whereby liberalization
covers all items other than those specifically listed for continuing protection).
Meanwhile, subregional arrangements, such as the 1981 Gulf Cooperation Council arguably the only effective Arab trade agreement to date, with its successful
promotion of trade liberalization and free movement of capital and labor among
member states - and the abortive 1989 Arab-Maghreb Union, along with a
proliferation of strictly bilateral arrangements between trade partners have become a
feature of the Arab scene. Bilateral treaties are now estimated to number more than
45. They typically comprise limited preferential arrangements, mostly confined to
varying degrees of tariff exemptions for specific categories of agricultural goods and
raw materials; their partial nature has had the net effect of hindering rather than
stimulating wider inter-Arab trade (Hoekman 1995).
While noble political aspirations helped to initiate successive integration efforts, less
noble political frictions equally often helped subsequently to vitiate them. Lack of a
forceful time table for practical implementation of such agreements, together with
lack of coordination with the private sector, poor infrastructures, partiality in the
nature of the agreements, differences in economic and political systems, spread of
corruptions and red tape, and regional political instability were among the main
factors behind the poor achievements of these early formal attempts.
III.2 The Greater Arab Free Trade Area
In February 1997, the Arab League launched a free trade programme, known as the
Greater Arab Free Trade Area, or GAFTA, in which member states were asked to
come up with specific commitments regarding elimination of tariffs, non-tariff
measures and rules of origin. The so called Executive Program was an effort to revive
the 1981 Agreement for Facilitation and Promotion of Trade among the members. All
the 22 member states of the Arab League, except Algeria, Djibouti, the Comoros
Islands and Mauritania have endorsed the Agreement and have committed to the
Executive Program.
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The programme calls for tariff reductions over a ten year period at a rate of 10 per
cent per year, meaning that tariffs would be reduced to zero by 2007. In addition, the
members agreed to bind their national tariff schedules as of December 31, 1997.
By September 1999, 14 countries had applied tariff reduction schemes and fulfilled
the tariff commitments. For the rest of the members who did not ratify the agreement,
the bound tariffs will be applied at the time they notify the Arab League of their
endorsement of the programme.
Regarding liberalization of industrial products, members are allowed to draw up a list
of exceptions from tariff reductions during the first years of the programme. The
exceptions are intended to enable local industry to restructure and improve its
competitiveness before having to face competition from other GAFTA countries'
imports.
In the area of agriculture, the programme offers members the opportunity to suspend
tariff reductions on some produce during the peak harvest seasons. Each GAFTA
country is allowed to submit ten produce items for suspension, with a total exemption
for all the items of 45 months. So far, 10 GAFTA countries have submitted a list of 30
fruits and vegetables.
Non-tariff barriers
Although the programme calls for a schedule to reduce non-tariff barriers, at this point
the GAFTA countries have not tackled these barriers. A committee on non-tariff
barriers has agreed on a list of goods whose imports are prohibited for religious,
health, environment and national security reasons, and the list is to be reviewed on a
yearly basis. The committee is also supposed to sort out other goods submitted by
members and start negotiations for their elimination.
The programme calls for the application of international rules regarding subsidies,
countervailing measures, safeguards and anti-dumping measures. This should be
possible under WTO agreements. However the programme does not explicitly refer to
the WTO agreements since some Arab countries are still seeking membership.
GAFTA rules of origin
The programme offers rules of origin for duty-free treatment. The GAFTA value
added requirement is set at 40 per cent, and there are two methods for calculating
origin. The first is based on the local value added approach. The other is the net cost
approach, which subtracts specified imported expenses from the transaction price to
determine the base for calculating the ratio of foreign to domestic content. An
important feature of the programme is the ongoing scheme for the elaboration of
detailed preferential rules of origin for GAFTA-made products. This scheme adopted
rules for full commutation of origin among the GAFTA countries. This means that
materials obtained from, for example, Jordan, and incorporated into a product made in
Egypt, may be considered as if they were obtained in Egypt. Finally, the programme
also calls for the need for harmonization of preferential rules of origin to comply with
the Euro-Mediterranean free trade agreements underway.
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Monitoring GAFTA implementation
GAFTA is managed by the Council of Ministers of Member Countries and by a
permanent executive body. So far, GAFTA has a functioning Secretariat that comes
under the Economics Department of the Arab League Secretariat. The programme
also calls for the chambers of industry and commerce in Arab countries to monitor
implementation. The involvement of the private sector is expected to enhance the
transparency of the members' trade practices.
GAFTA achievements prospective
The GAFTA programme calls for across-the-board tariff reduction offering the
advantage of transparency and ensuring that high tariffs are reduced faster than lower
tariffs. However, the extent to which this approach will boost intra-regional trade
flows depends on the magnitude of tariff dispersion as well as the effective rate of
protection across industries in various countries. Tariff structures among the members
are uneven. Low-tariff countries, namely the Gulf countries (Bahrain, Kuwait, Qatar,
Oman, Saudi Arabia and the United Arab Emirates) have simple average tariffs of
four to 12 per cent, while countries such Egypt, Jordan, Morocco, Syria and Tunisia
have tariffs of 40 to 100 per cent. Tariffs reach 235 per cent in Syria. In addition,
tariff escalation exists in many countries, particularly in textiles, clothing, leather and
basic metal industries where average tariffs on finished products are multiples of the
lower tariff levels on raw materials.
An across-the-board tariff reduction could have a significant effect on trade creation.
However, the most serious shortcomings of the programme are loopholes allowing the
exclusion of certain industrial agricultural products from tariff reduction. The list of
exceptions already submitted includes consumer goods competing with domestic
production (e.g. textiles, clothing and leather articles). Moreover, the transition period
for the excluded industrial products would allow for pressures from interest groups to
resist market opening at all. The exclusion of certain agricultural products during the
crop/harvest seasons for the full transitory period of ten years would also substantially
limit the trade creation effect.
The use of quotas has been declining in GAFTA countries partly as a result of
unilateral trade reforms implemented by countries such as Morocco, Tunisia, Egypt
and Jordan. In these countries, non-tariff barriers take the form of import licensing for
safety and health standards. In the Gulf Cooperation Council (GCC) countries, nontariff barriers are relatively low. However, Syria still imposes an import license
requirement on virtually all imports.
Customs and administrative procedures associated with importing are still important
trade barriers within the region. The programme calls for some harmonization related
to customs clearance procedures, but it does not address harmonization of other major
regulations regarding product standards, testing and certification procedures, and
environmental standards. Transportation is also a problem. The members signed an
earlier agreement to simplify the transit of goods and persons, but there has been no
legal enforcement for the implementation of this agreement, and there are periodic
reports citing barriers to cross-border trade such as closure of roads, delays and
cumbersome cross-border regulations such as no driving on weekends or the refusal
of visas professional drivers of certain nationalities.
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At first, the commutating of rules of origin for products made in GAFTA countries
may help create backward and forward linkages between the member countries and
increase the potential for trade. However the further extension of commutation of the
Euro-Mediterranean Agreements and the GAFTA countries would be even more
beneficial to Member Countries and would also help reduce the emerging hub-andspoke nature of the Euro-Mediterranean Agreements.
Deepening integration of GAFTA
So far, GAFTA has been limited to regional liberalization of merchandise trade. This
effort at regional integration alone is not sufficient to ensure a more credible path for
further domestic market efficiency allowing GAFTA member countries to face greater
competitiveness from world exporters. There is a need to extend regional
liberalization to the areas of trade in services and labor. Linking GAFTA with the
Euro-Mediterranean trade areas through incorporation of binding rules and various
policy harmonization that are included in the Euro-Mediterranean Agreements would
enhance market efficiency, allowing GAFTA countries to face greater competition
from emerging world exporters in Asia and Eastern Europe.
The absence of provisions for free movement of services and the right of
establishment in GAFTA reduces the benefits of the agreement, given that services
trade is generally complementary to merchandise trade. Barriers to trade in services in
GAFTA countries are clearly important. A regional agreement which allows free
entry into services activities should help domestic services companies to expand to
regional markets before venturing into the more competitive world markets.
Liberalization of transportation services should lie at the heart of intra-regional efforts
to facilitate merchandise trade. Maritime transport remains by far the principal means
of intra-regional transport of goods and a regional agreement on common shipping
policy principles is needed. Land transportation services are an important cross-border
mode of passenger and freight transport in the GAFTA countries. However, the
regulatory regime for road transport is highly restrictive in the GAFTA countries. For
instance, cross border freight transport returning with cargo is not allowed by most of
the GAFTA countries. Internal coasting trade is also not allowed in virtually all the
GAFTA countries. A regional agreement regarding land transport is needed.
Financial services
There is also the need to harmonization some of the banking and insurance
regulations as well as a provide for the right of establishment with countries in the
region. There is relatively little integration among the financial institutions in the
GAFTA countries, although it is more significant in banking activities. Egypt, being
the most advanced in liberalizing the financial sector among the reforming MENA
(Middle East and North Africa) countries, has discretionary procedures for allowing
new entry in this sector. Since domestic financial institutions in most of the GAFTA
countries have comparable high operating costs and comparable technology, the real
efficiency gains would come from integrating domestic financial markets into the
world financial markets in order to facilitate capital and technological flows into the
region.
For many GAFTA countries, labor services are the mainstay of their service exports.
From the viewpoint of efficiency, free movement of skilled labor enhances the
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efficiency of production. Cooperation among GAFTA countries to promote
professional/technical labor mobility is desirable. Some important measures for freer
mobility of professional and skilled labor in the context of GAFTA include
recognition of professional certification standards, visa and work permit practices and
measures allowing the temporary movement of corporate personnel, engineers,
architects, accountants, lawyers and computer programmers.
Political and economic considerations dictate that integration at the bilateral, regional,
inter-regional and multilateral levels needs to proceed in a systematic way on parallel
tracks. Hopefully, building closer commercial ties in the region can play a role in
supporting political initiatives to reactivate the peace process. Economically, the
emergence of an integrated market in the region may yield advantages that
substantially exceed the current dimension of intra-regional trade.
This paper's final objective is to provide an objective evaluation of the potential
success of GAFTA in expanding intra-Arab trade (IAT). But first it is necessary to
review the trend and main characteristics of Arab countries' trade.
IV.
Trend and characteristics of intra-Arab trade
IV.1 Growth of intra-Arab trade
Trade in the region has witnessed reasonable growth during the period 1980-2005; it
grew at an annual rate of 2 per cent. The growth rates of total exports and imports
reached 1.8 per cent and 2.3 per cent, respectively. Similarly but more outstandingly,
IAT grew by 5.9 per cent. However, the percentage of IAT in total trade did not
exceed 10 per cent. The percentage of intra exports in total exports has been rising
over the period while the percentage of intra imports in total imports has been
declining since 1990 to reach 8 per cent in 2005, as shown in Figure B1.
Figure B1: Intra Arab Trade, 1980-2005
14%
12%
Exports
10%
8%
6%
Imports
4%
2%
0%
1980
1985
1990
1995
2000
2005
Source: Calculated based on data taken from the Arab Monetary Fund website (www.amf.org.ae).
It is interesting to note that intra trade growth rates are higher during the period 19982004 compared to the period 1980-1997. This might suggest that the GAFTA
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agreement had a significant role in enhancing intra trade, as shown in Table B1
below.
Table B1: Growth rates of intra trade during the period 1980-2004
1980-1997
1998-2004
1980-2004
Intra exports
3.5
14.7
5.7
Intra imports
3.5
12.6
6.0
Intra trade
3.5
13.7
5.9
Source: Calculated using exponential growth formula based on data taken from the Arab Monetary
Fund website (www.amf.org.ae).
Indeed, as shown in Table B2 individual countries trade growth rates vary
significantly among themselves. For example, Syrian and Egyptian intra exports grew
by 10.2 per cent and 9.7 per cent respectively, while the corresponding growth rates
for Morocco and Jordan did not exceed 4 per cent. Similarly, Egyptian intra imports
grew by 9.6 per cent while that of Saudi Arabia was less than 2 per cent, as shown in
Table B2.
Table B2: Intra-Arab trade growth rates for selected countries (per cent)
Country
Intra exports
Intra imports
Jordan
4
5.1
Syria
10.2
2.6
Egypt
9.7
9.6
Morocco
2.9
6.2
Saudi Arabia
7.2
1.3
United Arab Emirates
8.7
8.1
Source: Calculated by the researchers using the exponential growth formula for the period 1980-2004.
Data are taken from the Arab Monetary Fund, Annual Statistical Book, several issues.
IV.2 Intra-Arab trade commodity structure
The analysis of commodity groups uses the SITC classification and for this purpose
the following commodity groups were chosen: Food and Beverages, Raw Materials
and Fuel, Chemicals, Machines and Transport Equipment, and Manufactured Goods
(Table B3).
Fuel and raw materials share in intra trade exceeds 50 per cent, followed by food and
beverages with a share of 17 per cent, then chemicals with a share of 14 per cent-15
per cent, followed by manufactured goods with a share of 8 per cent-9 per cent, and
finally machines and transport equipment with a share of 5 per cent-6 per cent.
Over the period under investigation in this study, the development of the relative
importance of the above mentioned commodity groups, as shown in Table B3, reveals
that food and beverages and manufactured goods have realized a dramatic gain in
relative importance on the expense of raw materials and fuel.
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Table B3: Relative importance of intra-Arab exports according to commodity
groups
Intra exports
Group/year
1980
1998
2002
Food and Beverages
0.9
13.0
18.2
Raw Materials and Fuel
96.0
55.0
52.2
Chemicals
1.0
16.0
16.2
Machines and Transport Equipment
0.7
5.0
5.5
Manufactured Goods
1.4
11.0
7.9
Source: Arab Monetary Fund, Annual Statistical Book, several issues.
2005
17.2
57.7
14.1
5.0
6.0
IV.3 Intra-Arab trade destination
Intra-Arab trade is characterized by a high level of geographical concentration, and in
most cases, it is restricted mainly among two partners or three. For example, in 2005,
Oman exported 64 per cent of intra exports to the United Arab Emirates, Libya
exported 69 per cent of its intra exports to Tunisia, 57 per cent of Bahrain’s intra
exports were destined to Saudi Arabia, and Iraq’s intra exports with Morocco and
Jordan amounted to 47 per cent and 21 per cent, respectively. In contrast, the case for
intra imports is very similar. For instance, Oman imported 91 per cent of its intra
imports from the United Arab Emirates, and 70 per cent of Jordan’s intra imports
came from Saudi Arabia, 56 per cent of Iraq’s intra imports came from Jordan, about
one half of Libya’s intra imports came from Tunisia, and intra imports of Morocco,
Bahrain and the United Arab Emirates from Saudi Arabia amounted to 58 per cent, 54
per cent and 52 per cent, respectively (Arab Monetary Fund 2005).
V.
Measuring the effect of GAFTA on intra-Arab trade
Intra-Arab trade over the past twenty five years grew steadily and substantially, while
Arab trade with the rest of the world (total trade less intra trade) declined in the 1980s
but gained momentum in the 1990s and continued to grow steadily thereon. Figures
B.2 and B.3 show the development of exports and imports, respectively. The growth
in trade is due to several factors, but mainly trade agreements among Arab countries
themselves and with the rest of the world, as well as the economic growth in the
world are the main factors behind those trade developments.
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Figure B2: Intra exports and exports with the rest of the world (US$ millions)
600
560
520
480
440
400
360
320
Rest of World
280
240
200
160
120
80
Intra
40
0
1980
1985
1990
1995
2000
2005
Source: Arab Monetary Fund, Annual Statistical Book, several issues.
Although it is possible to consider some degree of substitution between intra trade and
trade with the rest of world but this element is suspected to be relatively weak. Also, it
is possible to consider some effects resulting from elements of past experience and
previous trade trends on what is happening in the present and what is going to happen
in the future.
To evaluate the impact of regional trade agreements two analytical tools are
employed: the revealed comparative advantage (RCA) analysis and a multiple
regression model. The RCA index will help identify the possibilities of intra trade
expansion, a higher than one value indicating a revealed comparative advantage in
that particular sector. However if RCAs are similar among countries of the particular
region then there will be limited potential for expanding intra trade within that region.
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Figure B3: Intra imports and imports with ROW ($US million)
350
300
250
200
150
Rest of World
100
50
Intra
0
1980
1985
1990
1995
2000
2005
Source: Arab Monetary Fund, Annual Statistical Book, several issues.
V.1 Revealed comparative advantage
Revealed comparative advantage (RCA) indices for a group of countries help identify
as to whether there exists high or low potential of intra-group trade in a particular
product category. The RCA for the jth country for the ith product can be defined as
follows:
RCAij = (Xij / Xiw) / (∑Xij / ∑Xiw),
Where, commodity i = {1, 2, 3,…, n.}, Xij = exports of the i-th product from country j,
∑Xij = total exports from country j, Xiw = exports of the i-th product from the world,
∑Xiw = total exports from the world. Clearly, if the RCAs for a commodity for all the
countries are close to each other or 1, there is less scope for intra-regional trade in that
commodity for the group of countries. Correspondingly, if a country’s RCA is greater
than 1 for a commodity, while for the rest of countries the indices are less than 1, it is
indicative of a high scope for intra-group trade in that commodity.
Table B4 shows the RCA's for GAFTA countries. It reveals that for food products six
countries had value of RCA greater than one, with Morocco being the highest (2.8),
followed by Jordan, Lebanon, Syria, Sudan and Egypt. In agricultural products only
three countries showed values greater than one; i.e. Egypt (3.8), Sudan (3.3) and Syria
(1.7). Fuel products showed the strongest RCA for most Arab countries ranging
between 6-8.9, the relevant countries are Algeria (8.9), Kuwait, Yemen, Oman, Qatar,
Saudi Arabia, Sudan, Syria, Bahrain and the United Arab Emirates (6.1). Five
countries showed higher than one values of RCA in ores and metal products including
Bahrain (6.2), Jordan (3.8), Lebanon (2.7), Morocco (2.6) and Egypt (1.1). For
manufactured products none of GAFTA countries showed a revealed comparative
advantage except Tunisia (1.1). Similarly only Jordan had an RCA greater than one
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(1.8) for chemicals. For machinery and transport products no country in the region
showed a relative comparative advantage.
Based on the above RCA analysis it can be concluded that the GAFTA countries
showed a high concentration in revealed comparative advantage in primary goods,
mainly fuel and ores and metals, with almost negligible advantages in the other
products. This implies a very limited potential for expanding intra trade in the region.
Table B4: RCA indices for GAFTA countries by broad commodity groups (2003,
2004)
Ores
&
Metal
0.1
6.2
1.1
3.8
2.7
2.6
0.3
0.0
Manufactured
Goods
0.0
0.2
0.4
1.0
0.7
0.9
0.2
0.2
Machinery
&
Transport
0.0
0.1
0.0
0.3
0.3
0.4
0.2
0.0
Country Total Food Agriculture Fuel
Chemical
Algeria
0.0
0.0
8.9
0.1
Bahrain
0.1
0.1
7.1
0.3
Egypt
1.2
3.8
4.3
0.7
Jordan
2.1
0.2
0.1
1.8
Lebanon
2.0
0.8
0.0
0.8
Morocco
2.8
1.0
0.3
1.0
Oman
0.7
0.0
8.0
0.1
Qatar
0.0
0.0
7.9
0.9
Saudi
Arabia
0.1
0.1
8.0
0.1
0.2
0.9
0.0
Sudan
1.4
3.3
7.9
0.1
0.0
0.0
0.0
Syria
1.9
1.7
7.1
0.3
0.1
0.1
0.0
Tunisia
1.0
0.5
0.9
0.6
1.1
0.9
0.4
UAE
0.5
0.1
6.1
1.0
0.4
0.3
0.0
Yemen
0.7
0.2
8.4
0.1
0.0
0.0
0.0
Kuwait
0.0
0.1
8.5
0.2
0.1
0.4
0.0
Source: Calculated based on data from UNCTAD Handbook of Statistics 2005. Calculations are based
on either 2003 or 2004 depending upon data availability.
