New Economic Ways between South and Southeast Asia

In this edition of Sambandh Scholars Speak, Bhavyanshi Sinha interviews Cecile Fruman and Nora Dihel on the report, Deepening Linkages between South and Southeast Asia, published by the World Bank in 2022.

Trade linkages between South Asia and Southeast Asia have grown nine-fold over the past two decades, rising from US$ 38 billion in 2000 to US$ 349 billion in 2018. However, despite this progress, there remains a significant untapped potential of economic integration within and between these two regions. The World Bank has highlighted that economic integration in South Asia remains at 5.6%, compared to 25.6% in the Association of Southeast Asian Nations (ASEAN) (p. 9).

The report looks at new approaches to strengthening trade and revitalising economic links between South Asia and Southeast Asia. It extends beyond intra-regional economic connectivity in South Asia and investigates its connectivity with Southeast Asia as reflected in various national policies, including India’s Act East policy, Thailand’s Look West policy, and the overall emphasis on increasing connectivity in the Bay of Bengal and the wider Indo-Pacific regions.

The report highlights the potential for trade and investment between South and Southeast Asia. Currently, South Asia imposes tariffs on imports from Southeast Asia that are three times as high as those levied on imports from South Asia. The report suggests that by reducing tariffs, South Asia could potentially increase trade to as much as 10.6% of the gross domestic product (GDP). The report also delves into the key barriers that restrict economic connectivity, including tariffs, non-tariffs (custom procedures, sanitary and phytosanitary measures, etc.), regulatory restrictions, and the absence of comprehensive trade agreements. Finally, the report studies two potential areas of trade cooperation between South and Southeast Asia—digital, and environmental goods and services. It argues that bringing these areas under a region-wide and investment-friendly regulatory regime would cut down costs and help both regions become hubs for the production of environmental and digital products.

The report uses novel data sets on services, investments, and migration and applies machine learning techniques to estimate the restrictiveness of barriers. It uses an economy-wide general equilibrium model that explicitly incorporates services and investments to provide a more complete picture of regional integration.

Bhavyanshi Sinha: India, under its Act East Policy, has undertaken various initiatives to increase its engagements with Southeast Asia. This includes a focus on development in India’s North-east Region, the Bangladesh–Bhutan–India–Nepal (BBIN) initiative, the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), and so on. What effects do such initiatives have on enhancing connectivity between these regions?

Cecile Fruman: India’s focus on the North-east Region and on BBIN connectivity has strong economic and developmental benefits for eastern South Asia and the broader Asia-Pacific region. The implementation of the BBIN Motor Vehicles Agreement (MVA) which will boost regional connectivity and trade remains a priority and was discussed at the top level between Bangladesh and India recently. The countries have finalised the enabling memorandum of understanding and are working on the passenger and cargo protocols that are essential to operationalise the MVA. Implementation of the MVA and full transport integration between Bangladesh and India would result in significant economic gains and can potentially increase the national income of Bangladesh by around 17% and that of India by 8%.

These gains would spread to landlocked Nepal and Bhutan as well as North-east India, giving these geographies shorter access to ports in India and Bangladesh and, ultimately, access to the broader Asia-Pacific region. A focus on BBIN connectivity will position the eastern subregion as a gateway for connecting South Asia to Southeast Asia and beyond.

A focus on BBIN connectivity will position the eastern subregion as a gateway for connecting South Asia to Southeast Asia and beyond.

There is also a strong emphasis on the scope for energy connectivity and cooperation in BBIN countries and beyond. Nepal already sells its surplus hydropower to India through the energy trade market, and it could expand to trading with Bangladesh via India. An integrated regional market will support green and resilient energy security in the subregion. The momentum behind the subregional electricity market can eventually be expanded further east to include ASEAN and Southeast Asian countries, but there is a fair amount of regulatory and infrastructural groundwork that needs to be done.

BS: While India was sceptical about joining the Regional Comprehensive Economic Partnership (RCEP), it has become a member of the Indo-Pacific Economic Framework (IPEF), though it has not signed up yet for the trade pillar. Given such competing geopolitical and economic blocs, how do you see the economic cooperation between South and Southeast Asia taking shape?

CF: The economies in South Asia and Southeast Asia are heterogeneous in size and structure, and so are their trade relationships; but the potential to trade more is considerable. India has a history of developing strong linkages with ASEAN countries. India–ASEAN ties have progressed over the past three decades, from the first sectoral dialogue partnership in 1992 to a full dialogue partnership in 1995. In the period between April 2021 and February 2022, the commodity trade between India and the ASEAN region amounted to more than US$ 98 billion, with Indonesia, Malaysia, Singapore, Thailand, and Vietnam being the main trading partners.

Ties between India and Singapore are also robust. India received the largest foreign direct investment (FDI) inflows from Singapore in 2021–2022. East Asia also entertains economic linkages with other South Asian countries such as Nepal and Bangladesh, which send thousands of migrant workers to the region. There are also many cultural, religious, people-to-people, and tourism ties between South Asia and East Asia.

