The economic integration of SAARC

by Professor Mahfuz R. Chowdhury

Economic growth today is a collective matter in a very significant way. Not even a nation, big or small, can think of going it alone anymore. In fact, the whole world has become so inter-linked that every event no matter how small or where it happens is having an instant worldwide effect. Earlier, the world had to deal with rising nationalism, and governments had to find ways to protect domestic industries from outside competition. Now, the world is increasingly dealing with globalization, and so governments have to promote the efficient management of domestic industries in order to withstand foreign competition.

The term 'globalization' may entail many things. From an economic point of view, globalization refers to the effects of extensive free trade among nations as well as the increase in the movement of capital and labor. Trade among nations is not a new phenomenon. However, because of the free trade policy being promoted by the United States and because of the emergence of new technologies, such as the internet, fast communication, and rapid transportation, market globalization has accelerated tremendously since the 1990s. Currently, things move from one place to another almost in a flash. Capital flows wherever there is profit, and people follow the money in search of a better life.

Accordingly, to meet the challenge of globalization, the world is frequently undergoing various economic realignments. One of the current major trends among the countries seems to be to bury their hatchets and create or join a free trade block, where goods and services can move freely from one country to another with no tariffs or duties.

The primary idea is to establish a solid market structure for domestic industries to be able to withstand global competition. A free trade area helps a business firm grow, as it increases the size of the market. As mass production often leads to efficiency and lower production costs, business firms with a bigger market become more competitive. Moreover, competition from firms in other members of the free trade zone forces firms to try yet harder to be more efficient, and at the same time drives the weaker firms out. In this way, by becoming more efficient, the domestic firms could prepare themselves to avert the adverse effects of globalization.

Europe would be a good example for the beneficial effects of economic realignments. Europe is essentially an amalgamation of states with different languages, cultures and nationalities. Many of the world's important events including the democratic movement and capitalism originated there. However, history is filled with tales of enmity and competition among European states.

Without even going too far back in history, one could get an idea about the extent of hostilities that existed in Europe from the following examples: The Hundred Years' War between France and England that lasted from 1337 to 1453; the many wars of Napoleon Bonaparte during his rule over France from 1804 to 1815; World War I (1914 to 1918), though classified as a global conflict, took place primarily in Europe; World War II (1939 to 1945) originated as a conflict among European nations; and then there was the savage war in Yugoslavia in the 1990s. In addition, one should consider traditional communal enmities between the English and the French, the French and the Germans, the Germans and the Poles, the Poles and the Russians, the English and the Irish, Serbs and Croats, Serbs and Kosovars, etc.

But it is hard to imagine those old enmities nowadays. Amazingly, economic interests are rapidly changing the situation in Europe and bringing the previously disgruntled countries together by eliminating all international barriers to an improved economic life. The European Union, which was officially launched in 1993 with only six member states, has since expanded to twenty seven, comprising a majority of states in Europe. In 2002, twelve member states also surrendered their national currencies and adopted the Euro as their common currency.

Slovenia adopted the Euro this year, and more countries are likely to follow suit next year. All these moves are indeed intended to face one thing - the market globalization. The EU countries' GDP of over $13 trillion in 2006 rivals that of the United States, and will surely go up when additional states join the union.

In order to maintain its superiority and to counter the move by the Europeans, the United States quickly created its North American Free Trade Agreement (NAFTA) with Canada and Mexico in 1994. Even in the absence of a congenial overall relationship, the United States found good reasons to form an economic alliance with Mexico. As a free trade block, NAFTA countries' GDP exceeds $15 trillion, which is also poised to go up if and when Chile and other Central American countries are granted their memberships as expected. But unlike the European Union, NAFTA is limited in scope. For example, the United States would allow free movement of goods and services from Mexico, but disallows free movement of its people. In other words, this is a special kind of marriage limited to economic integration with no social assimilation, and it is designed simply to help domestic industries withstand global competition.

Capitalism, the present dominant economic system, clearly thrives on specialization and trade. So market control is the name of the game in capitalism. In this game of market dominance, what is good for the goose should be good for the gander! Put it another way, if the above tactic of market integration works well for the rich and industrialized countries, why shouldn't it work for others? In fact, it should serve as a wake up call for the emerging economies to create their own free trade block as it may be the best and most practical defense for the maintenance of stability and growth.

Let's look at the situation of the South Asian Association of Regional Cooperation (SAARC), a regional organization that has a potential to greatly benefit from an effective free trade block.

SAARC was initially launched in 1985 with four states, but has now expanded to eight, comprising all of the states in the Indian sub-continent and Afghanistan, which joined this year as the newest member. The organization encompasses a region that houses almost one fourth of the world's population.

This region as a whole is known for its many diversities as well as major conflicts. Yet, under trying circumstances, it has emerged as one of the fastest growing regions on earth; this is especially true in the case of India.

To be continued next week