Regional Cooperation for Inclusive and Sustainable Development

South and South-West Asia Development Report 2015-16

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South and South-West Asia Development Report 2015-16

Regional Cooperation for Inclusive and Sustainable Development

Executive Summary

The 2030 Agenda for Sustainable Development, comprising 17 Sustainable Development

Goals (SDGs) adopted by world leaders at the United Nations Summit in September 2015, is

particularly relevant for eight countries of South Asia (Afghanistan, Bangladesh, Bhutan,

India, Maldives, Nepal, Pakistan and Sri Lanka) which, despite their dynamism and

remarkable MDG achievements, account for two fifths of the world’s poor and suffer from a

number of development and infrastructure gaps. Given South Asia’s share of the world’s

population and poverty, the subregion will occupy a pivotal place in the global achievement

of SDGs. Hence, the stakes are very high.

The South and South-West Asia Development Report argues that South Asia has a unique

opportunity to close the development gaps and eradicate poverty and hunger by 2030 by

implementing the 2030 Agenda. The Report proposes seven key policy priorities for South

Asia that can expedite achievement of the SDGs by exploiting interrelationships between

different goals. The Report also argues that regional economic cooperation and integration

between the South Asian countries and with their contiguous neighbours in South-West Asia

(the Islamic Republic of Iran and Turkey) and South-East Asia could significantly support the

achievement of the SDGs in the subregion. Besides strengthening the countries’ collective

energy and food security and enhancing their resilience to natural disasters, regional

integration and connectivity could enable South Asian countries to maximize economic

opportunities by harnessing the potential of regional value chains for employment creation,

poverty eradication and sustainable development. As a development partner of the subregion,

UNESCAP outlines in this Report, a forward-looking policy agenda for unlocking the

potential of regional cooperation and integration in pursuit of inclusive and sustainable

transformation of South Asia.

Implementing the Sustainable Development Agenda in South Asia

The SDGs build on the MDGs agenda in the first 7 Goals, with cross-cutting issues

such as economic growth, job creation, industrialization and inequality (SDG 8, 9, and 10),

and the ecological sustainability related goals (SDG 11-16) besides reinvigorated global

partnership (SDG 17).

The MDGs remain an unfinished agenda for South Asia, even though the subregion

has achieved the poverty reduction target, as well as targets pertaining to gender equality in

primary education, reducing Tuberculosis (TB), increasing forest cover and protected areas,

CO2 emissions per unit of GDP and access to safe drinking water, in addition to being on

track towards achieving the primary enrolment target and gender equality in secondary

education. South Asia has found it challenging to meet the targets in respect of maternal and

child mortality, sanitation, and in bringing down the proportion of underweight children.

Progress has also been uneven across countries besides prevalence of sharp rural-urban and

gender divides in terms of achievement.

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The 2030 Agenda leverages the favourable spillovers between economic, social and

environmental dimensions of development through their integrated treatment. Failure to

exploit those favourable externalities of coordinated development across the three pillars has

left South Asia with vast structural imbalances and vulnerable to external shocks. Over half a

billion people are still living in extreme poverty, inequalities have been rising, and the

employment elasticity of growth has fallen. Land degradation and a failure to harness

sustainable agricultural practices to enhance agricultural productivity have made South Asia

the biggest hunger hotspot in the world. Failure to harness renewable energy resources and

inadequate attention to energy efficiency have led to rising imports of hydrocarbons straining

the current account balances and resulting in energy scarcities, including blackouts that have

led to losses of up to 2-3% of GDP. The inability to manage the effects of climate change has

exposed South Asia to rising incidence of natural disasters, making it the worst affected

subregion accounting for the bulk of fatalities from natural disasters in Asia and the Pacific.

Taking cognizance of the interrelationships between the SDGs and positive spillovers

from integration between the economic, social and environmental pillars of development, the

Report identifies seven key strategic policy priorities for SDG achievement in South Asia

aligned with national development priorities to foster a virtuous cycle of progress where

achievement of one SDG can spill over to accelerated progress towards other SDGs.

1. Sustained, broad-based and job-creating economic growth through industry-

oriented structural transformation

Robust job creating economic growth (SDG 8) is critical to support the achievement

of poverty eradication (SDG 1) and achieving other SDGs (1-7), providing resources for

access to basic social services and physical infrastructure (SDG 9) and pathways to

sustainable growth (SDGs 11-16). South Asia is currently the fastest growing subregion in

the world but South Asia’s growth has not been creating adequate productive jobs for its

youthful population. The structural transformation in South Asia has moved from agriculture

to services bypassing industry whose share in GDP has virtually stagnated over the past two

decades and more, leaving agriculture to support nearly half of workforce with only 17%

share of income. With much lower proportion of industry in GDP compared to the East and

South-East Asian countries, South Asia has not been able to harness the substantial backward

and forward linkages of industry for job creation. The UNESCAP-SANEM South Asia model

simulations show that an industry-oriented structural transformation along with a couple of

other SDG priorities would generate more than 65 million additional jobs and would lift more

than 83 million additional people out of poverty compared with a business-as-usual growth

strategy in South Asia. An industry-oriented structural transformation is therefore a key

strategy for South Asian countries. It could be achieved through reforms intended to ease-of-

doing business and through other supportive policies, commonly referred to as industrial

policy covering aspects of monetary, fiscal, exchange rate and intellectual property rights

policies. It would also be supported by demand stimulus from poverty reduction, the

expansion of health, education and other social sector programmes besides rising incomes.

