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"As long as human rights are violated, there can be no foundation for peace. How can peace grow where speaking the truth is itself a crime?"

South Asia: Bonds to build

July 16, 2010

By James Lamont
The Financial Times (UK)
July 14 2010 20:43

Members of the ultra-left politburo sit under a
big red banner. In the middle is Puspa Kamal
Dahal -- a former teacher better known by his nom
de guerre, Prachanda -- the man making an
aggressive bid to become Nepal’s next prime minister.

Lining the corridors are portraits of the old
days of the Himalayan former Hindu kingdom --
tiger-hunting expeditions; royal households in
red tunics and plumed headgear; and doughty
queens in uncomfortable-looking Victorian-era regalia.

Following a decade of radical change in which
Nepal overthrew its monarchy, the tottering
republic is engaged in a halting peace process
that has brought Maoist militants into the
political mainstream, accompanied by falling
economic growth rates and anxieties about a fragile banking system.

Altered, too, is the once umbilical relationship
between the republic of close to 30m people, and
its large, fast-growing neighbour, India. New
Delhi’s influence over the landlocked mountain
state was far-reaching. It helped bring in
democracy in the 1950s, and at one time backed
Maoists in the struggle against an autocratic
monarchy. In the words of one Nepalese political
analyst, India’s ambassador to Kathmandu was like
the “second king” in terms of his local power.

Not any more. India has grown unpopular among
young Nepalis, and Prachanda’s Maoist party is
openly hostile to New Delhi. Economic asymmetries
are widening, as India grows at nearly 9 per
cent, while Nepal languishes at 3 per cent.

The two countries do not even share a rail link.
It is Chinese contractors, rather than Indian,
who are building highways across the Himalayas
and power plants. Beijing has plans for a large
inland port at Xigaze in Tibet, on Nepal’s
border, to facilitate trade in south Asia.
Remittances are the mainstay of the economy as
Nepalis travel to the Gulf, Iraq, Afghanistan and Malaysia for work.

The relationship with Nepal illustrates a dilemma
that puzzles and frustrates policymakers in New
Delhi: the mismatch between the growing economic
power of the world’s biggest democracy, and its
ability to convert this into geopolitical
influence, particularly across south Asia.

India

By comparison, China -- Asia’s other great
emerging economic power -- has made huge efforts
to improve relations with its neighbours during
the past decade, settling a number long-running
border disputes, making large investments in
infrastructure and offering preferential trade terms.

Tensions between China and some of its neighbours
have increased, however, especially over what
some countries see as Beijing’s increasingly
assertive approach to territorial disputes in the South China Sea.

A lack of regional cohesion will put the area at
an economic disadvantage to the more dynamic markets of east Asia.

It also poses big security risks for India, most
importantly from China, in what is likely to
become a tussle for regional dominance in the
coming decades. Ashok Mehta, a retired general
and respected security analyst, says that if
China one day controlled the heights of the
Himalayas in Nepal, it would have no need of a
nuclear arsenal trained on India. He views the
country as a strategic linchpin whose loss would cost New Delhi dearly.

Long-term difficulties with unruly neighbours
worry New Delhi. Manmohan Singh, prime minister,
has made efforts to engage Pakistan, a
nuclear-armed power with which the country has
fought three wars in 63 years since independence
from British rule. He favours openness over a
security lockdown in the region. He has also
sought greater engagement with Bangladesh’s new
civilian government under Prime Minister Sheikh
Hasina, and a dialogue with President Mahinda Rajapaksa of Sri Lanka.

"It is our obligation to make every effort to
normalise relations with India’s neighbours. That
is essential, I have always believed, to realise
the development potential of our country," he says.

To do that, Mr Singh will need to lead efforts to
reverse the instability and economic weakness
beyond his borders, and restitch the unity lost
among the constituent parts of British India that
once stretched from Colombo to Kabul to Rangoon.