Regionally, economic cooperation between South Asia and Southeast Asia has been steadily on the rise. Trade linkages grew ninefold over the past two decades, from US$ 38 billion in 2000 to US$ 349 billion in 2018. But there is potential for much more. As per World Bank estimates, inter-regional integration, supported by the liberalisation of tariffs, non-tariffs, and FDI barriers, along with trade facilitation, can boost the GDP by 0.4% to 10.6% for South Asia and by 0.1% to 0.4% for Southeast Asia. The gains are much greater if these reforms are extended to third countries and intra-regionally.

Going forward, economic cooperation between both the regions will be guided not only by geopolitics, but also by emerging opportunities in areas such as digital technology, the services sector, and trade in environmental goods.

Going forward, economic cooperation between both the regions will be guided not only by geopolitics, but also by emerging opportunities in areas such as digital technology, the services sector, and trade in environmental goods. There are other avenues that have been triggered due to the pandemic, such as cross-border delivery of healthcare, telemedicine, disease surveillance, and education services. Many of these linkages will continue to be tapped at the bilateral and subregional levels and by strengthening and expanding some of the already existing free-trade agreements, such as the ASEAN–India Free Trade Agreement.

BS: One reason for low intraregional trade is the similar factor endowments in countries in South Asia, in terms of natural and human resources. In this context, what makes digital and environmental products different from conventional areas of trade such as agricultural produce and textiles? How important is the presence of differentiated factor endowments in these areas of trade?

Nora Dihel: There is a significant potential for intraregional digital trade. The presence of economies with dynamic Information Technology and Information Technology Enabled Services (ITES) sectors — such as India, Singapore, Malaysia, the Philippines, Thailand, Vietnam, Indonesia, Sri Lanka, and Bangladesh — indicates a strong potential for trade and investment in this sector. The availability of niche skills in tasks related to programming, data analytics, and database management, as well as the need for local customisation for large domestic markets, has led to the establishment of a tiered localisation structure within the ITES industry. The critical nodes are served by global development centres.

Looking ahead, there are already signs that in at least some of the more-developed South Asian and Southeast Asian economies, fifth-generation (5G) wireless technology will open up exciting possibilities for the development of new and innovative service solutions.

Smaller regional product clusters and regional delivery centres serve large national or regional markets. For example, the Philippines, with its large pool of English-speaking professionals, is an important global location for performing certain back-office and analytical tasks. Sri Lanka is another example, where the country has developed a niche for certain accounting services tasks. Looking ahead, there are already signs that in at least some of the more-developed South Asian and Southeast Asian economies, fifth-generation (5G) wireless technology will open up exciting possibilities for the development of new and innovative service solutions. Furthermore, automation and additive manufacturing (3D printing) are already impacting manufacturing sectors (for instance, the textiles and garments industry) by transforming production processes and the relative importance of inputs. The key implication for textile exporters such as Bangladesh is that they need to adopt these technologies to improve productivity and retain production. Future technologies, including improved artificial intelligence and deep-learning technologies, as well as increased uptake of blockchain, are developments that governments must consider when looking at the digital economy.

Green trade is critical for all countries in Asia to scale up climate change mitigation and adaptation efforts in order to maintain export competitiveness and diversify their export baskets. Greening traditional export sectors such as ready-made garments will be critical for countries to ensure worker health and maintain productivity. In addition, diversification to more environmentally sustainable exports that have less or no impact on the environment is also of great importance. To this end, reducing trade barriers to access environmental goods and services (technologies) to reduce greenhouse gas emissions and produce greener products is key to increasing the earnings for major export industries and foreign exchange earnings for all countries.

BS: The report states that weak logistics and infrastructure systems are one of the many issues that hamper investment potential in South Asia. How can the private sector be leveraged to complement existing efforts to increase connectivity?

ND: The report shows that weak logistics and infrastructure systems, fragility, and insecurity hamper South Asia’s investment potential. A trade agenda that includes trade facilitation reforms in addition to the liberalisation of goods, services, and investments can generate important gains. The private sector can play an important role in implementing such reforms. For example, our report highlights opportunities for improvements in sanitary- and phytosanitary-related infrastructure, including establishing accredited private-sector laboratories, reviewing mandatory standards, and using trade facilitation tools such as harmonisation, equivalence, and mutual recognition in the region.

About the author:

Cecile Fruman is Director, Regional Integration and Engagement in the South Asia Region (SAR). She is responsible for fostering collaborative activities amongst SAR countries and managing partnerships and engagements with the SAR and global development partners. Previously, Cecile was Senior Manager for Financial Intermediary Funds and Partner Relations in the Development Finance Vice-Presidency (DFi), where she oversaw a portfolio of Financial Intermediary Funds (FIFs) that disbursed in the order of $6 billion a year in grants for key global development priorities to multiple implementation agencies and coordinated the World Bank’s strategic engagement with development partners. Cecile holds an MBA from ESCP Europe, one of France’s top business schools, and furthered her studies at the University of Osaka in Japan.

Nora Dihel is a Senior Economist at the World Bank, Thailand. She is currently working on trade and regional integration in South Asia. Prior to joining the Bank, Nora worked in the Chief Economist Unit of the Directorate General for Trade of the European Commission and the OECD Trade Directorate. She has published extensively on the economic impact of services reforms, regional integration and South-South linkages. Nora has a Doctorate Degree in Economics from the Helmut Schmidt University, Germany.