Underpinned by the subregion’s youth bulge and rising middle class, South Asia is projected

to emerge by 2050 as the largest centre of final consumption in the world. A regionally

coordinated industrialization strategy would leverage spillovers of manufacturing and rising

consumption across the borders, creating productive capacities all across South Asia through

regional value chains, provided transport connectivity and trade facilitation are strengthened,

as discussed in the Report.

2. Closing gaps in infrastructure by providing essential services to all

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South Asian countries are characterized by wide infrastructure gaps in transport

infrastructure (SDG 9), basic needs infrastructure such as access to drinking water and

sanitation (SDG 6), electricity (SDG 7), and ICT, and are ranked at the bottom half of

infrastructure development in the Asia-Pacific. The subregion loses 3-4% of GDP due to

infrastructure deficits. Access to water, sanitation, energy and transport are fundamental

requirements for basic needs for meeting sustainable subsistence and also critical

determinants for the achievement of all other SDGs including health and education. Recent

research suggests that South Asia per capita incomes would increase roughly 1% for each one

percentage point increase in infrastructure availability in South Asia.

For closing the

infrastructure gaps, South Asia would need staggering resources of the order of USD 4-5

trillion by 2030, but there are opportunities for raising them as summarized in the Report.

3. Harnessing the demographic dividend through universal access to education and

health

Health (SDG 3) and education (SDG 4) related goals are critical priorities for South

Asia, given the gaps remaining and despite remarkable progress accomplished over the past

decade. Investing in human development through universal health coverage and quality

education and vocational training for skill development to provide equal opportunity to all,

including women and vulnerable sections of the society, will enable South Asia to reap the

demographic dividend from the its youthful population as the dependency ratio for the

subregion will continue to decline till 2030. Such investment will also allow the subregion to

bridge the global skills deficit of 40 million workers with tertiary degrees and another 45

million with secondary education by 2020. South Asian governments are adopting rights-

based approaches to provide universal education but need to also pay attention to the quality

of education and vocational education to produce skilled human resources needed for

industry-oriented structural transformation. There are opportunities for regional cooperation

in health and education that should be harnessed, as demonstrated by the South Asian

University.

4. Social protection and financial inclusion for reducing inequalities, poverty and

other deprivations

Social protection strategies and financial inclusion are important for accelerating

poverty reduction (SDG 1) and reducing inequality (SDG 10) as they increase the resilience

of vulnerable populations, especially to adverse income shocks. The rural-urban inequalities

have increased as a result of financial development, economic growth and consumer prices

dynamics that benefit urban populations. The bottom 40% of the population in South Asia

have less than 6-7% of the national income, less than half the adults in South Asia have an

account at a financial institution, and except for Sri Lanka, fewer than 11% of workers have

social security. Expenditure on social protection is a smart investment in sustainable

development and the most obvious evidence of increased development that most households

will experience in their daily lives. South Asian countries have evolved several models of

social protection including income support or employment guarantee or conditional cash

transfers or micro-insurance and micro-pensions that could be scaled up and made universal.

These countries have also launched financial inclusion campaigns while self-help groups,

microfinance institutions and community-based organizations are also playing an important

role in enhancing financial inclusion. Governments may also leverage new innovations such

as branchless banking and mobile-based financial services for this purpose.

5. Addressing food security and hunger with agricultural productivity improvements

through sustainable agriculture

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Food security and eradication of hunger (SDG 2) is a key development challenge in

South Asia which continues to be one of the largest hunger hotspots in the world, with one in

five people in the subregion being undernourished. In 2014-15, around 281 million people in

South Asia remain undernourished, which represents 35.4% of the undernourished population

globally. Addressing the hunger through doubling agriculture productivity by 2030 through

sustainable agriculture would lead to the creation of 13 million additional jobs and over 16

million additional people going out of extreme poverty as per the simulations made within the

UNESCAP-SANEM South Asia model, besides addressing hunger challenge. Regional

cooperation can also play an important supplementary role in addressing food security

challenge in South Asia, as discussed in the Report.