For decades, India’s economy, growing at 3 per
cent a year, was a laggard in a region notorious
for deep poverty, and where a combination of
political mistrust, poor infrastructure and
crossborder red tape restricted trade. For
decades a liberalising Pakistan outperformed its
bigger southern neighbour with average growth
rates of 5.5 per cent between 1947, when
partition formed the two countries at the end of
British rule, and 1990. During the past two
decades the lead has evaporated, and asymmetries are becoming more pronounced.

Former Pakistani finance minister Shahid Javed
Burki says: "There has been remarkable growth [in
Pakistan] in the past. What we are seeing today is a downturn.

"Pakistan needs to change its [competitive
stance] to collaborate with India in many areas.
Pakistan has to realise that India is south Asia’s anchor economy."

Mr Burki urges New Delhi to look to its
neighbours for trade partnership rather than to
"distant relationships" with Association of South
East Asian Nations members and Europe.

TRADE RELATIONS

Barriers that restrict a fragmented zone’s growth potential

The Wagah border post between Amritsar in India
and Lahore in Pakistan is routinely clogged up by
scores of trucks transporting agricultural
produce. Their progress is slow in the heat.
Papers are checked and re-checked under the
watchful eye of military and customs officials on
both sides of a hostile divide.

An army of porters in blue overalls -- called
"coolies" -- earn their living by loading and
unloading cargoes of onions heading north, most
often in different vehicles. Little more than 20
civilians cross the major crossing point between
two of the world’s most populous countries.

South Asia is considered by some to be the
world’s least economically integrated region.
Despite many attempts at liberalisation, the
region boasts some of the world’s highest barriers to trade.

Only about 5 per cent of the region’s total trade
is among its nations -- despite their proximity
and shared cultures and language. (Intra-regional
trade in Africa is nearer 15 per cent, over far greater distances.)

The failure to liberalise is traditionally blamed
on high tariffs, political differences --
including open warfare -- and mismatched
economies. Trade between India, the region’s
dominant economy, and the likes of Sri Lanka,
Bangladesh and Nepal has been blighted by
inefficient customs and border procedures,
outdated infrastructure and high transport costs.

"Notwithstanding the attempts made to liberalise
trade, South Asian countries maintain a great
many trade barriers against each other," says
Jeevika Weerahewa of Sri Lanka’s University of
Peradeniya. "These include high customs duties,
non-tariff barriers like technical and health
certifications and standards, and also quantitative restrictions."

The World Bank has long expressed concern that,
alongside such constraints, the region’s economic
prospects are further dimmed by not investing in
better roads, rail and communications networks.

The result is that south Asian countries are less
able to benefit from expanding global trade, and
economic growth is hampered. Meagre trade also
holds back political integration between bitter
rivals such as Pakistan and India, and has left
landlocked nations such as Nepal and Afghanistan isolated

Today India’s strong economy, which is forecast
to grow by 8.5 per cent this year, is
outstripping those of its neighbours rather than
pulling them with it. The growth rate is double
that of Nepal and Burma. Pakistan’s growth is no
more than 4 per cent. With 6 per cent growth,
only Bangladesh, emerging from military rule, and
Sri Lanka, recovering from a long civil war, remain close.

Of those, Bangladesh is viewed as offering the
best prospects for improving relations. There, a
shared Bengali identity runs deep, the Muslim
population is less prone to religious
fundamentalism than that of Pakistan and Ms
Hasina is regarded as an ally of India.

Also promising are Bhutan, a tiny benign mountain
monarchy that likes to measure its progress in
terms of happiness rather than gross domestic
product; and Afghanistan, where New Delhi makes a
great deal of its historic links to Kabul, and
has backed a reconstruction effort with a $1bn aid budget.

In contrast, Pakistan, Sri Lanka and
military-ruled Burma are judged to have fallen
more under the sway of China, whose interference in south Asia India fears.