V.2 Partial regression analysis
As GAFTA became effective starting 1 January 1998 and data on intra trade at the
time of writing is only available up to 2004, it is not possible to perform a subset
regression analysis for the two periods: before and after the agreement. Hence, a
multiple regression model is fitted for the whole sample. The effect of GAFTA on
intra trade is simply introduced using a “Dummy” variable that takes the value of zero
in the absence of the effect of the agreement, and one when the agreement was
effective (1998-2004). Two models were fitted: the first represents intra exports and
the latter represents intra imports. For the purpose of identifying the substitution
effect between intra trade and trade with the rest of the world (ROW), exports with
ROW was introduced as a an explanatory variable in the first model, and imports
from ROW was introduced as an explanatory variable in the second model. These two
variables can serve the purpose of capturing the effects of trade agreements other than
intra trade agreements. GDP was introduced as an extra explanatory variable to
capture the economic size effect of the region. In addition, a time trend was
introduced with the purpose of capturing the growth trend in intra trade that may be
attributed to other than GAFTA factors. Hence the two models to be estimated take
the following form:
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Intrax = B0 + B1 Netx + B2 GDP + B3Time + B4 Gaftad + u1
(1)
Intram = C0 + C1 Netm + C 2 GDP + C3Time + C 4 Gaftad + u 2
(2)
Where: Intrax = intra exports, Netx = exports with the rest of the world, GDP = Gross
domestic product, Gaftad = Dummy variable takes the value one for the period 19982004, and zero otherwise, Time is a simple time trend, Intram is intra imports, Netm
refers to imports with the rest of the world, and u1 and u2 are white disturbance terms.
Bi and Ci are unknown parameters to be estimated. For the purpose of data stationarity
and to obtain the long run elasticity directly the log-linear form is chosen.
B
The results of applying ordinary least squares (OLS) on the available sample (19802004) are shown in Table B5.
Table B5: Estimation results for intra exports and intra imports in logarithm
form
Parameters
Estimate
t-statistics
constant
3.5
1.25
lnetx
0.44
4.3**
lgdp
-0.007
-.27
ltime
0.29
5.35**
gaftad
-0.04
-0.48
R-square
0.84
constant
-1.77
-1.02
lnetm
0.91
6.2**
lgdp
0.01
0.5
ltime
0.16
4.4**
gaftad
0.15
1.82***
R-square
0.92
Notes: * Significant at 10 per cent level; ** significant at 5 per cent level; *** significant at 1 per cent
level. The import equation was estimated using Coherene–Orcutt procedures to correct for serial
correlation.
The high values of R-square and Fisher-statistic (not shown here) imply that both
estimated models can be considered of high significance, i.e. explaining the variation
in the data to a large extent. More than 80 per cent of the variations in intra exports,
and more than 90 per cent of the variations of intra imports were explained by the
independent variables. The variables representing trade with ROW (lnetx and lnetm)
took a positive sign and were significant at the 1 per cent level. This implies that there
is no evidence of any significant substitution effects between intra trade and trade
with ROW. It can be concluded that the two types of trade are indeed complements.
The coefficients of the time variables were positive and significant at the 5 per cent
level for both equations, indicating some positive growth of intra trade that cannot be
clearly attributed to GAFTA. The GDP variable failed to affect significantly either
intra exports or intra imports. This can be an indication of the limited effect of the
region's economic size on intra trade, and can be explained by lack of production
diversification and limited production capacities in these countries. In addition, most
traded goods between Arab countries are mostly essential and primary commodities
that have low income elasticities.
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Furthermore, the coefficient of the GAFTA dummy is statistically insignificant at the
5 per cent level in both equations, indicating to limited success of the agreement in
affecting intra-regional trade.
In summary, the estimation results lend support to the analysis of revealed
competitive advantage above, indicating a lack of effectiveness of the GAFTA
agreement during the short period of its application.
VI.
Intra-Arab trade problems and obstacles
The relatively insignificant contribution of IAT to total Arab trade can be attributed to
several factors and can be identified within six main groups; namely, political,
economic, structural, geographical, administrative and technical factors (see Alafouri
et al. 2004). It is worth mentioning here that since oil figures high in total Arab trade,
intra trade registered low significance as a per cent in total Arab trade. Hence, if oil
trade is excluded, intra trade's significance increases from about 10 per cent to about
20 per cent. It is imperative that in the absence of trade problems and obstacles intra
trade could be improved to a great extent. Having said that, some problems are akin to
the Arab region in particular and perhaps this caused the low share of intra trade in
total trade.
First: Political factors
The Arab countries got engaged on an individual basis, with different international
alliances and established strong ties with them which reflected negatively on intraArab relationships, thus, leading to weaknesses in the economic and trade relations
among Arab countries. The effects of those factors can be summarized as follows:
a) The strong political ties in addition to the trade and economic agreements of
Arab countries with other countries of the world, especially cooperation
agreements, loans and foreign aid, engineered stronger trade and economic
relations in favor of the rest of the world rather than among the Arab countries
themselves.
b) The variety of economic systems in the Arab countries in terms of the degree
of involvements of the public and the private sectors in economic activity
poses unfruitful and unproductive difficulties of trade transactions and
cooperation across borders. In addition, most economic and trade decisions of
Arab countries are directed heavily by their governments, with very limited
degree of coordination with the private sector.
c) The Arab countries are characterized by being small economies where the
private sector is largely dominated by small interest groups, and since the
openness to trade may result in conflicting interests, this has caused large
setbacks and retardation in the development of trade.
d) The Arab countries face major constraints and difficulties regarding the
movement of people and capital. For example, it is not easy to obtain
residence permits or undertake capital transfers.
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Second: Economic factors
The economic factors that affect the growth of intra-Arab trade are related to
monetary and financial constraints, the countries' economic structures and the
respective economic policies, which can be clarified as follows:
a) The monetary constraints include currency transfer restrictions, foreign
currency conditions, multiple exchange rates, import licenses and insurance
certificates.
b) The financial restrictions consist of additional and unnecessary fees with the
purpose of collecting revenues regardless of neither the nature of fee nor its
purpose. For example, stamp (authentic) fees on certificate of origin charged
by the respective consulates (embassies) as a percentage of the value of the
certificate rather than per certificate. Also, other stamp fees charged on other
merchandise-related documents such as bills.
c) The economic structures of the Arab countries are very similar. On the one
hand, the economic structures of some Arab countries consist mainly of oil
production and its derivatives, while on the other; the economic structures of
other Arab countries depend on the agricultural sector and raw materials. This
similarity in economic structures impedes intra trade to a great extent. This
issue is exacerbated when we consider further that since the economy is small
in the respective countries and hence, income is relatively low, the purchasing
power is weak to overcome this similarity problem and extend demand across
country borders to enhance trade efforts.
d) Several Arab countries depend on oil production to a large extent and since oil
prices fluctuate considerably, demand fluctuates accordingly. Hence, when oil
prices are high trade increases and vice versa when oil prices are low.
e) Several Arab countries adopt conservative economic policies and are under the
pressure of economic reform, tight spending and debt control which result in
conservative actions towards openness and trade extension.
f) The spread of globalization issues worldwide and the joining of WTO opened
the Arab markets to severe competition from Asian products which hindered
the domestic efforts to enhance intra trade and exacerbated sales problems
even for domestic products in their respective domestic markets.
g) The products of the Arabic markets lag behind world market products in terms
of competition, quality and production costs. For example, Asian products are
cheaper and western products are better in quality and have cost advantage
especially in terms of transportation costs.
h) The consumer demand and its growth rate in the Arab countries are relatively
small compared to the rest of the world which makes selling in the world
market more attractive due to its higher potential.
i) Intra-Arab trade is dominated by consumer goods and raw materials while
world trade consists largely of durable and capital goods. As the value of the
former and its growth are considerably lower than the latter this creates a
widening gap between them.
Third: Tariffs, fees and taxes
Tariffs were considered the main obstacle to intra trade development during the past
two decades. However, as a result of the signing by all Arab countries of the GAFTA
agreement which became effective, it is expected that all the negative effects of tariffs
on intra trade will be eliminated substantially.
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Nevertheless, the existence of taxes and fees with similar effects as tariffs that are
imposed on intra trade commodities among the Arab countries still deter intra trade to
a great extent. For example, all imported commodities are subject to stamp fees,
consulate fees, statistics fees, custom services fees, transit fees and other additional
taxes. Usually those fees and taxes are imposed as a percentage on the value of the
merchandise rather than as per document/license which increases costs unnecessarily
and lessens the effectiveness of tariff reductions.
Although all Arab countries signed and agreed on GAFTA but some individual
countries, especially those that were granted exemptions, still chose to impose tariffs
on intra trade commodities.
Fourth: Administrative and technical restrictions
a) The administrative restrictions consist of procedures related to the release of
merchandise from customs at the border point, which includes document
presentations, verifications, transit services, waiting, handling, inspection,
valuation, etc. Those procedures suffer from highly unorganized impotent
bureaucratic procedures and administrative inefficiencies. In addition, some
Arab countries still adopt quantitative restrictions on intra trade such as
limiting trade within specific institutions in the public sector or restricting
import licenses within a specific group of individuals and companies, as well
as in cases were bilateral agreements dictate certain trade restrictions.
b) The technical restrictions are related to standards and specifications, health
and environmental conditions, certificate of origin and value added. The issue
here is not whether to have or not to have standards and specifications and
health and environmental conditions; on the contrary, the existence of such
controls is necessary. The problem under consideration involves the variety
and multiplicity of tests and other requirements that keep changing from time
to time between countries, thus incurring higher costs and requiring extensive
time. As far as the certificate of origin is concerned, the products entering
trade are subject to a 40 per cent value added requirement of Arabic origin in
order to get a preferential treatment under the GAFTA. Although some
progress has been made in this respect between Arab countries this item is
considered one of the main obstacles to the development of intra-Arab trade.
Fifth: Transportation
The transportation sector in Arab countries is characterized by excessive costs since it
depends heavily on land transport across the borders in the case of adjacent countries,
mainly through the use of heavy vehicles. In the case of relatively long-distance
transport (between eastern and western Arab countries), marine transportation is used.
In contrast world trade depends to a large extent on railways. Further more, ArabEurope marine transportation is much more efficient than Arab-Arab transportation.
In general, the transportation sector in the Arab countries cannot be considered
developed to the extent that it can facilitate trade transactions. On the contrary it poses
a major obstacle. Perhaps the geography of the region implies trade concentration
among two to three trade partners in most cases.
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Sixth: External factors: E.g. conflict resolution and information
Trade transactions between individuals, companies and institutions involve a
commitments and responsibilities that need to be enacted and respected to the utmost
intent. However, in some cases, disagreements occur on any item under
implementation in any trade transaction which implies the need for a well identified
mechanism that is agreed upon by all partners in order to be able to resolve any
disagreement or conflict that might arise in this context.
It is worth mentioning here that this item applies to trade in general and not to intra
trade in particular. In this respect a conflict resolution mechanism is being
implemented by the Arab countries but it is not identified as a very efficient one and
is not fully accepted by all partners.
In addition, the trade-related information services lack efficiency and suffer
weaknesses in the provision of the necessary information. For example, a lot of
information could be provided on markets, commodities, consumption, standards and
specifications, quality, laboratory test requirements, fees, and other trade services
such as storage facilities, transportation, transit, banks, insurance, etc.
VII. Conclusion and recommendations
Most economic integration efforts in the region were initiated at the political level,
without parallel support from the private sector leading to a limited success.
Throughout the period of the study, regional trade grew at a modest rate but it did not
exceed 10 per cent of total trade. However, intra trade grew more rapidly after the
signing of GAFTA compared to the period before. In addition, most intra-Arab trade
was concentrated in fuel and raw materials, and to a lesser extent in food and
manufactured goods. Over the period under investigation, food and manufactured
goods had realized a substantial gain in relative importance at the expense of raw
materials and fuel. Also, intra-Arab trade was characterized by a high level of
geographical concentration, and in most cases it was concentrated mainly among two
or three neighboring countries.
The impact of GAFTA on intra-Arab trade was evaluated using two analytical tools:
The revealed comparative advantage analysis and multiple regression technique. The
RCA analysis showed similar competitive advantages in Arab countries, concentrated
in raw materials and primary products including fuel, which indicates a limited
potential for expanding intra-Arab trade. In addition, the regression estimation results
supported the RCA analysis indicating lack of effectiveness of the GAFTA agreement
during its first period of application.
Expansion of trade within the region still faces many obstacles including poor
infrastructure, political instability in the region, spread of corruption and red tapes in
some countries, inefficient transportation network and bureaucratic custom
procedures at the border.
It should be noted that the study findings are contingent upon the available limited
data. Deeper and richer analysis including using more advanced econometric
technique can be used in the future as larger sample become available.
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Finally the recommendations of the study are as follows:
1) Trade integration among Arab countries taking the form of an FTA is not enough;
it needs to be deepened to higher levels of integration, and has to be accompanied
by parallel efforts on production diversification and capacity building.
2) If trade integration is to be successful, it has to deal with other non tariff barriers,
including rules of origin, duplicative customs procedures, differing national
product standards, bureaucracy and corruptions at border, and poor infrastructures
particularly transportation.
3) Policy makers should coordinate more with the private sector in terms of
designing trade policies and its implementation. The private sector should be
encouraged to play a more active economic role in Arab economies, and to
participate more effectively in the decision making process.
4) Finally to achieve the needed political and social stability needed for any
successful economic integration, economic reform and democratization must be
pursued by all countries of the regions.
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C.
THE CASE FOR COMESA
By Rojid Sawkut, Sannassee Vinesh, Seetanah Boopen and Fowdar Suraj
I.
Introduction
RTAs in Africa
Africa is home to some 30 regional trade arrangements (RTAs), many of which are
part of deeper regional integration schemes. African RTAs have largely been
motivated by the continent’s desire to promote growth through regional cooperation.
Many African countries are landlocked small economies with inadequate
infrastructure. Although Africa has 12 per cent of the world’s population, it produces
just 2 per cent of the world’s output because its productivity is low. In 2003, subSaharan Africa’s GDP was 17 per cent lower than Australia’s; when South Africa is
excluded, Africa’s GDP is about the same as Austria’s. RTAs, by creating larger
markets, are thought to enable African countries to exploit economies of scale and
enhance domestic competition as well as to raise returns on investment and, hence,
attract more foreign direct investment (FDI). On average, each African country
belongs to four RTAs (World Bank 2004) and on top of the list are many Eastern and
Southern African countries. As for Mauritius, it is a member of South African
Development Community (SADC), Common Market for Eastern and Southern Africa
(COMESA) and the Indian Ocean Commission (IOC).
Overlapping membership
There is overlap of membership among Regional Economic Communities (RECs) in
the Eastern and Southern African region to an extent unparalleled anywhere else in
the world. 1 For example, almost half of COMESA members are also members of
SADC, whose membership is smaller than COMESA's. This may tend to weaken the
integration process. It leads to costly competition (even for attention and resources);
conflict; inconsistencies in policy formulation and implementation; unnecessary
duplication of functions and efforts; fragmentation of markets and restriction in the
growth potential of the sub-region. Yet, as most RECs in the Eastern and Southern
African region wish to move to a Customs Union (CU), member states with multiple
memberships at present will have to strike the balance of the costs and benefits of
belonging to one or another CU grouping. 2
II.
Regional trade blocks in Africa
IOC
The Indian Ocean Commission (IOC) is a regional organization regrouping four ACP
states (Comoros, Madagascar, Mauritius and Seychelles) plus one ultra-peripheral
region of the EU (Reunion, an overseas department of France). Set up in 1984, the
IOC is one of the first formal experiences of regional cooperation in this part of the
1
See Jakobeit et al. (2005).
From a legal as well as from a technical point of view a country cannot apply two different common external tariffs (CET) and
therefore cannot be a member of more than one CU. Hence, the current pattern of overlapping membership becomes impossible
to maintain once COMESA and SADC also become CUs in addition to SACU and EAC.
2
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vast region constituted by the Indian Ocean. The approach, essentially political in
nature, was at the time part of the drive to reinforce cooperation within the Southern
hemisphere. The objectives and missions established by the founders of the IOC were
primarily to strengthen links between the peoples of its member states and improve
their standard of living, promoting cooperation in a number of areas: diplomacy,
economy, trade, agriculture, fishing, the conservation of resources and ecosystems,
culture, science and education. In terms of development, however, these islands are
not all on an equal footing and are in fact at various levels, which are often, very far
apart. Reunion is part of the developed world; Comoros and Madagascar are members
of the group of least developed countries (LDCs); while Mauritius is classified as a
newly industrialized country and the Seychelles as a middle-income country. 3
ECOWAS
The Economic Community for Western Africa States (ECOWAS) was founded in
1975 with the idea of a community embracing all of Western Africa. The idea was
particularly promoted by Nigeria out of the conviction that a broader community
would reduce her dependence on oil and increase her influence in French dominated
regions.
The ECOWAS Treaty of 1975 envisaged the creation of a common market among
member countries with a phased reduction of tariffs and non-tariff barriers on
products of community origin until their complete elimination for all categories of
goods and all countries by 1989; the establishment of a common external tariff by
1994; fiscal and monetary harmonization; and close cooperation in all areas of
economic activity.
ECOWAS is composed of 15 countries, i.e. all the countries in Western Africa
(Benin, Burkina Faso, Cape Verde, Côte d'Ivoire, Gambia, Ghana, Guinea, GuineaBissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone and Togo) and had an
estimated total GNP of $US64 billion. 4 It also has a wealth of mineral resources and a
huge variety of agricultural products. ECOWAS is the largest and most diversified
economic community in sub-Saharan Africa (SSA). The GNI per capita in 1989 was
only $US326 which increased to $US370in 2003. The structure of the ECOWAS
economies is shown below.
Source: World Bank. http://siteresources.worldbank.org/EXTAFRREGINICOO/Resources/EWSaag.pdf
3
See http://ec.europa.eu/development/body/publications/courier/courier201/pdf/en_018.pdf.
Currently there are 15 members in ECOWAS. One new country joined in 1977 (Cape Verde) and one withdrew in 2002
(Mauritania).
4
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It should be noted that the economic activity of ECOWAS is concentrated heavily on
extractive industry and agriculture for exports. Fourteen out of the sixteen ECOWAS
countries derive over 60 per cent of their export revenues from just one or two
commodities.
The population in ECOWAS is more than 250 million, but its combined economy is
only $US125 billion. Over the 1974-2004 period, the ECOWAS economy grew 3.2
per cent annually (in nominal dollar terms), just slightly ahead of the 2.8 per cent
annual increase in population. One should bear in mind that Nigerians constitute half
of ECOWAS’ combined population and that ECOWAS-wide averages are dominated
by developments in Nigeria. Against the background of stagnant oil production, the
Nigerian economy has trailed economic developments elsewhere in the region and the
share of the Nigerian economy in the total ECOWAS economy fell from two-thirds in
1974 to one half in 2004. In contrast, rigorous economic growth in Benin, Burkina
Faso, Cape Verde, Ghana, Mali and Senegal was significantly higher than in other
ECOWAS countries.
Progress towards regional integration was initially slow and uneven, but renewed
momentum was provided by enactment of a revised ECOWAS treaty in July 1993.
The revised treaty clarified the community’s economic objectives (establishment of a
common market and a single currency) and facilitated the establishment of
community-wide bodies such as a parliament, a social council and a court of justice.
In 1994 a subgroup of seven member countries - Benin, Burkina Faso, Cote d’Ivoire,
Mali, Niger, Senegal and Togo - established the West African Economic and
Monetary Union (WAEMU), which Guinea-Bissau joined in 1997. Already sharing a
common currency - the CFA franc - with a regional central bank located in Dakar,
Senegal these countries recognized that they could pursue subregional integration at a
somewhat faster clip than what could be expected for the broader ECOWAS
membership. By 1999 the WAEMU countries had adopted a regional pact of
convergence, stability, growth and solidarity aimed at strengthening economic
performance through deeper regional integration and in 2000, a customs union was
created with the elimination of tariffs on intra-WAEMU trade and establishment of a
common external tariff (CET) on imports from outside the WAEMU area.
