Cost of Economic Non-cooperation to Consumers in South Asia and Nepal

Chandan Sapkota
South Asia Watch on Trade, Economics and Environment (SAWTEE)
April 2, 2012

Presented at Cost of Economic Non-Cooperation to Consumers in South Asia event, April 2, 2012, Union House, Kathmandu, Nepal
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Presentation outline
The study Concept Intra-regional trade in South Asia Cost of Economic Non-cooperation to consumers in South Asia Cost of Economic Non-cooperation to consumers in Nepal Recommendations Perception survey in South Asia Way forward (based on perception survey in Nepal)
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1. The study

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Project
CUTS International implemented the project with help from The Asia Foundation and regional partner institutions in Bangladesh, India, Nepal, Pakistan and Sri Lanka

SAWTEE conducted the perception survey in Nepal (Biratnagar and Kathmandu) Extensive meta-analysis of existing literature on economic integration in South Asia, quantities analysis and perception survey
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2. Concept

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Concept
Usually, benefits of economic integration and impact on producers is given importance This study focuses on cost of economic non-cooperation Cost to consumer is the focus Potential consumer welfare accruing to each country is computed by taking the difference between the total import expenditure in selected products incurred by a country under consideration and likely import expenditure if that country were to import the same products from SAFTA trading partners at a lower price. Doesnt consider:
Impact of displacement of domestic industries Loss of customs revenue Trade facilitation measures

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Concept
Specifically,
Products in sensitive lists of a SAFTA member country (m) with high shares in the total exports of partner countries (p) to rest of the world (RoW), reflecting the export potential of partner countries in such products Further filtered by selecting products in which exports of partner countries to the member country is minimal

Consumer welfare gains for a member is calculated as:

CWmi = (pmiqmi ppiqmi)

where,
CWmi Consumer Welfare due to change in import price of country M in product i pmi Import price of member country M in product i from ROW ppi Export price of SAFTA partner country p in product i to ROW qmi Import Quantity of member country (m) in product i from ROW

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3. Intra-regional trade in South Asia

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Trade in South Asia

South Asia Free Trade Agreement (SAFTA) came into force since January 2006 Progress in intra-regional trade has been miserable at approximately 5 percent in 2010, up from 2.5 percent in 1995, of total world trade of the region Reasons for limited integration:
Limited tariff preferences extended to a countrys trading interest Limited depth in tariff cuts Prevalence of para tariff and non-tariff barriers Difficult political relations between the most influential members
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4. Cost of economic non-cooperation to

consumers in South Asia

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Cost of economic non-cooperation to consumers in South Asia

Intra-regional trade at reduced prices would generate 31.36 percent savings on South Asias import expenditure, leading to annual savings of about IS$1948.15million (=US$2 billion) for buyers in the region. A minimum consumer welfare gain of approximately US$2 billion each year by way of savings on aggregate expenditure on imported products in selected categories. Of the US$2 billion total consumer gain
Indias share is estimated to be 30.66 percent Nepals 23.48 percent Bangladeshs 20.46 percent Sri Lankas 14.81 percent Pakistans 10.58 percent
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5. Cost of economic non-cooperation to

consumers in Nepal

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Cost of economic non-cooperation to consumers in Nepal

23.5 percent of aggregate regional welfare gains of US$2 billion Import displacement in 73 selected product categories Saves US$ 457.5 million, which is almost 43 percent of their current import expenditure on these categories. Imports from India and Pakistan account for the bulk of the countrys welfare gains. Key items which would help Nepal save on spending are mineral fuels and minerals including salt, sulphur and limestone.
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Cost of economic non-cooperation to consumers in Nepal

Consumer Welfare Gains for Nepal (US$ million)
SAFTA trading partner Bangladesh No. of products in sensitive list 45 Consumer welfare gains 11.23 Value imports from ROW 25.55 % of welfare gains in imports 43.96

Pakistan

20

255.04

586.59

43.48

Sri Lanka

0.12

0.85

12.56

India

191.12

455.28

41.98

Total

73

457.5

1068.27

42.83

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Welfare gain to consumers in Nepal

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Export opportunities of Nepal to South Asia

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6. Recommendations

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Recommendations

Separate non-trade issues from trade issues during negotiations Raise awareness about untapped and neglected aspects of consumer welfare gains Expedite initiatives for networking amongst consumer organizations at the national and international level in South Asia

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7. Perception survey in South Asia

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Perception survey in South Asia

Opinions about regional trade varies widely between and within different stakeholder groups in all South Asian countries Such perceptions had an important role in shaping up the course of regional trade negotiations Stakeholders believe lack of success from SAFTA till date is owing to political rather than economic reasons
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8. Perception survey in Biratnagar and

Kathmandu

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Perception survey in Nepal (Biratnagar and Kathmandu)

High possibility for regional integration due to social, political, cultural similarities Enormous scope in cooperation in power generation, environment protection, addressing vulnerable population and reducing poverty Level of cooperation in the region at present is not encouraging when compared to the expectation of the interviewees when SAFTA was signed
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Perception survey in Nepal (Biratnagar and Kathmandu)

Slow regional cooperation:
Political misunderstanding in general and tussle between India and Pakistan in particular Small economies in the region suffer from small-nation psyche and spend more energy on thinking over if India is suppressing them unfairly Wide disparity growth between India and the rest of the countries has created mismatch of preferences A long list of items in sensitive list Existence of non tariff barriers SAFTA has not led to direct, efficient and cheaper transportation system (a container from Nepal heading to Karachi port through Kolkata port is not allowed to go directly; it has to pass through Singapore) Very high trade concentration with India; negligible trade share with other South Asian countries Nepal has not identified its area of comparative advantages for regional trade Business community is unaware about advantageous Nepali products for trading in the region beyond India Businessmen run for tariff differences and preferences instead of long run business profitability only 20-25 km distance to reach the nearest Bangladeshi market via India. But, the additional cost of transporting goods along that route is NRs 2/kg per container India's state governments are not respecting agreements/understandings made at central level

Cooperation is not working:

Nepal is not tapping available opportunities:

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Way forward
(Based on perception survey in Biratnagar and Kathmandu)

Reduce the size of negative list, minimize non tariff barriers, make policy predictable, and ensure effective implementation of what is already agreed upon Promote infrastructure development and enhance partnership in energy Increase land connectivity among all countries and make the cross-transportation smooth Simplify trading procedures and enhance logistic facilities Ensure transit rights and, importantly, be honest while granting the rights Increase domestic awareness and explore the areas for exploiting regional comparative advantages Open negotiations for sub regional arrangements

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Thank you

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