6. Promoting gender equality and women’s empowerment through entrepreneurship

South Asia has achieved gender parity in primary and secondary education, but large

gender disparities still remain in tertiary education, political representation, and the

proportion of women in paid employment (which at 21% represents only half of the world

average). South Asia has the highest prevalence of child marriage in the world and the

highest levels of female child mortality. A recent McKinsey study estimated that India and

other South Asian countries could gain $100 billion and $700 billion in their GDP by 2025

respectively following the ‘best-in-the region’ scenario while the full potential could add up

to $ 400 billion and $ 2.9 trillion respectively to their annual GDP by 2025. Promotion of

women’s entrepreneurship can be a potent catalyst for achieving gender equality and

empowerment. More effective women’s entrepreneurship can be promoted through a gender-

responsive policy attention and entrepreneurship promotion ecosystem covering “one-stop

shops” for information, guidance, credit availability, and legal assistance. Incentivizing

lending to women entrepreneurs through tax rebates, introduction of entrepreneurship

education in schools for girls, and targeted business training programmes for women

entrepreneurs may be helpful besides sharing of good practices across South Asia.

7. Enhancing the environmental sustainability through low-carbon climate-resilient

pathways to development

Policies for transformative development must reengineer growth towards sustainable

development pathways. Despite very low per capita emissions, South Asia’s monsoon

dependent agriculture and low-resilience infrastructure is highly vulnerable to climate

change. Even a one degree increase in temperature will raise sea levels by up to 98cm which

in Bangladesh, for instance, would erode 10% of the country’s land area and displace

millions of people. Failure to harness renewable energy resources and inadequate attention to

energy efficiency have led to rising imports of hydrocarbons despite South Asia being

endowed with huge hydroelectric potential, solar and wind energy potential. Changing energy

mix in favour of renewable sources such as solar and wind besides fuller exploitation of

hydroelectric resources, move towards cleaner fuels such as gas-based energy and employing

new technologies for reducing emissions in coal-based energy generation will need to form

part of decarbonization strategy for South Asia. Regional cooperation in exploiting

hydroelectric potential and for development of regional energy markets through gas pipelines

and energy grids would be important, as discussed later. Sustainable production and

consumption requires a pivotal change in the use of resources and control and management of

pollution and waste. Industry needs to move towards sustainable production through

enhanced energy efficiency, waste recycling, and cogeneration. Fuel subsidies that encourage

wasteful consumption would need to be phased out. Energy efficiency of lighting and

appliances needs to be enhanced. Sustainable consumption requires lifestyle change including

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3-R (reduce, reuse and recycle) practices. Interesting innovative models of sustainable solid

waste management are emerging from the subregion including those from UNESCAP

supported projects. Finally, South Asia will be developing huge new urban infrastructure

including hundreds of new cities to accommodate rising proportion of urban population. This

provides an opportunity to leapfrog to low carbon more sustainable paths including greener

and more resilient buildings and urban infrastructure, sustainable waste management and

urban transport systems in smart cities.

Means of implementation for SDGs

The means of implementation to achieve the 16 SDGs require domestic political will

complemented by a global partnership covering five policy dimensions of finance,

technology, regional coordination, data and monitoring and policy coherence.

a. Financing the 2030 Agenda in South Asia

South Asian countries will require $4 to 5 trillion to close gaps in infrastructure alone

by 2030. UNESCAP estimates that social investments including providing employment for

all, income security for vulnerable and health, energy and basic infrastructure for all would

cost 10% of GDP in India and up to 20% in Bangladesh by 2030. South Asian countries will

need to raise more domestic and external resources including through raising tax to GDP

ratios from current rates of around 10% through expanding tax base, improving tax

compliance and new innovative taxes for specific SDG priorities like education, sanitation or

infrastructure being tried in the subregion. South Asian countries are also beginning to

harness the potential of public-private partnerships (PPPs) for infrastructure development

besides harnessing the potential of corporate social responsibility for addressing the SDG

priorities, as India has recently legislated, or incentivizing sustainable investments by

financial institutions.

Developing regional bond markets, innovative asset classes, and cross-border listings,

regional clearing, settlement and payment systems can facilitate better capital and resource

integration. UNESCAP supports transformation of the SAARC Development Fund into the

South Asia Development Bank, as a regional development bank to catalyze infrastructure

investment complementing new regional development banks such as BRICS Development

Bank and AIIB. Complementing the Addis Ababa Action Agenda (AAAA) on Financing for

Development, Asia-Pacific member States have proposed establishing a regional Asia-Pacific

Tax Forum to foster cooperation on tax matters, profit shifting, transfer pricing and

information sharing, within UNESCAP framework. While 0.7% of GNI as ODA target by

OECD countries remains elusive, South-South flows of development assistance are fruitfully

complementing the conventional ODA flows, including rising Indian development assistance

to other developing countries within the region and beyond.

b. Harnessing technology and frugal engineering for low-carbon pathways

The implementation of the 2030 Agenda depends on facilitating new technologies that can

lead to low-carbon pathways and deliver on the INDCs committed by them under UNFCCC.