Relations with Pakistan, and its 180m people, are
where improvement is most needed but where
progress is most elusive. Bilateral trade between
the neighbours is paltry. Ten years ago, it was
just $251m. It now stands close to $2bn but has
the potential to be much higher if energy,
information technology and agricultural partnerships were to flourish.

By comparison, India’s bilateral trade with China
is expected to reach $60bn this year. But with
fast growth have come protectionist rivalries.

"India’s rise should not be seen in .negative
terms by our neighbours," says Nirupama Rao,
foreign secretary. "Our fast-growing economy and
large market should be seen as a growth
opportunity: a reliable source for investments,
technology and entrepreneurial resources, besides
being a rapidly expanding market for our neighbours’ exports."

But, she says, economic integration across south
Asia has been "stymied" by political enmity.
Intra-regional exports are only 5 per cent of the
region’s total exports. Even telecommunications
traffic within the region is low, in spite of the
fact that India is one of the fastest-growing
mobile markets in the world, and companies such
as Bharti Airtel are making investments in Bangladesh and Sri Lanka.

The need to mend relations with neighbours is
creating internal pressure to increase the ranks
and upgrade the skills of a ministry seen
internationally and among India’s own diplomatic
corps as far too thin for a country of its size and ambitions.

Ms Rao’s complaint applies as much to Sri Lanka
to the south as it does Pakistan to the north.
Colombo, dwarfed by its mainland neighbour,
distrusts New Delhi. India has also been held
back from building warmer relations with Colombo
by politicians in its southern state of Tamil
Nadu, where politicians were sympathetic to the
Tamil minority’s fight for greater autonomy.

Suspicion is growing in India of an increasingly
close relationship between Colombo and China.
Beijing became Sri Lanka’s biggest source of
foreign funding last year, providing $1.2bn. It
has provided military aid and is helping to build
big infrastructure projects, including an
airport, roads and a sea port at Hambantota on the south of the island.

"China’s ability to make the strategic inroads
into Sri Lanka has been at India’s expense," says
Professor Brahma Chellaney of the Centre for
Policy Research, a New Delhi think-tank.

In Nepal, India’s embrace is weakening without
much need for Chinese influence. Yuva Raj
Khatiwada, central bank chief, complains of a
growing asymmetry, in spite of the fact that his
country relies on India for 60 per cent of its trade.

He says the disparities make it hard to manage a
currency pegged to the Indian rupee at a time
when New Delhi is raising interest rates. In
spite of past liberalisation of the economy,
Nepal is at a structural disadvantage in terms of
technology, transport links, trade union militancy and power shortages.

India, in turn, fears that political confusion
and poor economic performance in Nepal will
threaten the economic recovery in the
neighbouring state of Bihar, one of its poorest.
There Nitish Kumar, chief minister, has defied
the state’s dismal record to deliver 11 per cent
growth in a part of India that many considered lost.

On the political front, another factor worrying
policymakers in New Delhi is the synchronised
rise of Maoism in Nepal and within its own
borders, which India’s home ministry believes are linked.

Nepal’s malaise makes both India and China
queasy. Neither of the world’s fastest-growing
large economies wants Maoist-led instability, nor
impoverishment, on its borders. Anti-Indian
sentiments are rising, yet the Nepalese are far from being pro-Chinese.

The packed-out hall at the Maoist meeting in
Kathmandu is a reminder of the urgency of the
challenge facing India. If it fails to strengthen
regional ties, it is destined to see its economic
expansion hemmed in by unsympathetic and
threatening neighbours. Moreover, China’s
economic ascendance in Asia will be hastened by
New Delhi’s shrunken influence. If, on the
contrary, India spreads its rising prosperity,
its goals of matching China with 10 per cent
economic growth will take a leap forward.

Additional reporting by Prateek Pradhan in
Kathmandu, Joe Leahy in Colombo and Geoff Dyer in Beijing
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