SAARC can benefit from regional investment and supply chain strategy - MTI

MTI Consulting, the only strategy consultancy with its own operations in the four main SAARC capitals of India, Pakistan, Sri Lanka and Bangladesh, have in recent times taken the thought leadership role for how countries strategise in an increasingly globalised trading environment.

Last year, President Musharraf of Pakistan awarded MTI the competitively bid task of developing the Country's Export Strategy and Trade Development Structure to MTI Consulting, as part of which MTI has undertaken extensive research into country strategies.

On the eve of the SAARC Conference in Sri Lanka, MTI continued its thought leadership role into optimising regional co-operation, thus sharing with the regional media their research findings and strategic thoughts on this economically critical subject.

Q: What is the attraction of SAARC to Global Markets?

MTI: The rapid economic growth in Asia will bring about a historic shift in the core of the world economy. The catastrophes of World War 1, the Great Depression and World War 2 did not shake the dominance of the North Atlantic economies, though they did shift the balance of geopolitical influence away from Europe to the United States.

Economic power

The American century is predicted to end sometime in the second quarter of the twenty-first century, when Asia becomes the hub of the world economy, in the sense of producing more than half of the world's income.

The end of the American century will not be the result of any collapse of America's well-being but rather the rise of Asia's economic power.

Within this South Asia plays a predominant role accounting for 1.5 billion of the world's population and $1.4 trillion worth of output.

Q: Given the opportunity, should individual SAARC countries pursue individual strategies or have a collaborative approach?

MTI: Individual countries will always have (and should) pursue their individual country strategies. However, there is a compelling case for regional co-operation (SAARC in this case) as regards developing a regional strategy to attract investments, tourism and as a supply chain hub.

Despite obstacles such as conflict, corruption and high fiscal deficits in some countries, South Asia has achieved impressive economic growth and poverty reduction in the past decade. If this growth accelerates to 10 percent a year, the region could see single-digit poverty rates by 2015.

A comparison with East Asia's sustained 7-10% growth rates - shows that South Asia's export-orientation, inflows of foreign direct investment, workers skill levels, infrastructure and ease of doing business are also substantially less advanced than East Asia's. South Asia's savings, investment and productivity are also lower.

These challenges suggest a set of policy choices for South Asian countries aimed at increasing investment, productivity and the quality of labour, while addressing the problem of lagging regions and poor service delivery.

Although the least integrated region in the world, South Asia can benefit from regional co-operation in trade, water and energy, among other things.

The enthusiasm and sincerity that characterises South Asia today makes us optimistic that some, if not all, of these challenges can be met and the region will achieve sustainable economic growth leading to a significant reduction in poverty.

Q: Why and what benefits will SAARC receive from such co-operation?

MTI: There are many reasons why such a strategy will benefit SAARC:

On the economic front a collaborative approach will help poorer countries such as Nepal, Bhutan, Bangladesh and the Maldives.

The South Asian Free Trade Area (SAFTA) agreement can facilitate zero customs duty on the trade of practically all products in the region.

In addition, exporters can benefit with regard to tariff concessions, especially the manufacturing sector.

With the exception of India and Pakistan (to some extent), the other countries lack the critical mass needed by the global market, be it in terms supply chain capabilities or consuming markets.

With the exception of India (with due respect to other SAARC member countries), the other SAARC countries are yet to establish a strong brand with a global appeal (of course there are niche exceptions such as Bangladesh Apparel, Sri Lanka Tea, the Maldives Tourism).

increasingly, our Global Customers (be it multi-nationals or national majors) are looking for a holistic, integrated supply chain solution that needs to cut across conventional geographical boundaries.

Even at a consumer market level, most long-haul tourists would first select a region (in some cases led by a strong brand destination) and then pick the micro destinations.

The cost of creating global awareness (leave alone building strong brands) is increasing and is prohibitive in some cases. Some of the regional countries may have severe country brand image issues, which may be partially overcome by a regional positioning. (this is a very clinical statement, while being sensitive to the country's national ego).

These reasons, we believe, are sufficiently compelling to support the concept. Country-brand image issues may be partially overcome by a regional positioning.