South Asian countries face large gaps in science, technology and innovation (STI) for

accelerating development. South Asia spends only 0.7% of its GDP on research and

development (R&D) compared to 2.6% in East Asia. South Asian countries require assistance

for access to sustainable technologies for energy generation and emissions reductions given

the high concentration of technology generation activity and patent ownership in a handful of

developed countries. Pooling resources to jointly develop sustainable solutions could also be

fruitful. The frugal engineering capability of South Asian countries could be valuable for

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developing low-carbon pathways for sustainable development. For promoting frugal

innovation, South Asian countries could establish ‘utility models’ or ‘petty patents,’ that

provide protection to incremental innovations for limited duration besides exploiting

flexibilities available under WTO’s TRIPs Agreement and could actively participate in the

proposed Technology Facilitation Mechanism and Technology Bank under the 2030 Agenda.

c. Regional coordination in implementation of the 2030 Agenda

Regional cooperation and coordination between South Asian countries for

implementation of the 2030 Agenda could supplement national strategies. South Asia leaders

at their 18th SAARC Summit held in Kathmandu in November 2014 provided a mandate for

SAARC coordination and cooperation in implementation of the 2030 Agenda. The revival of

the SAARC Development Goals, realigned for the SDG priorities would be an opportunity to

contextualize the SDGs at the regional level. It would also build institutional cooperation for

sharing of development experiences in addressing different development challenges and

exploiting the potential of regional cooperation for achievement of SDGs.

d. Implementation and monitoring SDG progress

South Asia countries face great challenges in tracking progress on the 17 SDGs and

associated 169 targets, especially given existing gaps in collecting some of the most

elementary statistical and administrative data, such as civil birth registration. Strengthening

regional cooperation for monitoring and evaluation of the means of implementation is an

agenda that UNESCAP and SAARC are well placed to carry out in an example of

intraregional South-South cooperation. A regional approach to monitoring and evaluation can

help develop common standards methodologies and reporting to feed broader regional and

global levels.

e. Policy coherence

The integrated pursuit of sustainable development requires effective governance and

new institutional arrangements to better coordinate across different ministries. In South Asian

countries, institutions such as Planning Commissions have generally coordinated priorities

across ministries. Strengthening the role and capacity of core development institutions, such

as Planning Commissions, for multi-sectoral policy coordination can balance short and long-

term planning objectives for sustainable development.

Harnessing the Potential of Trade and Regional Economic Integration in South

Asia

Trade and regional economic integration including through regional value chains are

critical means of implementation of the 2030 Agenda and for creation of productive

capacities in poorer countries especially in the changed external context. Regional economic

integration has assumed a new criticality in the dramatically changed external economic

context in the aftermath of the global financial crisis with diminished prospects of advanced

countries acting as locomotives of world economy and with the growth rate of world trade

coming down to a fraction of pre-crisis one. While the Doha Round of multilateral trade

negotiations has been virtually abandoned, new mega-trade blocks such as TPP and TTIP are

emerging to bring together advanced economies across the Pacific and over Atlantic in order

to consolidate access to markets. The emergence of large and dynamic markets in developing

Asia, including in South Asia, and significant complementarities that exist across the region

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create space for development of vertically integrated regional production networks that can

enable the region to harness economies of specialization and scale.

Notwithstanding the recent slowdown due to external factors, trade has been an

important dimension of dynamism of South Asian countries, as highlighted by 22% average

annual growth rate recorded during 2003-07. As a result, the trade-to-GDP ratio of South

Asia has recorded some of the most impressive rise, from 37.9% to 48.3% during 2004-2014.

Imports have grown faster than exports leading to widening of trade deficit from US$ 38.7

billion to $213.8 billion over 2004-14 for South Asia while the magnitude of trade

quadrupled from $ 245 billion to close to $1 trillion over the same period. Partly as a result of

the ongoing rebalancing of the world economy and partly due to conscious efforts of South

Asian countries towards deepening integration with East and South-East Asian economies,

the share of advanced economies as trade partners of South Asian economies has come down

in the last decade while developing Asia has emerged as an important trade partner. South

Asia has increased the share of both their exports and imports between the two decades. This

observation indicates the potential of regional economic integration in South Asia and

broader Asia.

South Asian countries exhibit a relatively high dependence on exports of raw

materials and commodities, with the exception of Bangladesh which has a very high

dependence on a single sector for its export earnings namely textiles and clothing. Given their

shared interest in textiles and clothing sector, a coordinated approach towards leveraging

these countries’ respective strengths may be fruitful, in order to move up the value chain and

emerge a global textiles and clothing hub. From the point of view of creating productive jobs,

which is a SDG priority, the subregion needs to also manufacture and export other labour

intensive products such as toys, leather goods and consumer electronics.

UNESCAP analysis suggests that South Asian countries exports have not been able to

fully harness the potential of product and markets diversification having grown by

intensifying exports of existing products benefiting from the expansion of global demand.

Policy initiatives should therefore focus on the consolidation of existing markets through

enhanced competitiveness and diversification into newer markets and products including

products of higher complexity and move up the value chain.