With WAEMU countries already sharing a common currency, monetary cooperation
among non-WAEMU countries (with the exception of Cape Verde and Liberia) takes
place within the so-called Second Monetary Zone where the aim is to establish a
common non-WAEMU currency that is then subsequently merged with WAEMU’s
CFA franc. As monetary unification requires macroeconomic stability, members of
the Second Monetary Zone have committed to comply, inter alia, with various fiscal
rules and limits on price and exchange rate volatility. In this area compliance has also
remained spotty, and the timeline for introducing the common currency has been
pushed back on several occasions (the last postponement shifted introduction of the
common currency back from 2005 to December 2009). 5
5 See Simplice and Lynge (2007).
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CEAO
The Communauté Economique de l’Afrique de l’Ouest (CEAO) was founded in 1973
by the Treaty of Abidjan and comprises seven members: Burkina Faso, Côte d’Ivoire,
Mali, Mauritania, Niger and Senegal were founding members. Benin became a
member in 1984. The CEAO operates as a free trade area for agricultural products and
raw materials and as a preferential trading area for approved industrial products, with
a regional cooperation tax replacing import duties and encouraging trade among
members. CEAO envisions eventual creation of a customs union and coordination of
fiscal policies. Community headquarters are in Ouagadougou, Burkina Faso.
SACU
SACU was established through the Customs Union Agreement of 1910 between the
Union of South Africa and the so-called BLS states, Botswana, Lesotho and
Swaziland. The 1969 Customs Union Agreement between South Africa, Botswana,
Lesotho and Swaziland replaced that agreement. After independence, Namibia also
formally joined the Union in 1990.
The Union was created in 1910, soon after the Republic of South Africa was formally
created as an independent state. The new union replaced an older one which had been
in existence since 1889. The main reasons for the establishment of SACU were that of
regional integration and the facilitation of trade between the members of the
agreement in order to improve economic development of the whole area, in particular
the less advanced members. The main feature of SACU is the overwhelming
dominance of South Africa over the other three members.
The economic environment of SACU
The Southern African Customs Union (SACU) consists of five member states,
Botswana, Lesotho, Namibia, South Africa and Swaziland. It was established through
the Customs Union Agreement of 1910. The 1910 Agreement was re-negotiated
leading to the 1969 Agreement. The Agreement was further re-negotiated in 1994
leading to the current SACU 2002 Agreement that came into force on 15 July 2004.
The main objective for the establishment of SACU was that of Regional Integration,
Trade Facilitation between the Members States and Trade Negotiations between
SACU and third parties, in order to improve the economic development of the
Member States.
The aim of the Southern African Customs Union (SACU) is to maintain the free
interchange of goods between member countries. It provides for a common external
tariff and a common excise tariff to this common customs area. All customs and
excise collected in the common customs area are paid into South Africa’s national
Revenue Fund. Revenue is shared among members according to a revenue-sharing
formula as described in the agreement. South Africa is the custodian of this pool.
Only the member states shares are calculated with South Africa receiving the residual.
SACU revenue constitutes a substantial share of the state revenue of the BLNS
countries (Botswana, Lesotho, Namibia and Swaziland).
SACU countries have very different levels of economic scale, structure and
development. Botswana and South Africa are upper middle-income countries
(although very different in economic structure), Namibia and Swaziland are lower
middle-income countries, and Lesotho is a least developed country. However, all
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SACU countries face common challenges such as eradicating poverty; combating
HIV/AIDS; promoting sustainable economic growth and development, and a more
equitable income distribution; reducing high unemployment rates; and being more
fully integrated into the world economy.
Monetary and exchange rate policies within SACU are largely led by South Africa.
Indeed, Lesotho, Namibia, South Africa and Swaziland have a Common Monetary
Area (CMA) Agreement, where the loti (Lesotho's currency), the Namibian dollar and
the lilangeni (Swaziland's currency) are pegged to, and freely convertible into, the
South African rand at par. Although a non-member of the CMA, Botswana has
pegged its currency (pula) to a basket of currencies, including the rand, and has
generally contained its fluctuations against the rand. This monetary stance and the
constraint on customs revenue due to SACU membership somewhat disciplined fiscal
policy within the customs union. This relative harmonization of policies has resulted
in comparable levels of inflation (around 7 per cent per year) throughout SACU.
Nevertheless, the lack of formal harmonization of fiscal policies leaves substantial
leeway for expenditure-induced public deficits. SACU countries have generally been
also slow in implementing structural reforms.
SACU members (except South Africa) depend on a limited number of products. The
share of agriculture in SACU's GDP decreased somewhat during the last few years,
but it remains an important sector with linkages to other activities. Food insecurity in
Lesotho, Namibia and Swaziland has increased recently due to several factors,
including unfavorable weather conditions (drought and floods), making emergency
food aid necessary. The food security objective has driven the move towards tariffs as
the main trade policy instrument in the sector, although some non-tariff measures still
exist.
Mining and quarrying provides a key anchor for growth and development, particularly
in Botswana, Namibia and South Africa, where mineral taxation, for example, has
enabled the improvement of basic infrastructure and social services. Furthermore, the
sector is one of the most important foreign exchange sources and a magnet for foreign
investment in these countries. Large mineral endowment has meant low tariff
protection, and private investment continues to be actively encouraged in the sector.
Certain labor-intensive manufacturing activities, particularly textiles and clothing,
have expanded strongly in recent years throughout SACU, largely as a result of new
incentives provided under non-reciprocal preferential arrangements. The general
development of the manufacturing sector, however, has largely been hampered by
supply-side constraints, such as high production costs, limited access to financing,
low capacity utilization, and low quality of products. Moreover, subject to
concessions, the tariff structure (mainly the relatively high rates on semi-finished
goods) is not conducive to investment in certain manufacturing activities.
Export opportunities in the services sector remain largely unexploited, other than in
South Africa and to some extent in Botswana and Namibia. In tourism, for example,
where SACU’s attractions are among the best in Africa, inadequacies in infrastructure
and marketing/promotion, financial constraints and lack of skilled labor have
constrained the development of the subsector. Further liberalization and investment in
services, in general, should improve the efficiency of other economic activities and
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the competitiveness of SACU’s exports, especially by reducing costs related to, inter
alia, telecommunications, transport and energy.
South African Development Community
The Southern African Development Coordination Conference (SADCC) was
established in 1980 in terms of the ‘Lusaka Declaration: Southern Africa: Towards
Economic Liberation’ by the governments of the nine Southern African countries of
Angola, Botswana, Lesotho, Malawi, Mozambique, Swaziland, Tanzania, Zambia and
Zimbabwe.
The positive experiences gained in working together in the group of Front Line States,
to advance the political struggle, had to be translated into broader cooperation in
pursuit of economic and social development. 6 From 1977, active consultations were
undertaken by representatives of the Front Line States, culminating in a meeting of
Foreign Ministries of the Front Line States in Gaborone, in May 1979, which called
for a meeting of ministers responsible for economic development. 7
That meeting was subsequently convened in Arusha, Tanzania, in July 1979. The
Arusha meeting led to the birth to the Southern African Development Co-ordination
Conference a year later. This transformation occurred in August 1992, when the
Heads of State and Government of the Southern African Development Co-ordination
Conference met in Windhoek, Namibia, to sign a Declaration and Treaty establishing
the new SADC - the Southern African Development Community.
The SADCC leaders had come to realize that although the coordination conference
had served them well and had demonstrated the crucial need to cooperate in their
development efforts, time had come to give the organization a legal and more formal
status. There was also a need to shift the focus of the organization from coordination
of development projects to a more complex task of integrating the economies of
member states. Hence the Treaty, which is the blueprint for building a Community of
Southern African states. The Southern African Development Community (SADC)
was established on 17 August 1992 by Angola, Botswana, Lesotho, Malawi,
Mozambique, Namibia, Swaziland, Tanzania and Zimbabwe. Originally known as the
Southern African Development Coordination Conference (SADCC), the organization
was formed in Lusaka, Zambia on 1 April 1980, following the adoption of the Lusaka
Declaration.
SADC is an intergovernmental organization aimed at promoting economic
development. The objective of SADC is to foster harmonized regional development
through the concerted undertaking of economic activities on a sector-by-sector basis.
Current member states are Angola, Botswana, Democratic Republic of Congo (DRC),
Lesotho, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa,
6
As the countries of the Southern African region gradually became independent, starting with Zambia in 1964, the newly
independent governments believed that it was their responsibility to give as much support as they could to liberation groups
fighting for their independence in neighboring states. So important was this mission that once Angola and Mozambique won their
independence in 1975, they joined Zambia, Botswana and Tanzania to form a political coalition known as the Front Line States.
They selected this name because they formed the front line between the independent states of Africa and the colonies still under
the control of European settlers within the southern Africa region. The Front Line States provided invaluable assistance for the
liberation struggle in neighboring states through direct material assistance and by providing bases for the armies of the liberation
movements. Each time one of the nations of the region won their independence, they joined the Front Line States and lent their
support for remaining liberations struggles http://exploringafrica.matrix.msu.edu/students/curriculum/m20/activity4.php.
7
SADCC grew Out of a political grouping, the Frontline States, whose objective was to brine about independence under majority
rule in Zimbabwe, Namibia and South Africa.
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Swaziland, Tanzania, Zambia and Zimbabwe. SADC headquarters are in Gaborone,
Botswana. All SADC counties are contracting parties to the General Agreement on
Tariffs and Trade (GATT), extending MFN treatment to each other. They are
members of the World Trade Organization (WTO).
SADC and its member states are expected to act according to the following principles:
• Sovereign equality of all member states;
• Solidarity, peace and security;
• Human rights, democracy and the rule of law;
• Equity, balance and mutual benefit;
• Peaceful settlement of disputes.
SADC objectives
• Achieve development and economic growth, alleviate poverty, enhance the
standard and quality of life of the people of Southern Africa and support the
socially disadvantaged through regional integration;
• Evolve common political values, systems and institutions;
• Promote and defend peace and security;
• Promote self-sustaining development on the basis of collective self-reliance,
and the interdependence of member states;
• Achieve complementarities between national and regional strategies and
programmes;
• Promote and maximize productive employment and utilization of resources of
the region;
• Achieve sustainable utilization of natural resources and effective protection of
the environment;
• Strengthen and consolidate the long-standing historical, social and cultural
affinities and links among the people of the region.
The ultimate objective of SADC as a community is, therefore, to build a region in
which there will be a high degree of harmonization and rationalization to enable the
pooling of resources to achieve collective self-reliance in order to improve the living
standards of the people of the region.
COMESA
The Common Market for Eastern and Southern Africa (COMESA) evolved out of the
former Preferential Trade Area (PTA) which had existed since the early days of 1981.
The establishment of COMESA followed a treaty signed in November 1993 and was
ratified in December 1994. COMESA was established, as defined by its treaty “as an
organization of free independent sovereign states which have agreed to co-operate in
developing their natural and human resource for the good of all their people”. 8
COMESA strategy of economic prosperity through regional integration has as main
focus the formation of a large economic and trading unit that is capable of
overcoming some of the barriers that are faced by individual states.
8
See the COMESA website at http://www.comesa.int/about/Overview/view.
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COMESA, the 20 9 -nation African trade bloc, launched its free trade area (FTA) on 31
October 2000 with nine 10 of its members initially participating in the project, which
dismantled trade barriers and guaranteed free movement of goods and services in the
region. COMESA was pushing ahead with its plan to adopt a common external tariff
and a customs union in December 2004 and to adopt a common currency for regional
members by 2025. The target for the CU was initially 2004 but this target has already
been missed and the new target is 2012. Article 45 of the COMESA Treaty provides
that “within the CU, custom duties and other charges of equivalent effect imposed on
imports shall be eliminated”. Non-tariff barriers shall also be eliminated. Furthermore,
a CET with respect to all goods imported into the member states from third countries
shall be established and maintained.
At its Eighteenth Meeting in Lusaka, Zambia in December 2004, the Council of
Ministers decided that member states should work towards harmonizing their external
tariffs as a transition strategy towards realizing the COMESA CET, as follows: 11
Category
Range for tariff harmonization CET target rate
Raw materials
0% to 5%
0%
Capital goods
0% to 5%
0%
Intermediate goods 10 to 15%
Not agreed
Final goods
Not agreed
25 to 40%
Whilst there is agreement on the CET target rates for capital and raw materials, work
is ongoing on rates for intermediate and finished products. With regard to the rates for
intermediate products, many of which are direct inputs for industry, there is a need to
define a rate that will ensure industrial competitiveness. In that regard, an exercise is
ongoing that will provide for exceptions, exclusions and derogations. This exercise
will also take into account goods used as inputs in production, goods under a rebate
system, merit goods, goods of social significance and goods covered by international
agreements. With regard to the rates for finished products, there is agreement to
harmonize tariffs in the range of 25-40 per cent. 12
The origins of the COMESA can be traced as far back as the mid-sixties. Before the
Lagos Plan of Action and the Final Act of Lagos were adopted, the countries of
Eastern and Southern Africa had already initiated the process towards creating an
Eastern and Southern African cooperation arrangement. The African integration
agenda was put forward in 1958, but it was not until 1960 and 1963 that the OAU
took practical steps. In 1965 the United Nations Economic Commission for Africa
(ECA) convened a ministerial meeting of the then politically independent states of
Eastern and Southern Africa to consider proposals for the establishment of a
mechanism for the promotion of subregional economic integration. The meeting,
9
The twenty members are Angola, Burundi, Comoros, DR Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Madagascar,
Malawi, Mauritius, Namibia, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe.
10
The nine members which initially joined the FTA are Djibouti, Egypt, Kenya, Madagascar, Malawi, Mauritius, Sudan, Zambia
and Zimbabwe.
11
For an assessment of the impact of COMESA forming its CU, the readers are directed to “The impact of COMESA forming its
custom union – A CGE based analysis” by Rojid Sawkut presented at the CSAE conference, St Catherine College, University of
Oxford, March 2007.
12
See the COMESA website, Custom Union page. http://www.comesa.int/trade/Folder.2004-04-19.2132/MS-OfficeDocument.2005-05-15.2735/view.
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which was held in Lusaka, Zambia, recommended the creation of an Economic
Community of Eastern and Southern Africa States. An Interim Council of ministers,
assisted by an Interim Economic Committee of officials, was subsequently set up to
negotiate the treaty and initiate programmes on economic cooperation, pending the
completion of negotiations on the treaty.
After the preparatory work had been completed, a meeting of the Heads of State and
Government was convened in Lusaka on 21 December 1981 at which the Treaty
establishing the PTA was signed. The Treaty came into force on 30 September 1982
after being ratified by more than seven signatory states as provided for in Article 50
of the Treaty. COMESA replaced the former PTA and established itself as an
organization of free independent sovereign states, which have agreed to cooperate in
developing their natural and human resources for the good of all their people.
The Treaty establishing COMESA was signed on 5 November 1993 in Kampala,
Uganda and was ratified a year later in Lilongwe, Malawi on 8 December 1994.
Principles of COMESA
The Treaty establishing COMESA binds together free independent sovereign states
which have agreed to cooperate in exploiting their natural and human resources for
the common good of all their peoples. In attaining that goal, COMESA recognizes
that peace, security and stability are basic factors in providing investment,
development, trade and regional economic integration. Experience has shown that
civil strives, political instabilities and cross-border disputes in the region have
seriously affected the ability of the countries to develop their individual economies as
well as their capacity to participate and take full advantage of the regional integration
arrangement under COMESA. It has now been fully accepted that without peace,
security and stability there cannot be a satisfactory level of investment even by local
entrepreneurs. Therefore, in pursuit of the aims and objectives stated in Article 3 of
the COMESA Treaty, the member states of COMESA have agreed to adhere to the
following principles:
•
•
•
•
•
•
•
•
•
•
Equality and inter-independence of the member states;
Solidarity and collective self-reliance among the member states;
Inter-State cooperation, harmonization of policies and integration of
programmes among the member states;
Non-aggression between the member states;
Recognition, promotion and protection of human and people's rights in
accordance with the provisions of the African Charter on Human and People's
Rights;
Accountability, economic justice and popular participation in development;
The recognition and observance of the rule of law;
The promotion and sustenance of a democratic system of governance in each
member state;
The maintenance of regional peace and stability through the promotion and
strengthening of good neighborliness; and
The peaceful settlement of disputes among the member states and the
promotion of a peaceful environment as a pre-requisite for their economic
development.
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Aims and objectives of COMESA
The aims and objectives of COMESA are defined in the Treaty and its Protocols.
They have been designed so as to facilitate the removal of the structural and
institutional weaknesses in the member states and the promotion of peace; security
and stability so as to enable them attain sustained development individually and
collectively as a regional bloc. These are as follows:
• To attain sustainable growth and development of the member states by
promoting a more balanced and harmonious development of its production and
marketing structures;
• To promote joint development in all fields of economic activity and the joint
adoption of macro-economic policies and programmes; to raise the standard of
living of its peoples, and to foster closer relations among its member states;
• To cooperate in the creation of an enabling environment for foreign, crossborder and domestic investment, including the joint promotion of research and
adaptation of science and technology for development;
• To cooperate in the promotion of peace, security and stability among the
member states in order to enhance economic development in the region;
• To cooperate in strengthening the relations between the Common Market and
the rest of the world and the adoption of common positions in international
fora; and
• To contribute towards the establishment, progress and the realization of the
objectives of the African Economic Community.
The COMESA agenda is to deepen and broaden the integration process among
member states through the adoption of more comprehensive trade liberation measures
such as the complete elimination of tariff and non-tariff barriers to trade and
elimination of customs duties; through the free movement of capital, labor, goods and
the right of establishment; by promoting standardized technical specifications,
standardization and quality control; through the elimination of controls on the
movement of goods and individuals; by standardizing taxation rates (including value
added tax and excise duties), and conditions regarding industrial cooperation,
particularly on company laws, intellectual property rights and investment laws;
through the promotion of the adoption of a single currency and the establishment of a
Monetary Union; and through the adoption of a CET.
By agreeing to the above, member states have agreed on the need to create and
maintain:
• A full free trade area guaranteeing the free movement of goods and services
produced within COMESA and the removal of all tariffs and non-tariff
barriers;
• A customs union under which goods and services imported from nonCOMESA countries will attract an agreed single tariff all COMESA States;
• Free movement of capital and investment supported by the adoption of
common investment practices so as to create a more favorable investment
climate for the entire COMESA region:
• A gradual establishment of a payments union based on the COMESA Clearing
House and the eventual establishment of a common monetary union with a
common currency;
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•
The adoption of a common visa arrangement, including the right of
establishment leading eventually to free movement of bona fide persons.
COMESA achievements
COMESA, as well as is predecessor the PTA, has achieved a lot in the area of trade,
customs, transport, development finance and technical cooperation. Impressive
progress has also been made in the productive sectors of industry and agriculture.
Trade facilitation and trade liberalization measures are bearing fruit.
•
•
•
•
•
•
•
•
Intra-COMESA trade, valued at about $US4.2 billion, is growing at the rate of
20 per cent per annum. Trade with third countries is growing at about 7 per
cent per annum.
Transport transit facilitation measures have resulted in a reduction of costs by
25 per cent.
Inter-state movement of persons, goods and means of transport has been
facilitated.
In the sector of telecommunications, special emphasis has been placed on
network development to enable direct telecommunication links through more
reliable infrastructure.
Establishment of several important institutions was achieved, including the
PTA Trade and Development Bank, the COMESA Clearing House, the
COMESA Re-insurance Company and the COMESA Leather and Leather
Products Institute.
The PTA Bank has, over the years, been very active in promoting investments
and providing trade financing facilities.
The Re-Insurance Company has, since its establishment in 1992, been able to
carve out a reasonable share of the regional insurance business and is now
transacting business in some nineteen countries.
