Speeches & Transcripts

World Bank Economist Identifies Biggest Constraint to Regional Integration

January 19, 2016

Sanjay Kathuria interview with Business Recorder Interview Islamabad, Pakistan


Sanjay Kathuria is the lead economist in the World Bank's Trade and Competitiveness Global Practice. He has been working exclusively on regional integration issues in South Asia for over three years. He is part of a team that looks at trade investment, cooperation, facilitation, and reducing barriers to trade.

BR Research spoke to Mr Kathuria regarding the pros (and cons) of regional integration in South Asia and the steps needed to be taken to get there. Below are edited transcripts of the interview.

BR Research: Tell us about some of the World Bank's programs in South Asia regarding regional cooperation.

Sanjay Kathuria: What we're trying to do is to promote an environment where people will trade better with each other. We're trying to do rigorous analytical work which looks at specific barriers. For example, on trade investment; we're doing an analysis of firms that have invested in other countries in South Asia - Sri Lankan firms in India and vice versa, Nepalese firms in India, etc - how they have managed to do it, and what are the lessons from those kinds of engagements. We're studying those because we think intraregional investing will be the key for trade increasing. Apart from trade and investment, WB is working on energy as it is one of the obvious areas of regional cooperation. We have supported CASA 1000 project. We're also working on the eastern side with Bangladesh to support India-Bangladesh energy cooperation. There's also a big program on regional transport linkages.

BRR: In South Asia, India is a big country while the rest are small. How does one address this issue of asymmetry?

SK: When a country opens up, the smaller country is worried that the larger country will wipe out its industries. But in a theoretical and very practical sense, smaller countries have more to gain from trade integration because they have a much larger market to have access to. India's imports are $350-400 billion or more. One percent of that market is $3.5-4.0 billion. Just imagine what that would do to Pakistan's exports!

Secondly, the consumer is always forgotten. He gets greater a choice and better prices. When it was becoming the world's largest exporter, China at its peak kept world prices down because of sheer exporting power. That benefited the consumers in the entire world. This is always forgotten when discussing trade.

Thirdly, exporters benefit. You get inputs at much cheaper prices, and the exporter has a better choice set. So these are three compelling arguments for trade liberalization.

The opposite is that our industries will suffer, and producer lobbies are very powerful in capturing the dialogue. Usually it isn't even all producers; it's a small group who thinks that they might suffer. In every country, the producer lobby dominates discussion. There should be a consumer lobby or an exporter lobby, but those are not well organized. Exporters who really gain from better inputs don't make much of a noise either.

BRR: Pakistan has a strong position of security on the foreign policy. From a security angle, you just see threats when discussing trade and regional integration. How does one change this approach?

SK: Security and trade facilitation are not contradictory, they go hand in hand. In the modern world, there are technologies now that can be very good for facilitating trade. Through a combination of risk profiling and technology, security agencies can focus their efforts on those transactions which they think are suspect.

On the other hand, if you have what I call supply chain management, over time you can develop confidence and trust. There is a very scientific model of risk profiling which comes up. The EU and the US use it. You can reduce the cost of trading by reducing time taken at the borders. Right now it's a 'scan everything' policy; that is not efficient.

You need to be aware of the whole supply chain of your supplier. You track your suppliers' sources. Once you start that process, it's very easy. It's like an audit. If there's a will to do it, this can happen.

BRR: What is the potential trade between Pakistan and India that can be achieved by regional integration?

SK: Currently, the recorded trade between India and Pakistan is less than $3 billion. The potential could be from $10 to 80 billion; there are a range of estimates. This is static, not taking into the account dynamic impact. Once you open up, who knows what kind of forces will be unleashed? Trade is dynamic.

Foreign investment is the biggest constraint. Real investment in each other's countries is more than just trade in goods; it becomes trade in parts, trade in tasks. For instance Pakistan is good at yarn; India is good at the final product. So you will have natural complementarities in tasks. That can only happen if there is investment on both sides. This happens when a firm decides to locate a certain part of production in the other country. This is called value chain creation. For that, investment is very important.

I'll give you an example of dynamic possibility. In 1994, Mexico was hesitant in signing NAFTA. But the politicians were forward-looking and they took proactive measures to help those industries that might be harmed. What they did not dream of was that today Mexico is an export powerhouse - Mexico exports a billion dollars a day! It's a major platform for American automobile production.

BRR: What is the situation regarding intraregional investment in South Asia, and how can it be improved?

SK: Intraregional investment in South Asia is still very low. Last year, India invested $10 billion overseas. Of this, in South Asia it invested a miniscule amount. Why? Why shouldn't India play the role that Singapore played in ASEAN, being the regional prime investor and creating regional value chain? What is holding back large Indian companies that are going so far to invest? This is one of the questions we're asking.

One reason is the domestic environment in each country. The ranking for doing business in the region is very low. To have intraregional investment, we need to create a good overall environment. Someone from outside has all kinds of fears and you have to reassure them if you want foreign investment.

Governments should go out of their way to welcome investors, offer them red carpet treatment to come and invest in their country. They can invite a regional company to do it, be it bilateral, trilateral JV, but let's start somewhere.

Countries should welcome foreign investment because it brings technologies, markets, skill up-gradation. One Japanese investment in India - Suzuki, 1981 - brought in a host of its own component suppliers in Delhi. Now, India is a world-class components manufacturer. That was the pioneering investment. It was not merely cars; it was the whole components sector that came along with Suzuki.

BRR: Isn't there a trade-off between the state's revenue collection and opening up trade? How do you reconcile that?

SK: Yes, at earlier stages of development, countries are more dependent on import revenue. That's standard. All countries have a fear that if I reduce taxes then what will happen to my overall tax revenue. It's a genuine fear.

The trick is how to make your tariff policies more rational without sacrificing import revenues. Also, the overall tax regime should be so that any losses in import/customs revenue are then set off by overall tax efficiencies on the economy as a whole. Not higher taxes; rationalization of taxes. That gets you a very long way: Uniformity of taxes, applying to everybody; those kinds of things. I can understand any minister grappling with this problem. Right now in South Asia, there is high variability and dispersion in taxes. Some sectors are protected, others are not.

If you rationalize duties, your imports are likely to increase and exports will also increase. Imports and exports always go together - rationalization of imports helps exports. Partial compensation will come from export increase.

Mexico had a forward-looking trade minister. Governments have to be prepared for positive labour policies that can help those that might get laid off, as long as they have a view that the gains outweigh the losses. The losses may be quick in short term, and immediately some uncompetitive industries might suffer. But competition helps domestic industry.

BRR: What does the future hold for South Asia and how can growth improve?

SK: South Asia just happens to be now the fastest growing region in the world. That is the World Bank's projections starting 2016. It is overtaking East Asia.

Similar to health, education, and infrastructure, regional cooperation is another tool of development policy. Right now, because it is so underused, you are sacrificing gains in employment and growth by not exploiting your neighbourhood. Look at any region that has grown - especially Europe and ASEAN. You cannot grow without integrating with your own neighbourhood. You can't override economic gravity. And why should you?

So, you're sacrificing a natural element of your own growth by not allying with your neighbourhood because of manmade barriers.

Copyright Business Recorder, 2016

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