South Asia’s trade in services has grown faster and has produced more favourable

balance than their merchandize trade and rising share in global exports underpinned by their

services oriented transformation. Key sectors of trade in services have been transport and

travel (particularly for tourism dependent economies e.g. Maldives, Bhutan, Nepal and Sri

Lanka). India has emerged as a hub of computer and information technology services

including business process outsourcing. Diverging comparative advantages across South

Asian countries are also indicative of opportunities for enhancing intra-subregional services

trade which have begun to take place but yet to be fully harnessed.

Despite increasingly liberal policy regimes offered by South Asian countries to FDI

inflows, the investment inflows to the subregion have stagnated at lower levels after the

global financial crisis. FDI to gross fixed investment ratio for South Asia has been much

lower fluctuating between 5 to 10%, compared to that in South-East Asian countries, where it

fluctuates between 15-20%. It is clear that despite rise in magnitudes of FDI inflows, South

Asia is yet to exploit its full potential. Like trade in goods and services, the low share of FDI

in gross fixed investment in South Asia may relate to its inability to harness the potential of

intraregional FDI especially with the emergence of some South Asian countries especially

India as significant sources of FDI outflows. In turn the low share of intraregional trade in

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goods and services and investment point to the inability of South Asian countries in

exploiting the potential of regional value chains.

The Southern Asia has a number of overlapping frameworks for regional economic

cooperation and integration including SAARC Free Trade Agreement (SAFTA), ECO Trade

Agreement, BIMSTEC Framework Agreement and APTA besides several bilateral ones.

SAFTA under implementation since 2006 over a 10-year time frame is the most

comprehensive framework for trade liberalization in the subregion and has subsequently been

complemented by the SAARC Agreement on Trade in Services (SATIS).

UNESCAP Gravity Model estimations suggest that South Asia’s intraregional export

potential at US$ 65 billion which remains grossly underexploited with actual exports at $22.5

billion in 2014. Intraregional trade could grow to nearly $ 136 billion by 2020. Regional

economic integration can also contribute to balanced and equitable regional development,

benefiting smaller and poorer parts of the region more as observed in different regions that

have experimented with it including the EU, ASEAN and India-Sri Lanka FTA. Among the

factors that explain low level of intraregional trade despite huge potential, include besides

high proportion of unreported informal and third country trade and poor supply capabilities,

high costs of doing trade in the region that tend to be higher than those with more distant

western countries that deny to intraregional trade benefits of geographical proximity and

contiguity.

For harnessing the potential of regional economic integration and value chains in

South Asia, UNESCAP in this report proposes consolidation of different initiatives in a

unifying framework namely South Asia Comprehensive Economic Partnership (SACEP) that

could pull together aspects of liberalization, facilitation and cooperation under 8 key

priorities that are more fruitful than sum of their parts:

1. Advancing and deepening liberalization of trade in goods: for effective

liberalization of trade in goods under SAFTA, sensitive lists have to be phased out

in an expedited manner to allow intraregional trade to take place at zero duty for

‘substantially all trade.’ India’s lead in virtually eliminating the sensitive lists for

LDCs to allow zero duty trade in all products could be followed by other

countries. UNESCAP-SANEM model simulations show that while all member

countries benefit from regional export and welfare gains from full liberalization,

gains are particularly significant for smaller trading partners and LDCs compared

to larger ones.

2. Effective liberalization of regional trade in services: Intraregional trade in

services is more dynamic and balanced than goods trade. Even though the

SAARC Agreement on Trade in Services (SATIS) has been in force since 29

November 2012, effective liberalization has been impeded by slow progress in

finalizing the schedules of commitments by member countries. To jump-start the

service trade liberalization, member states may agree to a regional common

schedule for SATIS negotiations in select key strategic sectors such as tourism,

construction, health, education, logistics, civil aviation, banking, power and

telecommunication.

3. A comprehensive investment agreement: Investment protection and liberalization

is critical to facilitate efficiency-seeking industrial restructuring and regional

value chains and for building productive capacities in relatively lesser developed

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economies. While the SAARC Limited Multilateral Agreement on Avoidance of

Double Taxation and Mutual Administrative Assistance in Tax Matters has been

signed, the South Asian agreement on promotion and protection of investments

needs to be also adopted besides addressing the information gaps on investment

climate and opportunities.

4. Bringing the cost of trade down through strengthening transport connectivity and

trade facilitation reforms: UNESCAP-SANEM model simulations suggest that a

40% reduction in trade costs would on its own generate a greater impact in terms

of exports and welfare gains than trade liberalization with smaller and lesser

developed economies benefitting proportionately more. The trade costs are to be

lowered through strengthening surface transport connectivity and transit

facilitation (as summarized later) and trade facilitation reforms. As per the surveys

conducted by UNESCAP, South Asia has implemented 41.3% of trade facilitation

measures compared to 69.6% of North and North-East Asia and 56.1% of South

East Asia. There are also variations across countries. Synchronization of trade

procedures and adoption of electronic platforms, or paperless trade and single

windows can lead to higher export gains for South Asian countries given poor

initial conditions, especially large gains for LLDCs namely Afghanistan, Bhutan

and Nepal. Implementation of WTO’s Trade Facilitation Agreement (TFA) also

provides an opportunity for reforms as also to benefit from initiatives taken by

UNESCAP, among other development partners, to assist the member states.