Investment in the region is promoted and this issue is addressed through
facilitation of bilateral agreements; promoting export drives by individual
member states, and identifying specific projects, which have the potential to
act as growth poles between two or more member states.
Major concerns about COMESA
The magnitude of COMESA’s external indebtedness is a source of serious concern.
The external debt of the COMESA region has increased twenty-fold since 1970 and
debt service ratios, which in 1970 were insignificant, averaged 45 per cent of export
earnings in 1989-90, making the region one of the most heavily indebted in the world.
While member states borrowed heavily to maintain incomes and investments, the
collapse of their export earnings undermined attempts to reduce their debts. Debt
relief to the COMESA region, and SSA as a whole, has been limited in relation to the
magnitude of the problem and inflows of Official Development Assistance continue
to decline.
On the production side, both the agricultural and industrial sectors have been in
decline. For many COMESA countries, agriculture constitutes between 50 and 76 per
cent of GDP but the growth of agricultural output, at an average of 2 per cent per year
over the last three decades, has barely matched that of population growth, so has not
contributed effectively to sustainable growth and development. Agricultural exports
have declined, budgetary allocations to agriculture have remained small and
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inadequate and an anti-poor bias in agricultural policy across much of the region,
notably through over-taxation of crops, inadequate spending on market infrastructure
for small-holder producers, and insufficient investment in research of local foods have
combined to adversely affect the region’s trade share of exports in the world market,
which has dropped by 50 per cent since 1970. Food imports are increasing at about 8
per cent a year and COMESA’s current bill for cereals is over $US2 billion. This
heavy and chronic dependence on food imports is particularly dangerous for
COMESA, not only because it’s debt and trade problems impose serious limits on its
ability to purchase food in world markets, but also because there is no guarantee that
food aid and/or commercial imports will be available when needed in the required
quantities and quality.
Although industry grew roughly three times as fast as agriculture in the first decade of
independence, the past few years have seen an alarming reversal in many states where
de-industrialization, as a short-term effect of structural adjustment, has set in.
Progress in the manufacturing sector has fallen far short of the target growth rate of 8
per cent per annum projected in the second Industrial Development Decade for Africa
(IDDA II) as a result of entrenched structural rigidities, weak inter-industry and intersectoral linkages, lack of access to advanced technologies and poor institutional and
physical infrastructure. The African continent’s share of world manufacturing value
added (MVA) rose from 0.7 per cent in 1970 to 1 per cent in 1982 and fell to 0.8 per
cent in 1994. Most African industries have a very low capacity utilization rate and
current structural adjustment programmes have as yet to have a positive impact on the
industrial sector.
Population is expanding at a rate of around 3.2 per cent, outstripping agricultural and
food production and COMESA now has twice the population it had in 1965 and more
than five times the population it had at the beginning of the century. The region has
also experienced, over the last few years, unprecedented droughts, leading to
widespread food shortages and famine. There is growing and widespread poverty in
the COMESA region, especially among the rural communities, aggravated by the
decline in expenditures on social services, including health, education and public
utilities, nutrition has worsened and mortality continues to increase.
There is a major crisis in employment in all countries, especially among the youth in
cities and towns. Unemployment in most countries is as much as 30 per cent or more
of the active labor force and under-employment is just as serious. The majority of the
region’s population still dwells in the villages and earns their living cultivating
between one and fifteen hectares. The COMESA region has also had to contend with
civil strife, ethnic wars and political instability, which have also contributed to the
decline in economic growth.
In summary, the economic performance of the COMESA region has been rather
disappointing over the last decades, with overall economic growth of the COMESA
region having averaged 3.2 per cent a year since 1960 and only marginally above the
level of the region’s population growth. Nevertheless, performance of the region has
been remarkable in the very recent past: In 2005, the COMESA region recorded an
overall GDP growth rate of 5.8 per cent, buoyed by high prices for petroleum and
metal products. During the same period, the average growth rate for the African
continent was 4.9 per cent. Total COMESA exports increased by 54 per cent in 2005,
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while imports surged by 46 per cent; primarily due to higher fuel prices. The oilexporting economies saw the fastest growth with Sudan recording 13.4 per cent
growth. Non-oil economies, that export mineral and metal commodities, also saw
strong increases. The DRC grew at 6.2 per cent and Uganda at 5.8 per cent. 13
III.
Economic structure of some COMESA Members 14
COMESA members vary largely in terms of size in many respects. For example, as
seen from Table C1, they differ in geographic, demographic and economic terms.
With a 2002 combined population of about 257 million (Table C1), these economies
are, for example, potentially rich in human resources. Ethiopia and DRC are the two
largest countries in the region with population size of 67.2 and 51.5 million
respectively. Comoros and Seychelles are the two smallest countries in population
size. Land area varies considerably ranging from 450 sq km in Seychelles to
2'267'050 sq km in DRC.
Likewise, GDP per capita also vary largely across countries. In 2002, GDP per capita
at constant 1995 prices ranges from $US515 in Malawi to more than $US9'500 in
Mauritius. Heterogeneity exists to a large extent among COMESA members as far as
economic structures are concerned. Some countries (like Burundi, DRC and Rwanda)
are still highly relying on the agricultural sector (more than 40 per cent of total
economic activity) while some others (like Seychelles, Mauritius and Kenya) are
already heading towards the services sector (more than 60 per cent of total economic
activity). Angola on the other hand is the only member state having more than 50 per
cent of its resources (68.1 per cent) employed in the industry sector.
Table C1 also shows that the prevailing level of inflation varies from country to
country. For example, while Zimbabwe and Angola are plagued by rampant
hyperinflation (140.1 per cent and 118.8 per cent respectively), Burundi and Uganda
are affected by declining inflation rates (-1.4 per cent and 0.3 per cent). These very
large increases in price level experienced are mainly attributed to the civil strife in
Angola and the severe currency shortage in Zimbabwe. The general negative inflation
rate prevailing in countries like Burundi and Uganda is due to deflation in the
commodities market.
13
See http://www.iss.co.za/dynamic/administration/file_manager/file_links/STATE%20OF%20INTEGRATION%20REPORT
%20-%2006TH%20NOV%202006.PDF?link_id=3893&slink_id=3873&link_type=12&slink_type=13&tmpl_id=3.
For a more elaborate study on the economic structure of COMESA states, readers are referred to the PDH thesis (not yet
published as of 0ctober 4th 2007) of one of the authors, namely Sawkut Rojid.
14
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Table C1: Basic economic indicators of COMESA countries and sectors’ share of
GDP (per cent), 2002
Inflation,
consumer
prices
(annual %)
118.8
-1.4
Population,
total
Angola
13'121'000
Burundi
7'071'000
Comoros
586'000
DR Congo
31.5
51'580'000
Ethiopia
1.6
67'218'000
Kenya
2.0
31'345'000
Madagascar
15.9
16'437'000
Malawi
14.7
10'743'000
Mauritius
6.7
1'212'000
Rwanda
2.5
8'163'000
Seychelles
0.2
840'000
Uganda
-0.3
24'600'000
Zambia
22.2
10'244'000
Zimbabwe
140.1
13'001'000
Source: WDI 2004 database, The World Bank.
GDP per
capita, PPP
(constant
1995 $US)
1890.6
561.3
1499.3
578.4
693.1
902.1
659.3
514.9
9577.2
1126.0
..
1228.9
742.7
..
Agriculture,
value added
(% of GDP)
7.8
49.3
35.4
56.3
39.9
16.4
32.1
36.5
7.0
41.4
2.9
31.6
22.2
17.4
Industry,
value
added
(% of
GDP)
68.1
19.4
10.6
18.8
12.4
19.0
13.3
14.8
31.0
21.3
30.0
22.0
26.1
23.8
Services,
value
added
(% of
GDP)
24.1
31.3
54.0
24.9
47.6
64.6
54.7
48.7
62.0
37.3
67.1
46.4
51.7
58.8
COMESA patterns of trade 15
As shown in Table C2b, the shares of COMESA members’ exports to the COMESA
block has increased in 2005 compared to 1980, with a peak around the year 2004.
Table C2a shows that COMESA as a destination of exports is particularly important
for Djibouti, Ethiopia, Kenya and Uganda with their share of exports to COMESA in
2001 being 24 per cent, 20 per cent, 23 per cent and 25 per cent respectively. The EU
is the main destination for COMESA members’ products. These countries products
are exported to the EU under several initiatives, namely the Everything But Arms
(EBA) 16 initiative and the Cotonou Agreement 17 (following the Lomé Convention).
Under both these agreements some of these countries have preferential market access
in the EU. The Cotonou agreement has already phased out and the ACP countries
together with the EU are in the process of negotiating new trade treaties called
Economic Partnership Agreements. Some countries have already initiated and interim
agreement towards this at the end of December 2007. The EPA should be signed by
end 2008.
15
For a detailed insight in Intra Industry Trade (IIT) analysis for COMESA, the readers are directed to the PHD thesis of Rojid
Sawkut (not published as of 4 October 2007).
16 EBA is an initiative of the European Union under which all imports to the EU from the least developed countries are duty free
and quota free, with the exception of armaments. It entered into force on 5 March 2001.
17
The Cotonou Agreement is a treaty between the European Union and the group of African, Caribbean and Pacific states (ACP
countries). It is aimed at the reduction and eventual eradication of poverty while contributing to sustainable development and to
the gradual integration of ACP countries into the world economy.
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Table C2a: Share of exports 18 (per cent)
EUROPE
1990 2001
Angola
36
26
Burundi
86
72
Comoros
75
47
DR Congo
--Djibouti
53
2
Egypt
45
37
Ethiopia
41
36
Kenya
40
33
Madagascar
54
42
Malawi
51
40
Mauritius
78
68
Rwanda
59
31
Seychelles
19
48
Sudan
38
8
Uganda
82
45
Zambia
37
44
Zimbabwe
44
43
Source: Calculated from WTA.
USA
1990 2001
56
47
7
0.7
18
24
17
13
<1
<1
8
9
11
5
2
5
17
20
17
14
12
19
21
4
1
3
3
<1
8
2
2
-6
5
COMESA
1990 2001
<1
<1
1
19
<1
<1
<1
7
4
24
<1
2
12
20
34
23
3
5
2
12
1
7
<1
-<1
7
6
2
1
25
1
9
13
17
Table C2b: Share of COMESA intra exports as a percentage of COMESA total
exports
1980
1990
2000
2004
2005
COMESA intra export
555
889
1'328
2'294
2'716
COMESA total exports
13'851
18'268
24'777
40'106
56'311
4.0
4.9
5.4
5.7
4.8
Share of intra exports to total
exports
Source: UNCTAD 2006/07.
Table C2c: Average annual growth rate of exports and imports for the
COMESA region (per cent)
Exports
Imports
Source: UNCTAD 2006/07.
1980-1990 1990-2000 2000-2005
4.1
4.1
18.1
6.4
5.2
12
As can be seen from Table C3, the range of products traded within the COMESA has
been submitted to significant changes throughout the period of study. Exports of ‘food
and live animals’, which in the 1980’s were ranked third in priority, were the main
intra-COMESA exports in 2000. ‘Manufactured goods classified chiefly by material’
have remained the second most important area of exports within the bloc.
Alternatively, ‘mineral fuels, lubricants and related materials’, which were the main
intra exports in 1980 was ranked third in 2000. Likewise, machinery and transport
equipment which made up 6 per cent of the COMESA total intra exports in 1980 was
18
The authors also calculated the shares for two more years, 1995 and 2000 and for the region Asia, and the data can be made
available on request.
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reduced to 2.7 per cent in 2000. In contrast, exports in ‘beverages and tobacco’ and
‘crude materials, inedible except fuels’ experienced steady increases from 1980 to
2000. ‘Animal and vegetable oils, fats and waxes’ and ‘miscellaneous manufactured
articles’ exported as a percentage of COMESA total intra exports have also increased,
but with minor fluctuations within the past two decades.
Rojid (on-going PHD thesis) notes that: COMESA member states exports on similar
product categories are becoming more intense (given by an increased IIT index
value). The number of COMESA members with a Grubel-Lloyd index higher within
COMESA than within the world increased from 5 to 11 during the 1980-2002. This
comes to confirm the hypothesis that trade within developing countries is more of IIT.
Table C3: Products exported as a percentage of COMESA total intra exports 19
Food and live animals
Beverages and tobacco
Crude materials, inedible, except fuels
Mineral fuels, lubricants and related materials
Animal and vegetable oils, fats and waxes
Chemicals and related products, n.e.s.
Manufactured goods classified chiefly by material
Machinery and transport equipment
Miscellaneous manufactured articles
Commodities and transactions not classified elsewhere
TOTAL
Source: Calculated from WTA.
1980
15.4
2.5
4.1
39.0
0.2
8.9
19.3
6.5
4.2
0.1
100
1985
42.0
4.1
4.1
24.5
0.1
6.3
13.7
3.0
2.0
0.1
100
1990
22.8
4.3
7.6
10.2
1.7
7.5
22.7
17.7
5.2
0.3
100
1995
33.5
4.8
9.8
5.4
0.4
8.1
25.1
6.6
5.9
0.3
100
2000
30.1
5.1
10.2
11.7
1.4
8.7
22.5
2.7
7.4
0.3
100
Trade performance
Over the last 2 decades, as seen from Table C4, growth performance in SSA has been
relatively poor compared to other developing regions. During the period 1986 to 1994
the performance of COMESA bloc was even worse than average SSA countries (1.24
per cent compared to 1.42 per cent). However, since 1995, the performance of the
SSA region improved and more interestingly, the performance of COMESA improved
more than average SSA.
Table C4: GDP (PPP) yearly growth rate (per cent, 1995 prices)
1986-1994
1995-2002
Sub-Saharan Africa
1.42
3.06
East Asia & Pacific
11.03
6.95
South Asia
5.79
5.38
Low & middle income
3.12
4.42
COMESA
1.24
3.62
Source: Author’s calculation based on WDI 2004 database, The World Bank.
According to Table C5, which takes demographic growth trends into consideration,
the GDP growth rate of COMESA since the mid-1980s has been sufficient to provide
an increase in the standard of living. However, it is important to note the high
variation in the growth performance of COMESA members reflecting the diverse
characteristics of these economies. During the period 1986 to 1994, average growth
19
Results at 2 digit and 3 digit SITC level are available on request from the author.
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rates of GDP per capita ranges from -5.5 per cent in Congo to 5.5 per cent in
Mauritius. Between 1995 and 2002, GDP per capita growth was 4.16 per cent in
Uganda in comparison to -3.6 per cent in Madagascar. COMESA as a bloc has done
much better than SSA countries taken as a whole.
Table C5: GDP per capita yearly growth rate (per cent, 1995 prices)
1986-1994
1995-2002
Angola
-3.76
0.63
Burundi
-1.09
3.15
Cameroon
-4.67
1.32
DR Congo
-5.54
2.84
Ethiopia
-0.50
-1.50
Kenya
0.05
2.24
Madagascar
-1.39
-3.63
Malawi
-0.88
-0.34
Mauritius
5.53
2.64
Rwanda
-4.77
-0.62
Seychelles
4.40
-1.20
Sudan
2.19
0.15
Uganda
2.39
4.16
Zambia
-2.00
3.72
Zimbabwe
0.35
2.39
Sub-Saharan Africa
-0.98
0.63
South Asia
3.19
3.15
Middle East & North Africa
0.38
1.32
Lower middle income
0.56
2.84
COMESA
1.26
2.42
Source: Author’s calculation based on WDI 2004 database, The World Bank.
In the context of regional trade arrangements, members of the same bloc exporting
similar products are less likely to benefit from the arrangement as trading within them
will be limited. The essence of trade creation within a regional bloc lies on diversified
export potentials among members of the region. Economists have used imports and
exports values to generate different indicators as a means to find out whether there
exist potential trade benefits between trading partners.
One of the ways to further analyze intra-COMESA trade flows is to look at the
revealed comparative advantages (RCA). In the context of regional trade
arrangements, the presumption is that country groupings that have a narrower range of
RCA indices (and in similar products) are less likely to find grounds for sustained
exporting within the RTA.
The technique of RCA ratios is used to measure the importance of a country’s exports
of a particular product in its total exports relative to world exports of that product to
the world market. In order to measure the RCA of a country in a certain product
category, we compare the share of that product category in that country’s exports to
the share of that product category in overall world exports. Thus this measure captures
the extent to which a country exports more of a product than the average country.
The RCA is defined as follows:
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RCA = ( X ij /
X
j
) / ( X iw /
X
w
),
Where X ij = exports of i-th product from country j
X
X
X
j
= total exports from country j
iw
w
= exports of i-th product from the world
= total exports from the world.
An RCA index above unity indicates relative advantage while that below unity
denotes relative disadvantage. According to our results in the Appendix the range of
comparative advantages for Zimbabwe, Zambia and Kenya are less concentrated than
other COMESA countries. Angola, Djibouti, Comoros, Mauritius and Seychelles have
the most concentrated range of comparative advantages. None of the COMESA
countries has comparative advantages in machinery and equipment products
(including telecommunication and electrical machinery and road vehicles). Except
from that, COMESA members have comparative advantages in almost all product
lines. In a logical sense therefore, there is potential for more trade within COMESA.
However, from the results obtained we should also note that some countries have
comparative advantage in quite similar products. This tends to suggest that to some
extent complementarities as a way to stimulate trade might be limited among some
COMESA members.
IV.
Measuring the effect of COMESA on intra-COMESA trade:
A preliminary analysis 20
Two preliminary models were employed in an attempt to measure the effect of
COMESA on intra-COMESA trade over the period 1985-2004 using a time series
analysis. The first represents intra exports and the latter represents intra imports and
we take the aggregate value of the countries in the COMESA. The purpose of these
models is to identify the substitution effect between intra-COMESA trade and
COMESA trade with the rest of the world. Therefore imports and exports with the rest
of the world have been introduced as explanatory variables in these models. These
two variables can serve the purpose of capturing the effects of trade agreements other
than intra trade agreements. In addition, time (t) was introduced in the model with the
purpose of capturing the growing trend in intra trade over time. Consequently, the
following summarizes the model:
Intrax = β 0 + β1 Re stx + β 2 gdp + β 3t + β 4 COMESA + u1
(1)
Intram = α 0 + α 1 Re stm + β 2 gdp + β 3α 2 t + β 4 COMESA + u 2
(2)
Where: Intrax = intra exports, Restx = exports with the rest of the world, COMESA =
Dummy variable takes the value one for the periods 2000-2005, and zero otherwise, t
is the time trend (taking values 1, 2…etc), Intram is intra imports, and Restm refers to
imports from ROW. We also include GDP due to the predominance of the scale
effect. The trade flows and GDP are measured in current million dollars and has been
20
For a detailed econometric analysis of COMESA trade using a gravity approach, see Rojid (2006).
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obtained from the World Trade Analyzer and the Penn World Table respectively. u1,
u2 are disturbance terms and are assumed to have zero mean and constant variance. αi
and βi are unknown parameters to be estimated.
Table C6: OLS estimates in logarithm
Parameter
Dep: log(Intrax)
Constant
Log Restx β1
Log GDP β2
Time β3
Dummy β4
R-squared
DW
Estimate
t-statistics
-3.233
0.85
0.63
0.154
0.03
0.91
1.97
2.11*
2.25**
1.92*
1.95*
1.22
Dep: log(Intram)
Constant
1.75
2.16**
Log Restm α1
1.53
2.34***
Log GDP α2
0.43
1.93*
Time α3
0.45
1.86*
Dummy α4
0.08
0.86
No of Obs.
20
R-squared
0.95
Notes: * Significant at 10 per cent level; ** significant at 5 per cent level; *** significant at 1 per cent
level.