Supply Chain Strategy

Q: Could you elaborate on the Supply Chain Strategy - at a practical level?

MTI: The world is looking to Asia for its supply chain, be it in manufacturing (akin to China's dominance) or knowledge based (akin to India's dominance).

Most multi-nationals are looking for a holistic, integrated supply chain solution that covers the entire process of procurement, value-addition, logistics and, in some cases, just-in-time deliveries on a 'consider-it-done' basis.

To do so, their Supply Chain Partners should be able to source the best material and intellectual resources from across the region, wherever that may be.

This means that infrastructure developments and enforceable trade agreements need to be implemented across the region to facilitate growth in trade and to reap the benefits of integration.

Integrated supply chain solution

At a regional SAARC level, this implies the need to create a regional supply chain cell and investment cell, backed by a strong web strategy and regional grants to set up truly pan-regional companies.

Q: Do you reckon India to be the engine of South Asian economic growth?

MTI: By far the largest economy in South Asia, India accounted for approximately 80% of South Asia's GDP, trade, and regional growth in 2007.

Therefore, the current accelerated growth of the Indian economy will naturally have positive externalities for the neighbouring countries.

India's High Net-Worth Individuals (HNWIs) control $350 billion worth of assets, according to research conducted by Merrill Lynch

India plans to invest $475 Billion between 2007-2012 for infrastructure development

The Indian telecom industry is the fastest growing telecom sector in the world

India is one of the world's largest recipients of FDI, and has become the favoured location of outsourcing labour intensive work such as call centres thanks to a well educated middle class

Proactive policies

Proactive policies to increase economic integration with other South Asian countries could multiply these benefits many-fold, and the impact on the economic development of the neighbouring countries could be dramatic.

The political implications of a more economically integrated and rapidly developing South Asia for the countries in the region could be a major additional benefit.

The impact on the economic development of the neighbouring countries could be dramatic

Q: In this scenario how can the other South Asian countries optimise on this economic growth?

MTI: Expansion of intra-regional trade offers immense opportunities for sustaining high growth and reducing poverty in South Asia.

Because South Asian economies have largely similar export baskets, the economies could expand trade by promoting intra-industry trade in the region. For example, most South Asian countries are large exporters of intermediate and finished clothing and textile goods.

The region could gain greatly if South Asian countries cooperate strategically to enhance efficiency, improve product quality, and increase value.

As India shares borders with most South Asian countries and has good marketing capability and linkages in the major importing countries, it could become a hub for spurring the growth of intra-industry trade in the South Asian region.

With its central location and size, India could serve as an assembly and exit point of high value South Asian goods, as well as services, for both domestic and international markets.

Intra-industry trade could also be boosted by greater cross-border foreign direct investment.

The world is looking for Manufacturing, ITES and raw materials in Asia.

For example, Singapore, with its open economy and efficient trade handling and marketing capability, plays such a role for Southeast Asia.

Singapore sources intermediate goods from the other Southeast Asian countries and exports high value goods within and outside the region. The key to the rapid expansion of intraregional trade in the ASEAN region has been collective action under the ASEAN Free Trade Agreement's (AFTA) framework.

The reduction in tariffs, elimination of no tariff barriers, and simplification and harmonisation of customs procedures has played an important part in this success.

Trade barriers

Q: However, in South Asia, barriers to trade remain high despite the introduction of SAFTA. What are the key learnings for the region?

MTI: High non tariff barriers such as complicated customs procedures at borders make intraregional trade difficult and costly.

Therefore, attention to 'behind the border' issues is crucial to India's development as the regional hub and to achieving deeper regional integration in South Asia.

The experience of successful regional trade blocs demonstrates that trade liberalisation can benefit all participants.

In South Asia, India's development into a regional hub would attract additional foreign direct investment into India and from India to other South Asian countries, thus boosting economic growth in the entire region.

The strong backward linkages that South Asian countries would develop with India would in turn translate into greater demand for Indian imports from the rest of South Asia, thereby further boosting growth in India.

In brief, India is not only crucial for the success of regional trade cooperation in South Asia; it could also transform the development and growth pattern of the entire region.