5. Regional cooperation for harmonization of standards and conformity assessment

procedures: Strengthening standards-related capacities, establishment of

accreditation bodies, establishing regional standards, developing regional

conformity assessment procedures and mutual recognition agreements (MRAs)

can help to mitigate any adverse impact that standards may have on trade. While

the South Asian Regional Standards Organization (SARSO) in Dhaka is helping

to develop harmonized regional standards for select products, a multilateral

arrangement on recognition of conformity assessment should be adopted at the

earliest within the SAARC framework.

6. Cumulative rules of origin and industrial cooperation: To facilitate regional value

chains and truly regional products, provisions on regional cummulation on in

SAFTA rules of origin may be made more flexible besides providing preferential

treatment under SAFTA to trade in intermediate products for further processing

and products of joint ventures irrespective of schedule of liberalization.

7. Payments arrangement and banking cooperation for trade facilitation: Besides

strengthening the Asian Clearing Union (ACU) mechanism for clearing of mutual

trade, use of advanced technologies, using real time gross settlement (RTGS) for

saving time and costs could facilitate intraregional trade as proposed by a

UNESCAP study. Given their critical role in facilitating trade and investments

between the countries, South Asian countries could expedite the liberalization of

banking linkages by providing national treatment to designated banks originating

in the subregion on a reciprocal basis.

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8. Regional cooperation in development finance: Enterprises from South Asian

LDCs may be allowed to list and raise capital in more developed capital markets

in the subregion such as in India, Pakistan, or Sri Lanka to increase options for

them to raise capital besides allowing cross-listing of securities on the subregion’s

various stock exchanges. The SAARC Development Fund could transform itself

into a SAARC Development Bank catalysing much bigger infrastructure projects

that are of critical importance for regional connectivity and subregional

development needs through a co-financing arrangement with ADB, or AIIB,

among other financing institutions.

Finally the report makes a case for creation of a broader economic space in Southern and

Central Asia by bringing the three overlapping groupings of the subregion namely SAARC,

ECO and BIMSTEC at a platform to facilitate cross fertilization and learning, and to connect

their cooperation programmes in certain sectors to exploit synergies and network externalities

as in the area of connectivity. UNESCAP is uniquely placed to provide a forum for regular

consultations between the subregional groupings of South and South-West Asia.

Towards Seamless Connectivity across South Asia and beyond

Enhanced intra-and inter-regional connectivity can open up many economic

opportunities by way of collective efficiency and competitiveness of native industries and by

way of access to markets spread across the Eurasian economic space. Massive efficiency

gains and energy savings that broad-based connectivity will bring about, forms an integral

part of the subregion’s sustainable development path as envisaged in the SDGs. The

objective of ‘safe, affordable, accessible and sustainable transport systems for all by 2030’

requires an integrated approach to policy making. Future discourse on development of

subregional cross-border transport has to be guided by the overarching conceptualization of

sustainable transport set out in the SDGs.

The next stages of transport development in South and South-West Asia should

consider ways to integrate the main subregional transport corridors with an Asia-Pacific wide

“trunk route-feeder links” model and thereby maximize the network externalities. Two trunk

corridors identified by UNESCAP-SSWA for the subregion are: Turkey–Iran (Islamic

Republic of)–Pakistan–India–Bangladesh–Myanmar (TIPI–BM) Road Corridor; and

Istanbul–Tehran–Islamabad–Delhi–Kolkata–Dhaka-Yangon (ITI–DKD-Y) Container Rail

Cargo Corridor. ITI-DKD-Y and TIPI-BM corridors are integral parts of AH and TAR

projects led by UNESCAP. In order for operationalising seamless transport along these

corridors, the subregional countries need to address the policy interfaces of transport and

transit facilitation, while encouraging institutional collaboration, adherence to applicable

international conventions and mobilisation of investments for infrastructure.

A recent UNESCAP-SSWA has shown that the TIPI-BM and ITI-DKD-Y land

transport corridors exhibits better transport efficiency, compared to alternate transport routes

and modes. Given that intra-regional trade cost in South Asia is more than 40% higher

compared to corresponding figures for most other regions in the world, by adhering to global

standards for transport and trade facilitation and by undertaking a series of coordinated

reforms to simplify procedures and provide better infrastructure, it is possible for the

subregion to halve costs, enhancing competitiveness for its tradable sectors and harnessing

the trade potential. UNESCAP-SANEM Model simulations show that reduction of costs by

40% can generate by its own an annual growth in intra-regional trade by about 12%. Growth

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in exports of individual countries to subregional trading partners could vary between 5.36%

(India) and 106% (Nepal). While transport facilitation in South and South-West Asia would

have a catalytic effect on intra-regional trade, it can also pave the way for a mega-market

integration by way of inter-regional trade between Europe, Central Asia and South East Asia

with South and South-West Asia acting as a central hub.

