By Ujjavala Bothra

Edited by Nidhi Singh, Junior Editor, The Indian Economist

If one looks closely, the problems that are being faced by SAARC nations today is akin to the ones faced by the European Union after the Second World War. Europe chose coal and steel industry as a linking factor for political stability through economic integration in a time when it was facing dire consequences of the World War II and had the further threat of an upcoming cold war. SAARC nations on the other hand have interesting cultural commonalities but the religious conflict and particularly the battle between Indian and Pakistan over Kashmir has not allowed this region to foster and flourish. Any event in this “abode of God” has always had devastating repercussions on both the economies. If the SAARC nations aim at economic integration, then political stability and conflict resolution will follow, and Europe is a striking example of the same. The strong correlation between economic and political factors might be because of the fact that economic integration makes the war between nations too expensive and urges the member nations to solve issues through a peaceful route. India’s fifteenth Prime Minister Narendra Modi had invited the head of states of all the SAARC nations to his swearing in ceremony. Political analysts have varied opinions on this move taken by the prime minister. Some refer to it as a photo opportunity while others consider it to be a kick-start for a new foreign policy. In fact some analysts have gone beyond and predicted that this might be the first step by the Indian government to replicate the European Union model.

The question here is that coal and steel were the common industries in Europe which paved the way for an economic merger. What could play a similar role in the case of SAARC nations? A detailed analysis of the industries reveals the fact that textile industry is the common interest industry for all the SAARC nations. Textile seems viable because of the following reasons. Firstly the export baskets of the SAARC nations are highly similar which may lead to a competition against one another in the same industry in the global markets. A classic example of the same is the raw material industry. Secondly, India has relative trade comparative advantage in a lot of industries but the only industry in which all the SAARC nations have relative trade comparative advantage is textiles. Hence textile industry could promote the merging of economies at the initial stage. Moreover, the newly formed government in India is planning to replace all the indirect taxes by one single tax namely the “Goods and Services Tax”. This could be well replicated in all the SAARC nations as this will act as a unifying force by promoting business, free trade and will thereby lead to a greater economic integration. A SAARC merger will allow free flow of goods, services, capital and people representing a stronger South Asia on the global front.

Nawaaz Sharif mentioned in a press conference on 27th May 2014 that “we need to change confrontation to co-operation and acquisitions and counter acquisitions will turn out to be counterproductive” and an economic solution might be the key to the political problems of the economies in South Asia which is the primary reason acting as an obstacle in regional development.

It seems quite evident that SAARC will be benefited by replicating the European Union model but at the same time there are many hindrances which might prove to be a challenge in this historic move. Firstly there is no doubt regarding the fact that India is the lone regional superpower as far as SAARC is concerned. This might not be appealing to other member nations as they might feel that the decisions may not be taken in their interest. Unlike SAARC, in the case of European Union, France and Germany were two powers getting into a union which ensured power symmetry. The other reason which might deter the nations from entering into a union is the issue of common currency for which the countries might have to give up some level of sovereignty in terms of monetary and exchange control policies to establish and function in an inter-governmental system.

With Pakistan Government admitting that “the meeting between Modi and Sharif was not just a photo operation” and that “the actual outcome of the visit was much better than it was expected”, we can be hopeful that the SAARC nations might take the economic route to resolve political disturbances. Only time will reveal the course of action that will be actually opted for by the SAARC nations but we can definitely be optimistic after the meeting of the SAARC nation leaders with Mr. Modi.

Posted by The Indian Economist | For the Curious Mind