Of interest to us, the effect of COMESA on intra trade, as revealed by the
insignificance t-values of the dummy variables in both models shows that the
COMESA agreements had no significant effects on intra trade. It should be noted that
this might be due to its early stage and that the agreement may hopefully matter in the
future. The variable representing trade with the rest of the world obtained a positive
sign and was significant at the 5 per cent level for both specifications. It thus appears
that there might be no significant substitution effects between intra trade and trade
with ROW for the sample of countries. In other words, for instance on the exports
side, the positive and significant coefficient of Restx would imply that, trade
agreements at least like COMESA, do not necessarily lead to an increase in exports
within COMESA at the cost of exports to ROW. The time variable in both models
turned out to be significant with a positive sign and validates the fact that there has
been an overall growth trend in both intra exports and intra imports. Further, although
to a lesser extent, GDP is also seen to have a positive effect on both intra-exports and
intra imports. Thus increases in aggregate regional GDP leads to higher increase in
intra trade. In both regressions, the value of R–squared is quite high (above 0.9)
implying that the independent variables have effective predicting power for the
dependant variables.
V.
The role of COMESA exports in COMESA economic
growth 21
To model the growth effects of trade in the COMESA region, a classical economic
growth function was extended with standard control variables such as investment,
21
The readers are guided to Rojid (2006) for a detailed explanation on the trade potential of COMESA.
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education, labor, financial development 22 and trade. This is consistent with works
from the literature (Barro 1991; Mankiw, Romer and Weil 1992; Benhabib and
Spiegel 1994; Levine and Renelt 1992; Levine et al. 2000; among others). The key
attraction of growth regressions is that they provide a way of testing directly for
productivity effects of various determinants. More importantly for the sake of this
study, the variable interesting for us, namely exports, has been decomposed into
exports of COMESA countries to other member states and into exports to nonCOMESA countries. This will permit us to gauge the effect of COMESA trade on
economic growth. The implied theoretical model is thus
OUTPUTit = f ( IVTit , EDU it , LABit , FDit , COMESAijt , NONCOMESAizt )
(1)
where i denotes COMESA member countries (in our analysis they are exporting
countries), j denotes COMESA importing countries, Z denotes non-COMESA
importing countries and t is the time period (that is 1985-2000). Therefore COMESAijt
would imply exports of one COMESA member to another COMESA member at time
t.
OUTPUTit denotes the respective COMESA members economy’s output (measured
as the real GDP at constant price in $US), IVTit (see Delong and Summers 1990,
1994; Reinhart 1989 and more recently Sala-i-Martin 1997 and Arin 2004) is the level
of investment in the country (measured as the investment ratio). EDUit is the level of
literacy and quality of labor (measured by the secondary enrolment ratio). It is
included following the arguments and empirical evidences of Mankiw, Romer and
Weil (1992), Barro (1998) and more recently Temple (2001). Human capital can be
thought of as affecting economic growth in the sense that workers with higher levels
of education or skills should, ceteris paribus, be more productive and more inventive
and innovative. Higher levels of human capital may also encourage capital
accumulation, or may raise the rate of technological catch-up for follower countries
(Temple 2001). LABit is the labor force (measured as the number of people in
employment), FDit is the level of financial development (measured by the ratio of
liquid assets to GDP (see Levine et al. 2000; Levine 1997). Export 23 has been
decomposed into COMESAijt that is the amount of exports to COMESA member
states(j) by COMESA countries(i) and NONCOMESAijt which is the amount of
exports to non-COMESA countries (z) by COMESA countries(i), both measured as a
percentage of GDP. The data series for OUTPUT, IVT, FD were generated from the
International Financial Statistic (IFS) various yearbooks, the secondary enrolment
ratio from the World Development Report (various issues) and the two sets of export
measures have been obtained from the World Trade Analyzer.
The econometric model and preliminary tests
Recall equation 1 above and taking logs on both sides of the equation 24 and denoting
the lowercase variables as the natural log of the respective uppercase variable results
in the following:
22
Seetanah (2008) discusses the link between financial development and economic growth.
The role of exports in economic development has been well documented in the literature, see work from Dollar (1992), Sachs
and Warner (1995) and Edwards (1998). The authors supported the idea that increased trade openness raised economic growth
through access for a country to the advances of technological knowledge of its trade partners, access bigger markets and
encouraging the development of R&D through increasing returns to innovation and also through providing developing countries
with access to investment and intermediate goods that are vital to their development processes.
24
This is for ease of interpretation whereby the coefficient can be expressed in terms of percentage change or output elasticity.
23
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outputit = β 0 + β1ivt it + β 2 eduit + β 3labit + β 4 fd it + β 5 comesait + β 6 noncomesait + ε it
(2)
where β0 is the constant term, β1 , β2 , β3, β4, β5 and β6 represent the elasticity of output
relative to investment , education, labor, financial development, exports to COMESA
countries and exports to non-COMESA countries. i denotes the respective countries in
the sample 25 and t the time period, that is 1985-2000. Thus the number of
observations comes to 192.
Analysis
We start by running the cross section regressions as a preliminary exercise (averaged
over the sample period 1985-2000). The results reveal that exports to COMESA
members have not had a significant impact on the economic development of the
countries in the block. Rather, on the other hand, exports to non-COMESA countries
had a positive and significant link to the economic development for the COMESA
bloc. As expected investment level, education, employment and financial
development proved to be statistically significant at 5 per cent and also have the
expected signs.
Table C7: Cross section and random effects estimates
Variable
Constant
ivt
edu
labt
fd
comesa
noncomesa
Cross section estimates
(COMESA exports to
COMESA and non-COMESA)
8.13
(3.22)***
0.31
(2.49)***
0.41
(4.16)***
0.59
(2.96)***
0.32
(3.26)***
0.19
(0.83)
0.68
(1.85)*
Random effects estimates
(COMESA exports to
COMESA and non-COMESA)
10.22
(1.85)*
0.45
(1.87)*
0.73
(4.13)***
0.45
(2.07)*
0.17
(6.91)***
0.11
(1.34)
0.36
(2.30)**
R2
0.61
0.56
Number of observations.
12
192
Prob>Chi2=0.411
Hausman Test
Notes: Dependent variable output = log of gdp, 1985-2000. *significant at 10 per cent, ** significant
at 5 per cent, ***significant at 1 per cent. The small letters denotes variables in natural logarithmic
and t values are in parentheses.
The limitations of using a single-equation OLS cross sectional regression model 26 and
pooled OLS are known (see Kennedy 2003). In the next section we use panel data
techniques to overcome these shortcomings. With panel data, the issue is whether to
use a random effects or a fixed effects estimation approach. Accordingly, to determine
25
These are Angola, Burundi, Comoros, Ethiopia, Kenya, Malawi, Mauritius, Rwanda, Egypt, Uganda, Zambia and Zimbabwe.
The most serious limitations being that simple cross section may produce biased and inconsistent estimates since they may not
take into consideration the endogeneity of some of the regressors. It ignores dynamics and throws away information (Attanasio et
al. 2000) and may suffer from omitted variable bias.
26
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which of these estimators are more appropriate to use in the present case, both a fixed
effects (FE) and a random effects (RE) estimator were initially used to estimate the
equation and the Hausman specification test was performed to evaluate the
assumption in the random effects model. In fact the Hausman test tests the null
hypothesis that the coefficients estimated by the efficient random effects estimator are
the same as the ones estimated by the consistent fixed effects estimator. 27 The pvalue, of the Hausman test reported in Table C7, shows that the test favors the random
effects approach as the null hypothesis was rejected. Note that it has also been argued
that since panel data techniques are employed, the issue of non-stationarity of the
variables is less serious (Garcia-Mila et al. 1996).
From the random effect findings, 28 it is interesting to note that the coefficient of
COMESA, that is exports to COMESA member states, is positive but not significant,
suggesting that it has not impacted significantly on the economic performance of the
block. This confirms the results from the cross section estimates. This can be
explained by the fact that, as we mentioned above, COMESA internal trade is very
minimal as a share of COMESA trade to the world. Exports to non-COMESA
countries (NONCOMESA) is observed to have been very influential to the economic
development of the countries in the sample and the coefficient of 0.36 suggests that a
1 per cent increase in trade to non-COMESA countries brings a 0.36 per cent increase
in the output level of the country. This is principally due to the large export volume
from COMESA to EU and USA under the Lomé Convention/ Cotonou Agreement
and the AGOA preferential regime. Below we analyze growth due to exports to EU
and US only. Investment, education, labor and financial development report signs and
magnitudes of elasticity as generally predicted by the literature. Interestingly the
growth of COMESA countries are principally determined by their level of investment
and particularly education as judged by the high output elasticities reported. For
instance a 1 per cent increase in the investment and education level of the country is
associated with a 0.45 per cent and 0.73 per cent respective increase in level of output
(see Table C7).
As a further analysis we segregated the exports of COMESA members into exports to
other COMESA countries (xpcom), exports to the US and EU (xpUSEU) and exports
to the other countries except COMESA, US and US (xpother) for further insights and
particularly to capture the effect to exports to EU and US and their importance to
COMESA economic growth. Table C8 below shows the results from the panel
estimates.
27
For a detailed treatment of the fixed and random effects model see among other Green (1997).
We have also tried to use 5 and 10 year average observations for the panel as it is believed that annual growth can be
influenced by short term effects. The results obtained were overall similar to the ones presented in the text. However since 5 and
10 years average dramatically decreased the number of observations (we could not obtained longer period data or more countries
in the sample due to data limitations), thus making the estimates less reliable, it was judged not appropriate to be included as an
integral part of the discussion.
28
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Table C8: Random effects panel estimates (COMESA exports to COMESA and
US and EU)
Variable
Constant
ivt
edu
lab
fd
xpcom
xpUSEU
xpother
Random effects
Estimates (COMESA exports to
COMESA and US and EU)
3.34
(1.77)*
0.48
(1.99)*
0.56
(2.56)***
0.33
(2.37)**
0.13
(2.31)*
0.07
(1.21)
0.43
(2.61)***
0.18
(1.89)*
R2
0.66
Number of obs.
192
Hausman Test
Prob>Chi2=0.643
Notes: Dependent variable gdp= log of gdp, 1985-2000. *significant at 10 per cent, ** significant at 5
per cent, ***significant at 1 per cent. The small letters denotes variables in natural logarithmic and t
values are in parentheses.
It is observed that COMESA exports to the EU and US have had a significant and
interestingly a larger impact (with an output elasticity of 0.43) than COMESA exports
to the other countries (that is excluding exports to COMESA members, US and EU on
the COMESA bloc economic performance. The above results yet again validate the
fact that exports to other COMESA countries have had an insignificant effect on
economic progress in member states and that growth is mainly due to exports to the
EU and US.
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Appendix
Table C-A: RCA for selected COMESA countries in 2000 at 2 digits SITC
Angola
00 live animals other than in
div 03
01 meat and meat prep
02 Dairy products and birds
egg
03 fish
04 cereals and cereals prep
05 veg and fruits
06 sugar and sugar prep
07 coffee, tea
08 feeding stuffs for animals
09 misc. edible prod
11 beverages
12 tobacco
21 hide, skins raw
22 oil-seeds
23 crude rubber
24 cork and wood
25 pulp and waste paper
26 textile fibres
27 crude fertilizers
28 metalliferous ores
29 crude animal
32 coal, coke
33 petroleum
34 gas
35 electric current
41 animal oils
42 fixed veg fats and oils,
crude
43 animal or veg fats and oils
processed
51 organic chemicals
52 inorganic chemicals
53 dyeing, tanning
54 medicinal products
55 essential oils
56 fertilizers other than 272
58 plastic in primary forms
59 chemical materials n.e.s
61 leather
62 rubber manufactures
63 cork and wood
manufactures
64 paper, paperboard articles
65 textile yarn
66 non-metallic minerals
67 iron and steel
68 non-ferrous metal
Comoros Djibouti Kenya Mauritius Zambia Zimbabwe
0.0
0.0
0.0
0.0
2.5
0.0
0.1
0.3
0.1
0.2
0.2
0.0
2.7
1.1
0.0
0.5
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.1
0.0
0.0
0.2
0.0
0.0
0.0
5.2
0.4
0.0
0.1
0.0
0.0
0.0
0.0
0.0
536.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.1
0.0
0.1
0.0
0.3
0.0
0.3
0.0
0.0
3.6
1.4
0.0
0.0
0.0
0.1
1.8
0.3
0.8
0.0
0.1
0.0
0.0
0.0
0.1
2.2
1.5
10.8
9.0
190.3
0.0
4.8
0.2
5.3
2.9
0.3
0.0
0.0
0.0
7.6
4.6
0.1
16.8
0.0
1.4
0.0
0.0
0.1
0.0
4.1
1.5
0.1
45.3
0.3
1.1
0.0
0.5
0.0
0.0
0.0
0.0
0.0
0.0
0.3
0.5
0.3
0.8
0.0
0.0
0.0
0.0
0.0
2.2
0.1
1.8
1.7
12.3
4.6
2.6
0.0
0.0
8.4
1.2
1.6
0.0
0.3
0.0
3.3
0.4
1.4
4.5
0.3
0.0
0.0
7.9
0.0
2.7
0.2
3.8
2.0
16.9
9.9
1.0
5.9
0.3
179.0
3.7
5.3
0.0
2.4
0.0
14.0
8.5
1.3
3.9
7.4
0.3
0.0
0.1
6.2
0.0
0.0
0.1
2.7
0.1
0.1
0.2
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.1
14.5
0.0
0.0
0.0
0.0
0.0
0.0
0.1
0.1
0.0
0.0
0.0
0.0
0.0
0.0
1.1
0.0
4.3
0.0
0.3
0.8
1.1
2.7
0.0
0.1
1.1
0.7
0.3
0.0
0.0
0.1
0.1
0.1
0.1
2.1
0.0
0.0
0.2
0.0
0.4
0.0
0.2
0.0
0.0
0.2
0.5
0.0
0.1
0.4
0.0
0.3
0.2
0.6
0.5
0.2
0.5
2.8
0.3
0.6
8.8
0.3
0.0
0.0
0.0
1.4
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.1
0.1
0.0
0.0
0.1
0.0
1.4
1.5
0.5
1.6
0.5
0.1
0.1
0.2
1.9
0.6
0.0
0.0
0.4
0.0
1.2
2.5
0.1
21.4
1.0
0.5
0.5
0.8
6.4
5.2
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69 manufactures of metal
71 power generating
machinery and equipment
72 machinery specialized for
particular industries
73 metal working machinery
74 general industrial
machinery
75 office machines
76 telecommunications
equipment
77 electrical machinery
78 road vehicles
79 other transport equipment
81 prefabricated buildings
82 furniture
83 travel goods, hand bags
84 articles of apparel and
clothing accessories
85 footwear
87 professional and scientific
apparatus
88 photographic apparatus
89 miscellaneous
manufactured articles
93 - Special transactions &
commod., not class.t
94 - Animals, live, n.e.s., incl.
zoo-animals
95 - Armored fighting
vehicles, arms of war &
ammunition
97 - Gold, non-monetary
99 - Non-identified products
Number of product lines with
revealed comparative
advantage (99 not counted)
Source: Authors calculations.
Angola
0.0
Comoros Djibouti Kenya Mauritius Zambia Zimbabwe
0.0
0.0
0.6
0.2
2.2
1.2
0.0
0.0
0.0
0.0
0.0
0.2
0.1
0.0
0.0
0.1
0.0
0.0
0.0
0.1
0.0
0.2
0.0
0.4
0.0
0.3
0.1
0.0
0.0
0.0
0.0
0.1
0.0
0.0
0.0
0.1
0.0
0.3
0.0
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.1
0.0
0.0
0.9
0.0
0.0
0.0
0.0
0.0
0.0
0.2
0.0
0.0
0.0
0.1
0.0
0.2
0.3
0.0
0.0
0.0
0.0
0.0
0.0
0.1
0.7
0.0
0.2
0.2
0.1
0.0
0.0
0.0
0.0
0.1
0.2
0.1
0.1
1.5
0.4
0.0
0.0
0.0
0.1
0.0
0.0
0.2
1.3
16.4
0.1
1.2
0.9
0.6
0.4
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.2
1.5
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.7
1.0
0.5
0.9
0.0
1.1
0.1
0.0
0.0
0.4
0.0
0.0
17.8
0.0
0.5
110.1
0.8
0.3
0.0
0.0
9.1
0.0
0.0
0.0
0.0
2.4
316.0
0.0
1.3
0.0
0.0
0.1
0.0
0.0
1.9
0.0
0.1
0.9
0.0
2
4
4
18
7
19
25
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D.
REGIONAL TRADE AGREEMENTS IN
SOUTH ASIA: PROSPECTS FOR INTRAREGIONAL TRADE COOPERATION
By Meeta Keswani Mehra, Manoj Pant, Saptarshi Basu Roy Choudhury and Amit
Sadhukhan
I.
Introduction and scope
The report attempts an analysis of trade liberalization efforts in contributing to
regional integration in the South Asian region. Most recently, these efforts have
culminated in the ratification of the South Asia Free Trade Area (SAFTA) Agreement
that was signed on 6th January 2004 by the South Asian Association for Regional
Cooperation (SAARC) countries, namely, India, Pakistan, Sri Lanka, Bangladesh,
Nepal, Bhutan, and Maldives and came into force on 1st January 2006. Afghanistan is
slated to join the SAFTA in January 2008. While the Free Trade Agreement (FTA)
within South Asia is of recent origin, subregional cooperation in trade and
development has been in existence for over three decades. This has taken the form of
instituting the SAARC, followed by the formation of the SAARC Preferential Trading
Agreement (SAPTA) as well as several bilateral and preferential trading arrangements
in the region. The important ones in the latter category are the India-Sri Lanka Free
Trade Area, the Indo-Nepal Trade and Transit Treaty and its extensions, the IndiaBhutan trade relationship, the BIMSTEC, the India-ASEAN Free Trade Area and the
India-Singapore Comprehensive Economic Cooperation, all of which have
contributed, in some measure, to promote intra-regional trade. The report aims to
briefly trace these developments towards regional trade cooperation, identifies
constraints posed in the past and the scope of intra-regional trade under the aegis of
the recently implemented SAFTA in contributing towards regional integration and
economic cooperation in the South Asia.
The South Asian region comprises eight SAARC nations, namely India, Pakistan, Sri
Lanka, Bangladesh, Nepal, Bhutan, Maldives and, recently Afghanistan as members,
The region accounts for around 23 per cent of the world population but produces a
mere 2.3 per cent of global GDP. In 2006 the region’s share in world trade was 1.6
per cent, although aggregate trade (exports plus import) flows accounted for a little
over 30 per cent of their GDP. The striking economic performance of the South Asian
region since the mid 1990s has made it emerge as one of the fastest growing regions
of the world. This has led many to believe that greater economic integration and freer
trade will play an ever critical role in furthering potential for economic growth and
improve other development indicators such as literacy, health, access to energy and
infrastructure, and such like.
This part of the report begins by providing the geo-political context in which these
attempts toward regional cooperation were forged and helps to understand as to why
there remains vast unexploited potential for greater regional cooperation and gains
from trade to be reaped. This is followed by an account of the two agreements, the
SAARC Preferential Trading Arrangement (SAPTA) and the South Asia Free Trade
Area (SAFTA), as well as a brief discussion of the key bilateral/ multilateral
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UNCTAD Copyright © 2008
arrangements forged within and with countries outside the region. Thereafter, the
report examines the crucial economic indicators/ characteristics that help in bringing
out the potential for economic integration, in particular, expansion of intra-regional
trade, among the SAARC countries. The first of the quantitative analyses focuses on
the estimates of trade intensity between pairs of countries in the region. This is
accompanied by an aggregated regional time series analysis of the extent to which
intra-regional trade flows have been determined by regional trade trends with the rest
of the world, the regional GDP levels and the formation of preferential or free trade
areas. An estimation of revealed comparative advantage (RCA) indices by broadly
defined sectors forms the groundwork for some complementarity analysis of
prospective commodity trade flows within the region.
The report concludes by noting that:
1. Although there was a faster increase in intra-SAARC trade in the post-SAPTA
period, there is less conclusive evidence as to whether this uptrend can be
ascribed to the formation of the SAPTA. By comparison, SAFTA is of very
recent origin and its impact on trade flows is yet to be realized.