In recent times, a number of positive factors are guiding the subregion to make a

significant turnaround from its status of poor connectivity. The increasing engagement of

South Asia with Central Asia and South-East Asia through various trade agreements is also

complemented by transport connectivity agreements and projects. Since joining the CAREC

Program in 2010, Pakistan has been actively looking for new ways to build transport

corridors to Central Asian countries. It is seeking to extend the Afghanistan-Pakistan Transit

Trade Agreement (APTTA) to include Tajikistan. Towards the East, progress on critical

transport corridors between South Asia and South-East Asia is being built under the

framework of BCIM (Bangladesh-China- India- Myanmar Forum for Regional Cooperation)

and BIMSTEC. Recent step to operationalize the India-Myanmar-Thailand (IMT) Highway,

which is part of Asian Highway 1, is an important advancement. The signing of the

Bangladesh, Bhutan, India and Nepal (BBIN) Motor Vehicle Agreement in 2015 is yet

another significant development. The SAARC Motor Vehicles and Railways Agreements are

likely to be finalized some time in near future.

For achieving connectivity in its broader sense, the subregion needs a comprehensive

approach, taking also into account the critical importance of ICT linkages as well as people-

to-people connectivity, besides physical infrastructure required for cross-border movement of

goods and services. Moreover, it also requires broadening the geographical scope of

connectivity beyond South Asia, “linking South Asia with contiguous regions including

Central Asia and beyond by all modes of connectivity” as the South Asian leaders have

emphasized in the Declaration of the 18th

SAARC Summit held in 2014. Such a

comprehensive approach to connectivity in turn requires a master plan. UNESCAP will be

helping the subregion develop its Connectivity Master Plan in partnership with the SAARC

Secretariat and with the support of member States. It will serve as a strategic document for

achieving overall connectivity in the Southern Asian subregion through responsibility sharing

between different stakeholders and coordination between various regional organizations and

initiatives, and thereby enable the subregion to realize its potential as a key growth pole in the

Asia-Pacific.

Regional Cooperation for Energy Security in South Asia

The subregion’s future development path is contingent on how it serves its collective

responsibility to “ensure access to affordable, reliable, sustainable and modern energy for

all”, as called for by SDG 7. The single most important energy challenge facing South and

South-West Asia is to catch up with advanced regions in terms of universal access and per

capita consumption levels through increased supply and operational efficiency without

causing a destructive rise in harmful emissions of greenhouse gases. Widespread adoption of

renewable energy is the only solution that would permit this achievement.

Tapping into domestic renewable energy sources will enable South Asia to bring

down growing import dependency. A successful energy security strategy for the subregion,

led by a renewable energy revolution, can be made possible only through regional energy

cooperation and trade. Trade in electricity is projected to have a positive effect by way of

readjustments in power generation capacity within the region through peak load sharing.

Recent estimates indicate that through regional cooperation and trade in electricity, South

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Asia could save US$222 billion over the 2015-2040 period, or more than US$9 billion per

year in electricity costs.

There are several contributing factors that can be leveraged to the advantage of the

subregion. Huge unexploited hydropower potential concentrated in certain areas of the

subregion provides a firm basis for a voluminous jump in aggregate installed capacity for

electricity generation and trade. The essential building blocks of an eventual region-wide

electricity grid are already in place in South Asia in the form of several commissioned and

ongoing bilateral electricity trading arrangements across the subregion. Integration of

fragmented trading infrastructure would pave the way for a “SAARC Power Grid”.

The same principle may apply to the process of regulatory harmonization that needs

to go along with infrastructural integration. The current bilateral trading arrangements cover

distribution, tariffs, ownership and a host of policy alignment issues, which can form the

basis for creation of a “SAARC Market for Electricity”. With the adoption of the SAARC

Framework Agreement for Energy Cooperation (Electricity), new possibilities have emerged

for making progress along these lines. Region-wide electricity trade will in turn create

possibilities for broader energy cooperation and trade with neighbouring subregions,

particularly with South-West Asia and Central Asia. This process is also under way with the

ongoing oil and natural gas pipelines connecting South and Central Asian countries, as well

as multi-country power trading projects involving both subregions including the CASA1000

project in power trading and TAPI and IPI gas pipelines.

In addition to renewable energy production and trade, regional cooperation holds

immense promise in the areas of joint energy exploration as well as the sharing of technology

and best policy practices. As a regional knowledge repository, the SAARC Energy Centre is

well positioned to anchor efforts in South Asia in this regard. Providing a platform for broad-

based cooperation in energy, the Centre can expedite the formation of an integrated grid

infrastructure and a regional energy policy framework. The regional apex body may also aid

action plans for mobilization of investments, facilitation of research and development and the

institutionalization of energy cooperation. Enhanced energy cooperation and integration in

South and South-West Asia can eventually form part of and benefit from an integrated “Asian

Energy Highway” as envisaged by UNESCAP.

