South Asia is one of the most dynamic regions in the world, but it is also one of the least economically integrated. Intra-regional trade accounts for just 5% of total trade, compared with 25% in the Association of Southeast Nations (ASEAN). With shared history and culture, the South Asia region has a huge potential for economic integration but issues on national identity and internal consolidation have caused political tensions and mistrust between countries, and as a result, intra-regional integration is limited. By building common interests across borders, regional integration could enhance stability in this volatile region -- which is home to 570 million or 44% of the world’s poor -- and pave the way for countries to cooperate on urgent and shared climate change-related challenges which aggravate the risks to sustainable growth.
Cross-border trade is especially important for smaller countries and for landlocked provinces/countries, including Afghanistan, Bangladesh, Bhutan, Nepal, Northeast India and Northwest Pakistan. Expanded intra-regional trade, increased investment and supply-chain integration, will need policy reforms, and improvements in regulations, border management, and infrastructure. Measures will need to pay due regard to the security concerns which dominate each country’s view of borders. Small and medium enterprises are likely to play a large role in expanded commerce (relative to power sector cooperation), creating a wider canvas of opportunities for cooperation, reduced mistrust and poverty reduction.
South Asian countries will benefit substantially from greater integration through energy trade, commerce and river basin management. The most obvious gains are in the power sector, with connectivity enhancing system reliability, lowering costs and carbon emissions, and relieving debilitating shortages in all countries by enabling the sustainable development of the enormous hydro and gas-based power generation potential of the Himalayas – the “water tower” of Asia – and of Central Asia. Afghanistan and Nepal have water resources that could potentially generate around 24,000 and 83,000 megawatts of electricity respectively. Transmission infrastructure, clean energy generation, and fair pricing agreements across borders hold the key to realizing this potential.
Momentum for economic cooperation has been building in recent years and months. India and Pakistan have revitalized ministerial-level negotiations on expanded trade including through granting Non-Discriminatory Access – a similar status to Most Favored Nation (MFN) – to India, reciprocating India’s granting of MFN status to Pakistan a decade ago. India has modernized its Attari border post with Pakistan and has offered to export 500 megawatts of power. India and Bangladesh have enhanced their bilateral ties, including in power trade, and India has extended tariff-free access to its market to all Least Developed Countries in the region. Afghanistan and Pakistan have started implementing a transit and trade treaty which they signed in 2011. Indian investment in Sri Lanka has risen significantly, as has cross-country trade, following a 2001 Free Trade Agreements.
World Bank Group Strategy
The overall aim of the WBG regional integration strategy for the next three to five years is to step up support for three main objectives which are listed below:
- Help put in place the building blocks for an integrated regional electricity market in South Asia (with links to Central Asia) to relieve energy shortages, which are a binding constraint to each country’s prospects for sustainable and equitable growth.
- Move SAR towards East Asian levels of trade and investment in goods and services to enhance competitiveness and create more and better jobs for the over 10 million young people who will enter the work force each year for the foreseeable future.
- Improve the in-country and cross-border authorizing environment (attitudes and policy) for regional integration by systematically building awareness and “championship” around the need for, and benefits from, increased regional cooperation. Building on analytical work on the costs of the status quo and high impact opportunities for cooperation, and by leveraging lessons from the South Asia Region and global experience, the strategy will seek to both facilitate sustained action in priority areas where there is already sufficient demand across countries as well as to build support for new high priority areas.