2. Despite the growth in intra-regional trade over 1995-2005, the region as a
whole had 95 per cent of its exports directed to the rest of the world and
imported close to 96 per cent from the rest of the world. Thus, its trade ties
continued to be primarily with countries outside the region.
3. The bilateral trade intensity indices and changes in it did not depict a steady
trend over 1995 through 2005. The results were mixed, depicting a decline in
trade intensity between some pairs of countries, while an increase in case of
some others.
4. The trend in intra-SAARC exports and intra-SAARC imports was found to be
positively related to SAARC’s exports and imports to the rest of the world,
respectively. The PTA/ FTA dummy was also found to have a significant
positive coefficient, implying that SAPTA and other bilateral trade agreements
within the region have contributed to the expansion of intra-group trade at the
aggregate regional level. The regression results are contrasting with those of
the trade intensity analysis and need to be reconciled with more detailed
country wise as well as product wise analysis, including the trade analysis of
newer service-oriented sectors such as banking, insurance, tourism,
telecommunications and information technology.
5. The RCA analysis of some broad product categories pointed toward an
absence of intra-regional trade complementarity. In fact, it showed a high
degree of competition in the export composition, thus pointing toward limited
scope for regional trade integration. Interestingly, however, despite limited
regional trade potential, regional integration did have a significant positive
impact on intra-regional trade in South Asia.
6. On the qualitative front, realization of the full potential of the SAFTA
Agreement has been circumscribed by both domestic protectionist interests
and political deadlocks between countries of the region. Owing to its large
membership, in terms of trade on a genuine Most-Favored-Nation (MFN)
basis, liberal rules of origin and streamlined trade facilitation measures, the
SAFTA Agreement has substantial scope for improvement.
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II.
Geo-political milieu of regional cooperation in South Asia
At the time of their independence and for a few years thereafter, the intra-regional
trade among three of the large economies of SAARC, namely India, Pakistan and Sri
Lanka, varied between 12-19 per cent of their total trade. This was a result of the dual
effect of trade protectionism in the developed countries and low trade barriers in the
South Asian subcontinent (Baysan et al. 2006). In the immediate period that followed,
countries of the region embarked upon a strategy of import-substitution
industrialization, anti-export discrimination, export controls and taxes, massive public
sector participation in production activity and tight regulation of the private sector.
The political problems between Indian and Pakistan at the time of partition in 1947
had a profound impact in inducing an inward-looking trade regime. The other
countries of the region also adopted a similar path of protectionist trade. Emerging as
an independent nation in 1971, Bangladesh also followed an import-substitution
strategy. Nepal and Bhutan, two small land-locked countries in the region, had
stronger trade ties with India at that time, but had erected barriers to trade with the
rest of the world. Maldives, a small island state in the Indian Ocean was the only
exception in that it had a small production base and continued to rely on trade within
and outside the South Asian region. With the exception of Sri Lanka, the regime of
protectionism lasted for over four decades. While the developed countries were
adopting outward-oriented trade policies through the 1950s and 60s and East Asia in
the 1970s, the South Asian region closed its doors to international trade. The strategy
of import-substitution industrialization was effective in limiting trade. In fact, the
anti-trade bias impinged upon intra-region trade more than the trade with the rest of
the world: official statistics point toward intra-regional trade as a share of total trade
reducing from 19 per cent in 1948 to 4 per cent by the end of 1950s, and 2 per cent by
1967. It rose marginally in the early 1970s and then declined again to reach a low
level of 2 per cent in 1990 (World Bank 2004).
Barring Sri Lanka that had taken the initiative to liberalize its trade regime as early as
in the 1970s, protectionist regimes prevailed in the region until the 1990s. India and
Bangladesh embarked upon liberalizing trade policies by reducing tariffs in the early
1990s. Freer trade regimes were ushered in steadily during the 1990s and the early
2000s. Nepal and Pakistan began to open up by reducing its tariffs in 1997. Until then,
Bangladesh had among the highest tariff levels in the region. Thus, most of the 1990s
witnessed a change away from stringent protectionism and quasi-autarkic economic
structures to a steady integration of the South Asian countries with the world
economy. However, the pace of reforms was cautious, selective, and far slower than
that adopted in the other Asian countries, including China. In fact, in response to the
East Asian financial crisis, India and Bangladesh backed off on tariff reforms in
1997/98, only to revive it in the early 2000s.
Concomitant with the general opening up to the world economy, South Asian
countries have been working toward broader multilateral regional and bilateral
cooperation (both within and outside the region). The formation of the SAARC in
1985 was a critical milestone covered to allow for discussions on better economic
cooperation and political harmony in the region, as well as to collaborate in
international forums on the issues of common interest. The SAPTA Agreement
emerged under the aegis of the SAARC as a means toward promoting trade and
economic integration in the region.
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III.
SAARC Preferential Trading Arrangement (SAPTA)
The formulation of SAPTA in 1993 and its implementation in December 1995 marked
the first step toward the formation of an economic union among the SAARC
countries. The agreement (which terminated on 31 December 2003) had exclusive
coverage of trade in goods and provided for gradual concessions on tariffs and nontariff measures in various stages. SAPTA included provisions for special treatment of
LDCs, including projects to identify export potential in specific sectors of their
economy. It also permitted countries to pull out of the agreement in the face of
balance of payments difficulties.
However, it was somewhat open-ended, in that the member nations had the freedom
to choose the pace, the list of items and the mode of trade liberalization. Thus, despite
its provisions and the four rounds of negotiations for the exchange of preferences, the
actual exchange under SAPTA remained rather limited. At the end of the first round
of negotiations, in 1995, concessions were granted on 226 products. It took four
rounds to agree upon 4'700 products (out of 6000) by the year 2000, with India
leading the tally (Table D1) (Kemal 2004).
Table D1: Preferences under SAPTA
Number of items
Bangladesh
521
Bhutan
233
India
2554
Maldives
178
Nepal
491
Pakistan
491
Sri Lanka
199
SAARC
4667
Source: Weerakon and Wijayasiri 2003 as quoted in Kemal 2004.
The persistence of high levels of protectionism, absence of meaningful offers and
exclusion of several large tradable sectors from tariff reductions, lack of trust among
the member nations and domestic political disturbances impeded the success of
SAPTA. Moreover, the agreement was institutionally weak in handling trade-related
disputes. The dispute settlement body of the agreement failed to impose time-bound
or legally binding decisions on the member countries involved in the dispute. To
make the transition from a preferential trade agreement to a full-fledged free trade
agreement, the Inter-Governmental Expert Group was established in 1996 to chalk out
a plan of action toward formation of an FTA. This transition from SAPTA to SAFTA
was envisaged to be completed by 2001. However, it took ten years of deliberations to
sign the SAFTA Agreement in January 2004 and another two years to activate it on 1
January 2006.
IV.
South Asia Free Trade Area (SAFTA) Agreement
The objectives of SAFTA indicate that the Agreement is more comprehensive in
scope and coverage (USAID 2005). It aims to “strengthen intra-SAARC economic
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cooperation to maximize the realization of the region’s potential for trade and the
development of their people.” The Agreement encompasses not just the removal of
tariff barriers but also non-tariff barriers, harmonization of standards and
certifications, trade facilitation, creating fairer competition and creating institutional
mechanisms for greater economic cooperation at the regional level (including
communication and transport infrastructure, removal of investment restrictions,
reducing exchange barriers and such like).
The institutional arrangements to manage the implementation of the agreement
comprise the SAFTA Ministerial Council (SMC) and the Committee of Experts
(CoE). The SMC is envisaged as the highest decision-making body of SAFTA that
will hold responsibility for the administration and implementation of the Agreement
within its legal framework. The SMC has the Ministers of Commerce/Trade of the
Contracting States as its members with the Chairperson changing every year on a
rotational basis. The SMC is backed by a CoE comprising senior economists with
expertise in trade matters. The CoE also acts as the dispute settlement body.
SAFTA specifies a phased reduction in tariffs for each of its member countries,
spanning the ten year period, 2006-2016. These reductions are envisaged to proceed
in two stages: 2006-08 and 2008-16. Moreover, tariff reductions will take place at
different rates for the least developed members (LDMs) namely Nepal, Bhutan and
Maldives as against the non-least developed members (NLDMs). NLMDs such as
India, Sri Lanka and Pakistan will reduce tariffs from the existing levels to a
maximum of 20 per cent and those tariff levels which are already below this will be
cut by 10 per cent per annum over 2006-08. Correspondingly, the LMDs will reduce
tariffs to a maximum of 30 per cent by 2008, and those levels that are below 30 per
cent will be reduced by 5 per cent annually until 2008. In the NLDMs, the subsequent
8-year period will have to attain tariff levels of 0-5 per cent for products from LDMs
by the third year of this phase and, thereafter over the remaining 5 years, at a rate no
less than 15 per cent per annum. The LDMs will cut down tariffs to 0-5 per cent over
the period 2008-2016, at a rate no less than 10 per cent annually.
To be eligible for tariff preferences, additional requirements in the form of rules of
origin, sensitive lists, safeguards and balance of payments, will have to be satisfied.
The rules of origin would specify how a good is being classified (as a proportion of
value added) in terms of it being produced in a member country. Here, more stringent
rules would tend to constrict scope for trade expansion. The agreement permits
exclusion of certain goods from the grant of preferences on grounds of national
security, public morals, and health or heritage value. Countries experiencing balance
of payments concerns or imports posing potential threat to competitive products at
home may also temporarily shelve the grant of preferences under the agreement.
As regards non-tariff barriers, the most significant component addressed is the
elimination of quantitative restrictions, which are not consistent with the World Trade
Organization (WTO) provisions and are not on the sensitive lists. Moreover, member
nations have to regularly inform on all non-tariff barriers to the SAARC Secretariat.
Unlike tariff reductions, however, no specific time frame or procedure has been laid
down for the removal of non-tariff barriers.
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Besides more relaxed tariff reductions and quantitative restrictions, the LDMs have
been extended favorable treatment, that is, the agreement provides for revenue
compensation for these countries for the loss of customs revenue. It deemed necessary
to establish the compensation mechanism for this before the tariff reductions were to
take-off in January 2006.
The implications of SAFTA to integrate the economies of the region remain to be
seen. Most recently, the Declaration of the Fourteenth SAARC Summit held in New
Delhi on 3-4 April 2007 stressed the need for ensuring effective market access under
SAFTA through steady trade liberalization as well as catalyze cooperation in other
areas, namely, trade in services and investment promotion, the inclusion of which
would be critical to SAFTA’s success.
The subsequent analysis reveals that intra-regional trade has grown at a faster pace
over the last decade as compared to the period prior to that. However, it is hard to
discern if this growth is ascribable to stronger bilateral and multilateral trade ties
among region’s countries (both within and outside South Asia) or to the regional
multilateral trade liberalization initiatives, such as the SAPTA or the SAFTA.
V.
Bilateral initiatives
The countries of the region have perceived the economic gains that could accrue from
trade and hence, have continued to undertake initiatives for freer trade. In order to
overcome the political deadlocks associated with the multilateral approach, countries
have been forging bilateral links with countries within and outside the South Asian
region. There exist several trade-related bilateral treaties between the countries of the
region; a discussion on these ensues.
Indo-Sri Lanka Free Trade Area
An immediate implication of liberalization embarked upon by Sri Lanka in the 1970s
and lasting through the 1980s and the 1990s was the economic gains from trade
accruing to exporters from India. The Indo-Sri Lanka FTA was forged to address the
concerns of growing trade deficit in Sri Lanka vis-à-vis India. In view of the political
deadlocks impeding the progress of SAPTA, an FTA with India was perceived by the
Sri Lankan government as an effective option. The agreement came into force in
January 2000 and included provisions for phased tariff elimination, identification of
negative lists, the rules of origin and safeguards provisions, including anti-dumping
and anti-subsidies policies.
While the provision of negative lists did constrain exports from one country to
another in case of some commodity groups, in general, the agreement has been
instrumental in boosting trade between the two nations. Studies point toward the fact
that this has been in an entirely new range of products, not previously exported by Sri
Lanka to India or vice versa (Baysan et al. 2005; World Bank 2004). Batra (2005)
states that, consequent to this free trade accord, the Sri Lankan exports to India rose to
3.6 per cent of its aggregate exports from only 1 per cent in 1999. In terms of relative
ranking, India emerged as the fifth-largest destination for Sri Lankan exports in 2002,
compared to its rank in the 20s in the mid-1990s. At the same time, India is the largest
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source of imports for Sri Lanka, with its share at 14 per cent of total imports into the
latter.
India-Nepal Treaties of Trade and Transit
The trade links between India and Nepal are of historical origin. The first official
trade agreement between the two countries, the Indo-Nepal Treaty of Trade was
formalized in 1950. It was revamped in 1961 and subsequently in 1971 to incorporate
the specific provisions on transit facilities extended by India to Nepal for the latter’s
trade with third countries, as well as to seek cooperation in controlling unauthorized
trade across the borders. The Treaty had to be suspended during March 1989 to May
1991 on account of a trade and transit crisis, but again revived in December 1991
following the change of governance in Nepal. In December 1996, a new Treaty of
Trade was forged with the proviso for automatic renewal in every five years. It
permitted more relaxed rules of origin requirements for Nepalese manufactures.
Subsequently, a Treaty of Transit was signed to free up transit routed between Nepal
and Calcutta (World Bank 2004). In 2002, India signed an FTA with Nepal that
enabled several Indian joint ventures to be operational in Nepal, as also to expand the
volume of trade and investment flows. As it stands, almost 200 Indo-Nepalese joint
ventures are active in Nepal and India’s trade with Nepal accounts for as much as 40
per cent of Nepal’s aggregate trade, also entailing a positive trade balance for it (Batra
2005).
Trade Agreement between India and Bhutan
Traditionally, there has been an inherent recognition of free trade arrangements
between India and Bhutan as per Article V of the Treaty of Perpetual Peace and
Friendship signed by the two, way back in 1949. Being landlocked, Bhutan has
historically had strong trade links with India. The trade relations were made explicit
and formalized in 1972 with the promulgation of the Agreement on Trade and
Commerce, which has been renewed periodically in 1983, 1990 and 1995. This bunch
of agreements has extended its domain to include technical and financial assistance
from India for the economic development and diversification of the Bhutanese
economy. In the interest of industry protection, the agreement allows Bhutan to
impose non-tariff barriers on commodities from India, with the proviso that these will
be no stricter in impact than those applied to goods from third countries. Currently,
Bhutanese trade with India is dominated by electricity exports to India from the
Chukka hydroelectric project, financed and built by Indian companies. By far, this
economic activity is larger than production and trade in any other agricultural or
manufactured good (World Bank 2004). In 1998, Bhutanese exports to India
accounted for as high as 94 per cent of its aggregate merchandise exports (UNCTAD
2006/07).
Trade Agreement between Bangladesh and Bhutan
On account of geographical proximity, Bangladesh is the second largest destination
(after India) for Bhutanese exports. In May 2003, Bangladesh and Bhutan renewed the
earlier (1980) Agreement on trade for another five years to offer tariff concessions to
exploit each other’s market potentials. Besides tariff preferences, the accord covers
aspects relating to trade and transit facilitation, controlling illegal cross-border trade,
and cooperation in transport infrastructure. Despite the preferential agreement,
Bangladesh’s import duty rates on exportable goods from Bhutan (namely apples and
oranges) continue to be excessive. Consequently, although the two-way trade volume
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is quite insignificant, accounting for only 4 per cent of Bhutan’s total exports in 1998
and a negligible fraction of Bangladesh’ aggregate export value over 2000-04, Bhutan
enjoys a trade surplus with Bangladesh (UNCTAD 2006/07).
Indo-Bangladesh Trade and Transit Agreement
Traditionally, India and Bangladesh have shared an intensive trade relationship with
each other, wherein, Bangladesh was the largest export market for Indian
commodities in the region. After its independence, in 1972, Bangladesh forged a trade
and transit agreement with India that provided for the use of waterways, railways and
roadways for commerce between the two countries. This agreement, which was
renewed on a yearly basis, was revoked during 1977-80. But subsequently, it
culminated in a new agreement being signed in 1980, which has been renewed
periodically. While facilitating existing trade flows, these agreements remained
limited in scope and were beset with constraints on cross-border movement of cargo
by road, illegal movement of goods, and lack of meaningful preferential trade
concessions (World Bank 2004). While the share of Bangladesh’s exports to India in
its total exports rose marginally from 0.72 per cent in 1995 to 1.26 per cent in 2004,
the share of India’ exports to Bangladesh in the former’s aggregate exports fell
steeply from 3.4 per cent to 1.7 per cent during 1995-2005 (UNCTAD 2006/07).
India-Thailand Free Trade Area
India and Thailand forged an FTA in 2003 for establishing a free trade area that
would cover goods, services and investment over the next ten years. The Indo-Thai
FTA includes in its domain as many as 84 items and is quite comprehensive in
approach in that, in the first phase itself, it includes services, investment, economic
cooperation and goods like food items, tourism, auto parts, and electronic goods. As
per the agreement, negotiations on goods were to commence in January 2004 and
concluded in March 2005. The FTA for zero duty imports is envisaged to be effective
by 2010.
India-Singapore Comprehensive Economic Cooperation
A comprehensive agreement for economic cooperation between India and Singapore
was signed in April 2003, which came into force in August 2005. The aim of this
comprehensive agreement is to expand the individual partner country’s domestic
market, through economic integration, and achieve growth and development through
the enhancement of trade and investment flows. Since then, bilateral trade and
investments between India and Singapore have grown steadily to reach unprecedented
levels. In 2006, India became Singapore’s twelfth largest trading partner with bilateral
trade between them valued at almost Singapore $20 billion. This amounted to an
increase of around 20 per cent over 2005, making India one of the Singapore’s fastestgrowing trade partners. The agreement also envisages to promote regional economic
integration and with other countries in the South East Asian region, in particular the
ASEAN.
VI.
Multilateral initiatives outside the region
Bangkok Agreement
Instituted in 1975, the Bangkok Agreement is the oldest preferential trade agreement
among the Asian developing countries. Formally called the Agreement on Trade
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Negotiations among Developing Member Countries of the Economic and Social
Commission for Asia and the Pacific (ESCAP), the Bangkok Agreement was
originally signed by Bangladesh, India, the Lao People’s Democratic Republic, the
Republic of Korea and Sri Lanka. The agreement covers concessions on tariffs,
reduction of non-tariff barriers, according MFN status to member countries, rules of
origin and preparation of national lists for exchange of preferential concessions.
Despite some expansion in scope and coverage, there has been no appreciable impact
on trade flows among the member countries under the Bangkok Agreement. This is
because, first, the number and level of concessions allowed by countries were not
sufficient to boost the trade flows markedly, and second, over the 1990s, both
unilateral liberalization efforts as well as multilateral initiatives such as the SAPTA
had begun to play a more important role. However, China’s accession to the
agreement in 2001 was perceived as a significant milestone covered in terms of
revitalizing it, but in view of the minimal grant of concessions by China therein, it
seems that the agreement would largely maintain a symbolic or political stature
(World Bank 2004).
BIMSTEC
The Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation
(BIMSTEC) was launched in December 1997 and has membership of Bangladesh,
India, Myanmar, Sri Lanka, Thailand, Bhutan, and Nepal. At a ministerial meeting
held in February 2004, the BIMSTEC member countries concluded an FTA
Framework Agreement to encourage goods trade and investment among themselves,
as well as to attract outsiders to trade with and invest in BIMSTEC. All the members,
except Bangladesh (due to its domestic procedures), became signatories to the
framework agreement in the 6th Ministerial Meeting. Bangladesh joined the
framework agreement later, in June 2004. The Trade Negotiating Committee (TNC)
was setup and had its first meeting in Bangkok in September 2004. As stated in the
adopted Terms of Reference, Thailand would be the permanent chair of the TNC
although the host country is proposed to be rotated. TNC’s negotiation areas cover
trade in goods and services, investment, economic cooperation, trade facilitations and
technical assistance for LDCs in the domain of BIMSTEC. It was agreed that once the
negotiations on trade in goods are completed, the TNC would proceed with
concessions on trade in services and investment.
India-ASEAN Framework Agreement on Comprehensive Economic Cooperation
India had entered into an FTA Framework Agreement with the ASEAN in October
2003. As per the Indo-ASEAN pact, the negotiations on commodities trade were
scheduled to conclude by June 2005 and that for services and investments to
commence at the beginning of 2005 and get completed in 2007. A TNC was
constituted to frame the rules of origin and work out the modalities for tariff reduction
to make the FTA effective.
India has agreed to grant a special and differential treatment to the ASEAN group and
align its peak tariff levels accordingly. Through January 2006 to December 2011,
India will reduce its tariff levels for Brunei, Cambodia, Laos, Indonesia, Malaysia,
Myanmar, Singapore, Thailand and Vietnam, in reciprocity to tariff concessions from
Brunei, Indonesia, Malaysia, Singapore and Thailand. The new ASEAN members like
Cambodia, Laos, Myanmar and Vietnam (CLMV) will do so by December 2016.
Philippines, which has expressed its reservations to the FTA has agreed to eliminate
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its tariffs on a reciprocal basis for India by 2016. India will unilaterally extend
concessions on 11 tariff lines to CLMV. The volume of trade and FDI flows between
ASEAN and India has started expanding recently, particularly with Malaysia and
Singapore.
VII. Broad economic and trade characteristics of South Asia
A broad discussion of the economic features and trade characteristics of the countries
of the SAARC region provides the context for the analysis of scope for future regional
trade integration.
VII.1 Economic characteristics of the SAARC region
The aggregate GDP in PPP US$ of the SAARC region has increased continuously
over the period 1984-2007, registering a compound annual rate of growth of 8.4 per
cent over this period (Figure D1). This growth performance implies that it is one of
the fastest growing regions of the world. Interestingly, the compound growth rate over
the period 1984-1994 was 8.3 per cent, whereas the same variable, over the period
1995-2005, grew at 8 per cent annually. So clearly, in the post-SAPTA period, there
was no spurt in growth as far as aggregate regional GDP is concerned.
Figure D1: SAARC’s GDP (billion US$ in PPP terms)
6000
5000
4000
3000
2000
1000
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
YE
AR
0
Source: IMF 2007.
Again, SAARC’s share in aggregate world GDP did not increase significantly. In the
year 1984, SAARC’s GDP (in PPP US$) was 4.8 per cent of the aggregate world
GDP; it rose to 6.1 per cent in the year 1995, and in 2007 it stood at 7.8 per cent of the
world GDP (Figure D2).
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Figure D2: Share of SAARC’s GDP in world GDP (per cent)
9
8
7
6
5
4
3
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
YEAR
2
1
0
Source: IMF 2007.
VII.2 Trade characteristics of the SAARC region
A look at the trend in trade flows within the SAARC region helps capture the
effectiveness of SAPTA/ SAFTA or other bilateral arrangements as the trade
liberalization efforts have unfolded at the regional level. Clearly, as indicated in Table
D2, the SAARC did seem to witness an upswing of intra-group trade in the postSAPTA period. What remains to be shown is whether this uptrend could be ascribed
to the formation of multilateral preferential/ free trade areas or due to overall trade
liberalization embarked upon by the countries of the region in the 1990s.
Table D2: Intra-group trade of the SAARC region (US$ million)
Year
1984
1989
SAARC exports 614.95 862.25
Source: UNCTAD 2006/07.
1994
1'433.54
1999
2'180.00
2004
5'705.84
2005
7'062.04
At the same time, what is interesting is to note that the growth of intra-group exports
was quite fluctuating over the period, even becoming negative in some years, during
the period of analysis (Figure D3).
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Figure D3: Year to year growth of intra-group exports of SAARC (per cent)
0,50
0,40
0,30
0,20
0,10
20
03
20
01
19
99
19
97
19
95
19
93
19
91
19
89
19
87
YE
-0,10
19
85
AR
0,00
-0,20
Source: UNCTAD 2006/07.
In quantitative terms, intra-regional trade depicted a steadily growing trend in recent
years. The compound growth rate of intra-SAARC group trade was close to 8 per cent
over the period 1984-1994, whereas the same variable grew around 12 per cent over
the period 1995-2005. So, we can observe a faster pace of growth of intra- group trade
in the post-SAPTA time period.
However, a look at the ratio of SAARC’s intra-group trade to its aggregate GDP is
more revealing. It shows that over the entire period of analysis, namely 1984-2005,
this share remained below 1 per cent, implying large unexploited potential for intraregional trade. In the pre-integration period (1984-1994) the average intra-regional
trade of SAARC was 0.24 per cent of its GDP, whereas the same variable rose to a
mere 0.50 per cent in the post integration (1995-2005) period. Thus, preferential
trading agreements made only a slight contribution to increase the share of intra-group
trade in aggregate regional GDP (Figure D4).
Figure D4: Proportion of SAARC’s intra-group trade to its aggregate GDP (per
cent)
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
20
03
20
01
19
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
YE
AR
0
Source: UNCTAD 2006/07.
Next, if one analyzes the proportion of SAARC’s intra-regional exports to its exports
to the rest of the world (ROW), it is evident that it rose from an average of around 4
per cent over the period 1984-1994 and around 5 per cent over the period 1995-2005.
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So, it is clear that for the region as a whole approximately 95 per cent of aggregate
exports are directed towards ROW (Figure D5).
Figure D5: Proportion of SAARC’s intra-regional exports to its exports to ROW
(per cent)
7
6
5
4
3
2
1
20
03
20
01
19
99
19
97
19
95
19
93
19
91
19
89
19
87
R
YE
A
19
85
0
Source: UNCTAD 2006/07.
Correspondingly, the proportion of intra-group imports in total imports was an
average of 2.4 per cent during 1984-1994 and rose to 4.1 per cent over the period
1995-2005. This implies that a bulk of imports, around 96 per cent, was sourced from
outside the region (Figure D6).
Figure D6: Proportion of SAARC’s intra-regional imports to its imports from
ROW (per cent)
6
5
4
3
2
1
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
0
year
Source: UNCTAD 2006/07.
A look at the commodity composition of SAARC’s exports to and imports from ROW
as in 2005 shows that manufactured goods exports (especially in other manufactured
goods category) are most important (at 72 per cent), followed by exports of textile
fibers, yarn, fabrics and clothing (at 29 per cent) and primary commodities (around 27
per cent). Across countries of SAARC, manufactured goods exports predominate in
all countries, except Maldives, while Bangladesh, Pakistan, Nepal and Sri Lanka have
large shares of textile exports. As far as imports are concerned, the product group that
again leads the tally is manufactured goods (at 52 per cent) of which a bulk is
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contributed by machinery and transport equipment and other manufactures. This is
followed by primary products and fuel imports, at shares of 42 per cent and 30 per
cent respectively. Among the SAARC countries, the relatively larger importers of
manufactures are Bhutan, followed by Sri Lanka and Bangladesh and India leads in
fuel import dependence (Table D3).
Table D3: Aggregate commodity composition of SAARC’s trade with the world
in 2005
Product
Primary commodities, including fuels
(SITC 0 + 1 + 2 + 3 + 4 + 68)
All food items (SITC 0 + 1 + 22 + 4)
Agricultural raw materials (SITC 2 - 22 - 27 - 28)
Ores and metal (SITC 27 + 28 + 68)
Fuels (SITC 3)
Non-ferrous metals (SITC 68)
Manufactured goods (SITC 5 to 8 less 68)
Chemical products (SITC 5)
Machinery and transport equipment (SITC 7)
Other manufactured goods (SITC 6 + 8 less 68)
Iron and steel (SITC 67)
Textile fibers, yarn, fabrics and clothing
(SITC 26 + 65 + 84)
Source: Estimated from data from UNCTAD 2006/07.
Export
share
27%
Import
share
42%
Aggregate trade
share
36%
10%
2%
6%
9%
2%
72%
10%
9%
54%
4%
29%
5%
2%
4%
30%
2%
52%
10%
23%
18%
3%
4%
7%
2%
5%
21%
2%
60%
10%
18%
32%
4%
14%
Further, a look at SAARC’s Intra-group trade by broad products categories reveals
that food, fuels, chemical products, other manufactured goods and textiles fibers,
yarn, fabrics and clothing are dominant, with their shares in intra group exports as in
2005 at 21 per cent, 18 per cent, 12 per cent, 29 per cent and 17 per cent respectively
(Table D4). Their dominance prevails even in case of intra-group imports. Over the
ten year period, 1995-2005, the share of primary commodities increased substantially
from 32-35 per cent to 47-48 per cent while that of manufactured goods declined (but
less significantly) from around 59 per cent to 52-53 per cent. The share of textile
fiber, yarn, fabrics and clothing also depicted a decline in case of both intra-exports
and imports.
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Table D4: Commodity composition of intra-group trade for the SAARC region
in 2005
Product category
Primary commodities, including fuels
(SITC 0 + 1 + 2 + 3 + 4 + 68)
All food items (SITC 0 + 1 + 22 + 4)
Agricultural raw materials (SITC 2 - 22 - 27 - 28)
Ores and metal (SITC 27 + 28 + 68)
Fuels (SITC 3)
Non-ferrous metals (SITC 68)
Manufactured goods (SITC 5 to 8 less 68)
Chemical products (SITC 5)
Machinery and transport equipment (SITC 7)
Other manufactured goods (SITC 6 + 8 less 68)
Iron and steel (SITC 67)
Textile fibers, yarn, fabrics and clothing (SITC 26 + 65 + 84)
Source: Estimated from data from UNCTAD 2006/07.
Exports
1995
2005
39%
48%
Imports
1995
2005
32%
47%
30%
4%
2%
2%
1%
59%
10%
14%
35%
5%
23%
23%
5%
3%
2%
1%
59%
14%
13%
32%
4%
22%
21%
4%
6%
18%
5%
52%
12%
11%
29%
6%
17%
25%
4%
8%
10%
5%
53%
14%
13%
26%
5%
14%
VII.3 Assessing the scope for intra-regional trade
a)
Trade Intensity Index (TII)
The analysis of trade intensity aims to bring out whether a country, given the relative
size of its own export market and the relative size of its partner’s import market, does
export to that partner as much as is expected. The formula for TII is given as:
Iij= (Xij / Xi) / [Mj / (Mw-Mi)],
where Iij, the intensity of country i’s exports to country j, is defined as the share of
country j in country i’s total exports (Xij / Xi) as a proportion of the share of j’s
imports, Mj, in total world imports, net of i’s imports from the rest of the world (Mw –
Mi). Intuitively, the TII denotes the export intensity of a country vis-à-vis the partner
country, normalized by the aggregate import intensity of the partner country with the
rest of the world. In general, trading partners with TIIs greater than unity are said to
have an ‘intensive’ trade relationship, namely, that the countries trade more than
would be expected, given the relative size of the market for imports.
The trade intensity analysis for the countries of the SAARC region helps bring the
degree of trade intensity and the trend in it over the years 1994/95 and 2004/2005.
The data were taken from the merchandise trade statistics of UNCTAD (UNCTAD
2006/07) and indices have been estimated based on trade flows expressed in current
$US.
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Table D5: Trade Intensity Indices for intra SAARC trade, 1994/95 - 2004/05
Partner
Reporter/
Exporter ↓
Bangladesh
1994
2004
or
or
1995
2005
Bangladesh
Bhutan
India
Maldives
58.2
27.3
Nepal
Pakistan
1.1
15.5
35.3*
12.8
7.4**
11.2
India
1994
2004
or
or
1995
2005
Nepal
1994
2004
or
or
1995
2005
Pakistan
1994 2004
or
or
1995 2005
Sri Lanka
1994
2004
or
or
1995
2005
1.1
1.2
1.2
0.4
4.3
2.8
3.8
1.4
152.1
122.9*
1.6
20.3
13.2*
49.3
1.1
2.9
0.2
0.5
13.6
132.3
24.9
141.6
19.8
0.7
55.7**
1.6
1.5
1.3
7.1
11.6
Sri Lanka
2.8
1.9
1.2
6.8
0.2
0.3
Source: Estimated from data from UNCTAD 2006/07.
Notes: * Figures refer to year 1998. ** Figures pertain to 2003.
6.6
2.9
From the indices compiled in Table D5, it is clear that the intensity of exports within
the region generally exceeded unity, with the exception of Maldivian exports to India
and Sri Lankan exports to Nepal. In relative terms, however, Bangladesh’s export
intensity with Nepal and India remains low. In fact, even with its other trading
partners, namely Pakistan and Sri Lanka, with whom Bangladesh’s exports depict
higher trade intensity, there has been a distinct decline from the year 1994/95 to
2004/05. Pakistan’s trade intensity with India and Nepal are also relatively low. It
shows a marginal increase with respect to India and a decline with Nepal over the
period under consideration. Bhutan’s trade intensity with both Bangladesh and India
has been very high but showed a decline over 1994/95 and 2004/05. Moreover,
India’s trading intensity with Bangladesh, Pakistan’s intensity with Bangladesh and
Sri Lanka’s intensity with both Bangladesh and Pakistan depicted also registered a fall
over the concerned period. Thus, the formation of SAPTA did not contribute to
raising the tendency of trade amongst the SAARC countries. The interesting
exceptions were strong and growing trade links between India and Sri Lanka and vice
versa, Bhutan’s with Nepal, Nepal’s with Bangladesh and India, and Pakistan’s with
Sri Lanka, where greater export integration was observable in the post-SAPTA
period. Being landlocked, both Bhutan and Nepal have traditionally had strong trade
ties, reflective in high trade intensities with respect to India.
On the aggregate, the trade intensity indices and changes therein over time from the
pre- to the post-SAPTA period did not depict a consistent positive trend over time
(Pitigala 2005). In fact, Pitigala (2005) goes on to show that the intensity indices,
when corrected for geographical proximity, fall below what would be expected for
some of the large economies of the region, namely, Pakistan, Bangladesh and Sri
Lanka’s trade with India. The evidence of uneven trade intensity changes implies that
neither the volume of trade nor forging of multilateral preferential trading
arrangements could be important determinants of growth in intra-regional trade.
Pitigala (2005) also demonstrates that the SAARC countries have shown an
increasing tendency to trade with partners elsewhere in the world, on account of
cultural, ethnic and religious affinity. For example, Pakistan demonstrated the most
robust evidence in this regard, with its growing trade with geographically far placed
countries such as the Islamic countries of Africa and the Middle East as compared to
the countries of the SAARC region. The same is true for India’s growing trade ties
with selected countries of the ASEAN region.
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Since the examination of bilateral trade intensities provides a mixed picture as regards
trends in regional integration in the post-SAPTA period, we carry out a more
aggregated investigation of regional trade flows over the past two and a half decades.
This is based on a simple regression analysis.
b)
Partial regression analysis for determinants of intraregional trade
The partial regression analysis aims to assess the extent to which the formation of
SAPTA and other bilateral trade agreements have impacted intra-SAARC trade at the
aggregate level. As discussed earlier, the region, in general, embarked on trade
liberalization in the early 1990s. SAPTA came into force in December 1995 and the
subsequent transition to a free trade agreement happened in January 2006 in the move
to SAFTA. To study the effects of these trading agreements on intra-regional trade,
we carry a regression analysis, separately for both aggregate export and import flows
within the region, through the 25-year period, 1980-2005. Thus, we have a more or
less commensurate time period for both before as well as after the SAFTA agreement.
If we look at the time series of intra-group exports and intra-group imports for the
region over this period, it depicts a somewhat fluctuating tendency in the initial years,
but grows steadily thereafter, especially in the 1990s with substantially high rate of
growth in the last few years of our analysis. The exports from the SAARC region to
ROW (total exports minus intra-group exports) show an even steeper rate of growth
over the period than that of the SAARC. A similar trend for ROW imports (total
imports minus intra imports) is observable (see Figures D7 and D8 below). The
growth in intra exports and intra imports can be ascribed to various factors such as
trade agreements among the SAARC countries themselves as well as those forged
with ROW, growth in the size of the economies of these countries and that of the
world economy as a whole.
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Figure D7: Intra-group exports and SAARC’s exports to ROW (current US$
million)
140000
120000
100000
80000
Rest of the World
Export
60000
Intra Export
40000
20000
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04
0
Source: UNCTAD 2006/07.
Figure D8: Intra-group imports and SAARC’s imports from ROW (current US$
million)
200000
180000
160000
140000
120000
Rest of the World
Import
100000
Intra Import
80000
60000
40000
20000
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04
0
Source: UNCTAD 2006/07.
We try to probe into the determinants of intra-group trade. One aspect that needs a
closer scrutiny is whether there exists a degree of substitution between intra-group
trade and the region’s trade with ROW. The other is the extent to which growth in
intra-group trade could be explained by the size of the economy or the underlying
time trend. Finally, the effect of the institutional change is captured by a dummy
variable, which is a proxy for the formation of SAPTA and strengthening of bilateral
trade ties amongst member countries of the SAARC. We specify two models in the
partial analysis, one representing intra-regional exports of the SAARC countries and
the second representing intra-regional imports. To explain these two variables through
the last 25 years, we introduce aggregate exports of the SAARC countries to ROW as
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an explanatory variable in the first model and aggregate imports from ROW in the
second model. These two explanatory variables capture trade agreements other than
intra-regional trade agreements and help identify the substitution effect between intragroup trade and trade with ROW. We also introduce aggregate GDP of the SAARC
countries as another explanatory variable in both the export and import equations.
This is because the growth of GDP reflects the expansion in the size of economic
activity and is postulated to have an important effect on intra-regional trade. Time is
included as the third explanatory variable in the model, and it captures the growing
trend in intra-group trade. Finally, we introduce a dummy variable in the model which
assumes a value zero from 1980-1994 and one from 1995 onwards. This binary
variable intends to capture the effect of the various regional trade agreements
(particularly SAPTA and SAFTA) on intra-SAARC trade.
c)
The model
The analysis spans the period 1980-2005. The estimation relies on time series data,
wherein for each year under consideration we capture the regional scenario by taking
aggregate values of the variables for the eight SAARC countries put together. The
data are obtained from UNCTAD’s Handbook of Statistics (UNCTAD 2006/07). The
following two equations summarize the two models:
Intrax = β 0 + β1 Re stx + β 2 gdp + β3t + β 4 SAPTA + u1
(1)
Intram = α 0 + α1 Re stm + α 2 gdp + α 3t + α 4 SAPTA + u2
(2)
where Intrax denotes SAARC’s intra exports, Restx refers to SAARC’s exports to
ROW, t is the time trend, and SAPTA is the dummy variable that takes a value of 1 for
the period 1995-2005 and 0 otherwise. Intram is intra-regional imports and Restm
denotes imports of SAARC from ROW. The aggregate trade flows and GDP are
measured in current million dollar and the time trend is scaled with 1980 taking a
value of 1, 1981 taking a value of 2 and so on. α i and βi are unknown parameters to
be estimated. u1 and u2 are the error terms, assumed to be distributed with zero mean
and a constant variance. This completes the specification of the model.
From the data plotted in Figures D7 and D8, the signs of β1 and α1 are expected to be
positive. What is also predictable is that GDP will be positively related to intra-group
exports due to the predominance of the scale (of economic activity) effect, while its
impact on the intra-group imports may be positive or negative. It may be positive as a
higher GDP implies higher consumption and imports. On the other hand, it may be
negative since a large scale of production within the region may, by itself, reduce the
need to rely on imports from other countries in the region. Intuitively, the time trend
and the SAPTA dummy are expected to impact intra-group trade in a positive fashion.
Intuitively, these are the probable findings of our estimation exercise.
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d)
Estimation results
We first estimated the two models with the absolute values of the variables.
Subsequently, we also attempted a log linear transformation of the dependent variable
and select independent variables, namely, the rest of the world exports and imports
and GDP. The estimation involving log values gives us much better results. We,
therefore, present here the results of the second estimation exercise. Equation (1) is
estimated by regressing log(Intrax) on log(Restx), log(gdp), time and the dummy, and
similarly equation (2) is estimated by regressing log(Intram) on log(Restm), log(gdp),
time and the dummy variable. Tables 6 and 7 summarize the results of the estimation
using the OLS method.
Table D6: Results of multivariate regression for intra-regional exports
Dependent variable: log(Intrax)
Method: Least Squares
Sample: Time series from 1980-2005
Included observations: 26
Variable
Coefficient Std. Error
Constant
-4.012579 1.199617
Log(Restx)
0.952823 0.179324
Log(gdp)
0.543024 0.327965
Time
-0.220178 0.057933
Dummy variable
0.062638
R-squared
0.985399
Adjusted R-squared 0.982618
S.E. of regression 0.046372
Sum squared resid 0.045158
Log likelihood
45.73140
Durbin-Watson stat 1.609263
t-Statistic
-3.344883
5.313410
1.655740
-3.800573
0.037047 1.690785
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)
Prob.
0.0031
0.0000
0.1126
0.0010
0.1057
3.135289
0.351733
-3.133185
-2.891243
354.3245
0.000000
Table D7: Results of multivariate regression for intra-regional imports
Dependent variable: log(Intram)
Method: Least Squares
Sample: Time series from 1980-2005
Included observations: 26
Variable
Coefficient Std. Error t-Statistic
Constant
2.294030 2.537075 0.904203
Log(Restm)
1.908277 0.467199 4.084501
Log(gdp)
-1.483981 0.816548 -1.817382
Time
0.257076 0.114829 2.238764
Dummy variable
0.140803 0.061886 2.275186
R-squared
0.970692
Mean dependent var
Adjusted R-squared 0.965109
S.D. dependent var
S.E. of regression 0.072223
Akaike info criterion
Sum squared resid 0.109540
Schwarz criterion
Log likelihood
34.21185
F-statistic
Durbin-Watson stat 1.510671
Prob(F-statistic)
84
Prob.
0.3761
0.0005
0.0835
0.0361
0.0335
3.127460
0.386653
-2.247065
-2.005124
173.8796
0.000000
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As can be seen from Table D6, the estimation yields a high value of R2 (of 0.98) and a
significant F-statistic. All the explanatory variables have got significant coefficients
except GDP and the dummy which are significant only at around 10 per cent level of
significance. Restx is highly significant and got a positive sign, conforming to our
expectation that there is no significant substitution between intra-group exports and
exports to ROW. On the aggregate, the two grow together in a complementary
fashion. Contrastingly, the time variable depicts a negative relationship to intra-trade.
The dummy coefficient is also positive implying that the SAPTA and other bilateral
trade agreements have contributed to intra-group exports, at least at the aggregate
regional level.
We might need to reconcile this with the results of the trade intensity analysis
(presented above) that throws up mixed results for pairs of countries as regards
changes in bilateral trade intensities in the pre- and post-SAPTA period. What is clear
from the regression analysis is that, at least for the SAARC countries as a group,
SAPTA and other trade arrangements have had a positive effect on intra-regional
export. Further, GDP has also got a positive effect on intra-exports, albeit it is a less
significant determinant of it. Interestingly, the time variable has a counter-intuitive
sign, although the size of the coefficient is smaller relative to Restx and GDP. Though
the volume of intra exports has increased over the years, the time variable does not
seem to capture this. To verify this, we dropped the time trend variable and estimated
the model again. This neither altered the signs of the other three independent
variables, nor did Restx or the SAPTA dummy lose their significance.
Table D7 compiles the estimation results for intra-group imports and indicates that the
results are highly significant here as well. The value of R2 is 0.96, and the F-value is
significant. The effect of Restm is significantly positive and so are the dummy
variable and time. This clearly explains that, similar to intra-group exports, the trade
agreements have made a positive contribution to intra-group imports. The time
variable shows a positive sign implying an overall growth trend in intra imports. In
terms of the size of the coefficients, Restm explains most of the direct (or positive)
variation in Intram, followed by time and the SAPTA dummy. Interestingly, the result
also implies that as the aggregate regional GDP increases, the member countries rely
less on imports from each other, presumably because now their own production base
is larger and (maybe) more diversified. The size of the coefficient of log(gdp) is also
large and significant.
We also check the univariate properties of the data series by running the Augmented
Dickey-Fuller (ADF) test and the Phillips-Peron (PP) test. Both of these show that
selected variables, namely, log(Intrax), log(Intram), log(Restx), log(Restm) and
log(GDP) are integrated of order 1, that is, all these series are stationary in the first
difference. Table D8 summarizes the results of these unit root tests.
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Table D8: Unit root tests
Variables (in natural log)
Intrax
Intram
Restx
Restm
GDP
e)
Level
ADF
PP
1.6186
0.7364
1.8766
2.5418
1.4442
2.4343
0.9076
1.4972
2.5418
1.1706
Critical
Value
(1%)
-3.7241
-3.7241
-3.7241
-3.7241
-3.7241
1st Difference
ADF
PP
-4.4845
-5.2452
-3.5771
-3.8302
-2.9006
-4.4768
-5.2368
-3.5771
-3.8040
-3.5527
Critical
Value
(1%)
-3.7378
-3.7378
-3.7378
-3.7378
-3.7378
Revealed comparative advantage (RCA)
So far the analysis has focused on either bilateral or regional trade analysis for all the
commodities put together. As against this, the RCA indices for a group of countries
helps to identify whether there exists a high or low scope of intra-group trade in a
particular product category. The RCA for the jth country for the ith product can be
defined as follows:
RCAij = (Xij / Xiw) / (∑Xij / ∑Xiw),
where, commodity i = {1, 2, 3,…, n.}, Xij = exports of ith product from country j, ∑Xij
= total exports from country j, Xiw = exports of ith product from the world, ∑Xiw =
total exports from the world. Clearly, if the RCAs for a commodity for all the
countries are close to each other or 1, there is less scope for intra-regional trade in that
commodity for the group of countries. Correspondingly, if a country’s RCA is greater
than 1 and deviates from other countries’ RCA for a commodity, it is indicative of a
high scope for intra-group trade in that commodity.
A look at the RCA indices for the year 2005 for the countries of SAARC as compiled
in Table D9, we find that for primary commodities, Bhutan (at 1.28), India (at 1.18),
and Sri Lanka (at 1.13) depict comparative advantages. Within this category, the RCA
indices for all food items point to an interesting result that all the indices exceed 1,
with those for Nepal, Sri Lanka and Bhutan relatively higher than others. Thus, these
three countries demonstrate greater comparative advantage in food items relative to
the other SAARC countries.
In case of agricultural raw material, Bangladesh (at 1.23) and Sri Lanka (at 1.31) have
comparative advantages. In case of ores and metals, Bhutan (at 5.24), India (at 2.18),
and Nepal (with 1.29) have comparative advantages, and for non-ferrous metals,
Bhutan (with 7.9), Sri Lanka (with 1.5) and Nepal (at 1.6) have comparative
advantages. Bhutan leads the tally in both of these commodities. Given their high
import dependence, none of the countries of the region depict a comparative
advantage in fuels.
In case of manufactured goods, the RCA values for all the countries are close to unity,
which implies less potential for intra-regional trade. Within manufacturing, in case of
chemical products, Bhutan (at 1.5) and India (at 1.09) reveal a comparative advantage.
None of the countries demonstrate a comparative advantage in machinery and
transport equipment, since the RCAs are low or even close to zero. For other
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manufactured goods, for almost all the countries there is evidence of comparative
advantage, again implying a low potential for intra-regional trade. As regards textile
fibres, yarn, fabrics and clothing, Bangladesh (with 16.53), Bhutan (with 2.0), India
(with 3.47), Nepal (with 9.93), Sri Lanka (at 9.64), and Pakistan (at 13.16) have
comparative advantages vis-à-vis the rest of the world.
Table D9: RCA indices for SAARC countries for broad commodity groups in
2005
Product
Bangladesh Bhutan
Primary commodities,
including fuels
0.422
1.288
All food items
1.228
2.036
Agricultural raw materials
1.239
0.404
Ores and metal
0.026
5.242
Fuels
0.033
0.042
Non-ferrous metals
0.007
7.900
Manufactured goods
1.250
0.953
Chemical products
0.030
1.567
Machinery and transport
0.010
0.033
equipment
Other manufactured goods
3.817
2.168
Iron and steel
0.124
9.821
Textile fibers, yarn, fabrics and
16.534
2.017
clothing
Source: Estimated based on data from UNCTAD, 2006/07.
India
Nepal
Pakistan
Sri Lanka
1.187
1.379
0.985
2.182
0.869
0.963
0.974
1.098
1.056
3.196
0.688
1.296
0.000
1.607
1.032
0.638
0.738
1.869
0.950
0.123
0.317
0.025
1.141
0.286
1.135
3.450
1.311
1.092
0.001
1.596
0.978
0.126
0.287
2.031
1.574
0.011
2.869
1.644
0.048
3.303
0.137
0.118
2.762
0.021
3.472
9.934
13.169
9.641
Theoretically, the higher the divergence in factor endowments, demonstrated in
divergent comparative advantage, the greater is the prospect for regional trade
integration. Evidently, for the member countries of SAARC, there is lack of
complementarity as indicated by similar RCA indices. This points toward a high
degree of competition in export structures, albeit at the aggregated commodity level.
This is also corroborated by Pitigala (2005) for a much finer commodity
classification.
VIII. Problems and obstacles of SAPTA/ SAFTA
The key problems envisaged in the implementation of SAFTA could be ascribed to
various factors in the economic, political, administrative, logistical and external
domains.
Economic factors
The moot question that arises out of an agreement is whether an FTA in the region
provides sufficient economic gains to its members or not (Baysan et al. 2006). As for
SAFTA, the following comments are in order:
• Although India, Pakistan, Bangladesh and Sri Lanka are largely populated
countries, they are relatively small compared to other developed economies in
the world in terms of GDP and trade flows. The economic size of the region is
less than one twentieth of the world in terms of GDP and, after dropping the
values for India, this is further reduced to 0.4 per cent. This involves the risk
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•
•
•
of trade diversion since there is less possibility of the most efficient suppliers
belonging to the region itself (Baysan et al. 2006).
As brought out earlier, the SAARC economies’ export structures are highly
competitive. Pitigala (2005) in his study, found low complementarity and high
degree of competition in export structures of the SAARC countries. Our report
also corroborates this through the RCA analysis. According to theory, the
larger the difference in factor endowments, the higher will be the probability
of success of an RTA. However, the absence of diversity in the export
structure of the SAARC economies poses a serious question on this issue.
More recently, prospects of trade in services yielding efficiency gains under
the SAFTA agreement are being discussed. According to Pohit (2004), since
the services sector requires simultaneous presence of the factors of production,
trade in services facilitates the movement of these factors between countries.
Thus, trade in services like tourism, investment, insurance, energy,
infrastructure development, information technology and communication can
prove very important for the SAARC nations to gain from SAFTA, which
otherwise can be limited due to similarity of export structures. In the long run,
the scope of SAFTA needs to be broadened to augment the gains from it
while, in the short run, the agreement needs to have a clearer and shorter
schedule for implementation (Batra 2005).
Services trade liberalization could be beneficial for all the countries providing
two-way gains, or else, countries except India might be viewed to lobby
against SAFTA due to the fear of being dominated by Indian goods (Pohit
2004).
Political factors
The success of the agreement is contingent on political commitment and harmony
among all the member countries.
• The political tensions between India and Pakistan are viewed as a major
obstacle to the fulfillment of SAFTA. As Kemal (2004) points out, the two
largest economies of the region, namely India and Pakistan, have not been able
to realize the full potential of the bilateral trade between them because of
persistent political problems.
• The domestic conflict in Sri Lanka and Pakistan, and the international tensions
on Pakistan’s borders generate instability and reduce confidence which
impede growth, especially cross-border investment flows. These perturbations
or political conflicts elsewhere in the region can lead to a fall in output, which
in turn, can have serious consequences on the vulnerable groups in individual
countries (Global Economic Prospects 2007).
Protectionism (tariff and non-tariff)
• Historically, the combination of politics and protectionism has been
responsible for the small share of intra trade in total SAARC trade. According
to Kemal (2004), trade liberalization under SAPTA was not effective due to
protectionist tendencies culminating in the absence of meaningful exchange of
preferences amongst the member countries.
• According to Baysan et al. (2006), except Sri Lanka, the SAARC counties
suffer from high applied duties on non-agricultural and agricultural goods. On
an average, the level of applied duties on non-agricultural goods ranges from
10.7 per cent in Sri Lanka to 25.4 per cent in Bangladesh. The level of
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•
protection is also high in case of agricultural goods: it ranges from 19.6 per
cent in Pakistan to 40 per cent in India. Bangladesh has recently increased the
use of para tariffs apart from custom duties and also enhanced nominal
protection on several import-competing industries.
While all the member countries are also members of WTO, if the MFN tariffs
are close to preferential tariffs then intra-regional trade may not grow as
rapidly as expected otherwise.
Administrative factors
• The SAFTA agreement expresses political commitment for trade facilitation in
the region. Therefore, it needs a creative and effective framework for its
accomplishment (USAID 2005).
• The sub-regional economies have engaged in large informal and unrecorded
trade for a long period. For example, illegal trade and smuggling via long and
porous Indo-Pak border have considerably increased the transactions cost of
sub-regional trade (Das 2007).
• The enforcement of trade facilitation norms is critical. SAFTA covers
institutional structures and dispute settlement/ resolution mechanism and,
accordingly, the policymakers need to employ many departments and agencies
to look after the issue of compliance. Unlike tariff reductions, which are
administered by a single government agency, trade facilitation covers many
procedures that take place along many steps of a cross-border commercial
transaction and, thus, requires measures more than the standard uniform
bureaucratic approach (USAID 2005).
• SAARC security discourses must be expanded to include political, social and
environmental perspectives in order to achieve sustainability (Thakur and
Newman 2004). To check violence and disorder, joint law enforcement,
intelligence and linkages with international organizations need to be
implemented (Khan et al. 2007).
Transport-related factors
• According to Pohit (2004), removal of barriers to transportation services can
be very important for trade between India and Bangladesh. According to him,
a transit route through Bangladesh will benefit the north-eastern states of India
by a more direct access to the other regions of India. Moreover, Bangladesh
can export power to these states and reap the benefits from economies of scale.
• A large volume of trade between India and Pakistan takes place via Dubai and
Singapore. This third country channel increases the transactions cost
considerably and the SAFTA agreement need to address the decline in
transaction cost and increase the volume of intra trade (Das 2007).
Others
• To maximize the potential benefits from the cooperation, right policy
measures need to be taken. According to Das (2007), these can include
reduction in tariff and non tariff barriers, eliminating sectoral and product
exclusion and having clear rules of tariff-rate quotas.
• A continuing process of unilateral or multilateral trade liberalization would be
helpful for the South Asian countries to diversify more and evolve new
comparative advantages and complementarities (Pitigala 2005).
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VIII. Summary and conclusions
The South Asia subregion is one of the most populous and fast growing regions of the
world. While the aggregate GDP of the region has been growing in the range of 7-8
per cent per annum, the performance in terms of per capita GDP has been lower,
implying the region has a long way to go to enhance the average incomes and quality
of life of its large populace. In 2006, region’s share in world trade was a mere 1.6 per
cent, although aggregate trade flows accounted for around 30 per cent of the regional
GDP.
Since the 1990s, individual countries of the region have been consistently striving for
trade liberalization, through forging trade agreements both within and outside the
region. These have taken the form of unilateral efforts to reduce protectionism as well
as broader multilateral regional and bilateral cooperation efforts. The implementation
of the SAPTA (in 1995) and then SAFTA (since 2006) agreements have been key
attempts at promoting regional trade, and larger economic cooperation among the
countries of the SAARC region. The key bilateral initiatives have taken the form of
the Indo-Nepal and Indo-Bhutan Trade Agreements, India-Sri Lanka Free Trade Area,
India-Singapore Comprehensive Economic Cooperation, BIMSTEC and the IndiaASEAN Framework Agreement on Economic Cooperation.
The analysis of data indicates that there was a faster increase in intra-SAARC trade in
the post-SAPTA period, but there is less conclusive evidence as to whether this
uptrend can be ascribed to the formation of the PTA or to the overall (unilateral or
bilateral) trade liberalization programmes adopted by the countries of the region in the
early 1990s. Moreover, through 1985-2005, the growth rate of intra-regional trade
depicted an uneven trend.
Despite the growth in intra-regional trade volumes, over 1995-2005, the region as a
whole had 95 per cent of its exports directed toward the rest of the world and
imported close to 96 per cent from it. Thus, a bulk of the commodity trade exchange
has been with the countries outside the region.
On the aggregate, the bilateral trade intensity indices and changes therein did not
depict a steady trend over 1995 through 2005. The results were mixed, depicting a
decline in trade intensity between some pairs of countries, while an increase in case of
some others. Thus, neither the growth in overall trade nor the forging of multilateral
PTA/ FTAs were significant determinants of intra-regional trade. For some of the
large economies of the region, there was in fact a decline in trade intensity in 2005 as
compared to 1995. India’s trading intensity Bangladesh, Pakistan’s with Bangladesh
and Sri Lanka’s with both Bangladesh and Pakistan depicted a fall during 1995-2005.
For the region as a whole, regression of intra-group trade on extra-group trade (or
trade with ROW), GDP, time and PTA/FTA dummy variables points to a strong fit.
Changes in intra-SAARC exports and intra-SAARC imports are significantly and
positively explained by variations in SAARC’s exports and imports to ROW,
respectively. The dummy variable also has a significant positive coefficient, implying
that SAPTA and other bilateral trade agreements within the region have contributed to
intra-group trade at the aggregate regional level. The regression results are contrasting
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with those of the trade intensity analysis and need to be reconciled with more detailed
country-wise and product-wise analysis, including analysis of trade patterns in
services, such as insurance, banking, tourism and hotels, telecommunications and
information technology.
The RCA analysis points toward absence of complementarity and, in fact, shows a
high degree of competition in the export composition, thus pointing toward limited
scope for regional trade integration. RCA analysis carried out for finer category of
products would be more revealing. Interestingly, however, despite limited regional
trade potential, regional integration did have significant positive impact on intraregional trade in South Asia.
Having run through the quantitative indicators, at this point, it is worthwhile to delve
into those problems and obstacles of the SAFTA Agreement that are qualitative in
nature and hence circumscribe the future intra-group trade opportunities. Some of
these, in fact, are inherent flaws envisaged at the inception of the agreement itself.
Although India, Pakistan, Bangladesh and Sri Lanka are largely populated countries,
they are relatively small compared to other developed economies in the world in
terms of GDP and trade flows. This involves a risk of trade diversion. In addition, the
success of the agreement is contingent on political commitment and harmony among
all the member countries. Thus far, a combination of politics and protectionism has
constrained the growth in intra-regional trade within the SAARC countries. Under the
auspices of SAFTA, potential benefits from liberalizing services trade are now being
discussed.
What remains to be ascertained is whether trade on an MFN basis or a bilateral
agreement by just opening up the border between the countries or a multilateral
endeavor such as the SAFTA, will be the most effective in achieving greater regional
integration. As Rodriguez-Delgado (2007) points out, RTAs are viewed as an
important tool for trade liberalization and, in most of the empirical studies, they have
been found to create trade more than to divert it. On account of its large and diverse
membership, in terms of trade on a genuine MFN basis, liberal rules of origin and
streamlined trade facilitation measures, the SAFTA Agreement has substantial scope
for improvement.
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References
Batra, Amita (2005). India Country Chapter (Chapter 3) in South Asian Free Trade
Area: Opportunities and Challenges, USAID, October 2005.
Baysan, Tercan, Arvind Panagariya and Nihal Pitigala (2006). Preferential Trading in
South Asia. World Bank Policy Research Working Paper 3813, January 2006.
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