Regional Cooperation for Food Security in South Asia

Food insecurity is key challenge facing South Asia as well as a key global priority for

the 2030 Agenda and more specifically Sustainable Development Goal (SDG 2). South Asia

has fallen short of achieving the MDG of halving the share of people living in hunger.

Progress must accelerate if the subregion is to achieve SDG 2.

Reducing drivers of food insecurity in South Asia requires policy action in four

priority areas. Firstly, policies to eradicate extreme poverty and address the challenge of food

prices ensure better access to food and reduce inequality. US$ 54 billion is required between

2016 and 2030 to increase incomes above poverty thresholds to provide the resources to

eradicate hunger. This should be complemented by the good investments in education, health

and sanitation towards gender equality can make for food security. Primary school attendance

can lead to a 20-25% decrease in food insecurity. Poor access to safe water and sanitation

explains one third of child undernutrition and gender inequality explains another 30%. The

second priority area to address food insecurity drivers should be ensuring access to more

nutritious food and combating the high levels of anemia and vitamin A deficiency that exist

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in the subregion. Thirdly, drivers of food insecurity can be reduced by ensuring better and

more comprehensive social protection in South Asia. Improving efficiency and accountability

for the variety of different social protection programmes can improve household incomes and

consumption and provide social protection for food security. Fourthly, increasing productive

agricultural employment and smallholder productivity will increase food security for the two-

thirds of the working population who are employed in low-productivity concentrated

agriculture.

SDG 2 sets a target of doubling agricultural productivity by 2030. UNESCAP

analysis shows that doubling the grain crop productivity alone for South Asia through

sustainable agriculture approaches by 2030 would lead to increases of 5-16% in GDP and 4-

14% in exports, and 11% increases in household incomes on top of growth under the

business-as-usual. Agricultural extension services, training and resources can help

smallholders address land degradation and chemical overuse, poor water resource

management and update currently unsustainable farming practices.

South Asia’s dietary energy supply is inadequate to meet food requirements for all.

114 kilocalories (kcal) (approximately 100g of cooked rice/1 large apple) are required per

person per day in South Asia to close the food deficit and eradicate undernourishment. This is

an additional 9 million metric tons of food per year. Food loss, due to losses occurring during

agricultural production, post-harvest handling storage and transit accounts for nearly 80% of

all food wastage (food loss plus waste) in the region. Improved post-harvest handling,

infrastructure and logistics including national and regional connectivity will have direct

multiplier impacts on food security through logistics and transport linking food production

systems.

Regional cooperation is essential for South Asia to manage natural resources for

agriculture and food security sustainably because ecological systems often spread beyond

national boundaries. Greater regional cooperation can reduce food volatility and similar food

preferences and production systems permit intraregional closure of supply and demand

mismatches. Population growth and agricultural intensity on existing water resources have

reduced per capita water availability in the subregion by 70% in the last six decades. With

70% of food production in South Asia being linked to monsoon rains, climate change impacts

could decrease annual agricultural production in some countries by 23% by 2080. UNESCAP

has led the emphasis of the regional cooperation agenda for food security. Strengthening

regional institutions is essential for food security in South Asia, for example in the use of

food, grain, seed, gene and other banks as reserves or to improve operationalization of food

reserves and buffer stocks, such as the SAARC Food Bank and SAARC Seed Banks.

Enhancing agricultural productivity requires cooperation in agricultural research and

development to provide new technologies, increase food production, consumption and

improve utilization practices. A collaborative regional approach to food related research and

development centres can improve supply and productivity. In South Asia, regional

cooperation in research and development could improve productivity for all crops and reduce

land use for these grains. Regional cooperation should spur innovation in diverse areas from

geographical information systems (GIS), to seed production, to livestock rearing and disease

management technologies. SAARC Member States could also draw upon and improve

linkages with Asia-Pacific institutions for research and development, including UNESCAP

institutions such as the Centre for the Alleviation of Poverty through Sustainable Agriculture

(CAPSA), the Centre for Sustainable Agricultural Mechanization (CSAM) and the Asia-

Pacific Centre for the Transfer of Technology (APCTT).

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South Asia could increase coordination on the continued push for intellectual property

rights reforms and greater freedoms for small-scale producers. Such cooperation during

negotiations and development of new systems can help guarantee that farmers would not face

perverse effects from innovation such as intellectual property violations from using their own

seeds.

South Asia should also maximize its intra-regional food trade potential which covers

85-90% of regional agricultural trade. UNESCAP assessment of the potential additional

market access frontier (AMAF) shows potential food trade of US$ 9.8 billion across 397 food

products among countries of South Asia, but currently is traded with countries outside the

region. Greater regional cooperation in trans–boundary disease management, including

developing SAARC coordinated positions in international forums and multilateral

negotiations can emphasize the need for further reductions in trade distorting practices and

secure equal competitive access for South Asia food producers in foreign markets taking into

account South Asia food security development priorities. The South Asian Regional

Standards Organization (SARSO) and Trans-boundary Animal Diseases Coordination Unit,

are good initiatives to help facilitate adequate Sanitary and Phytosanitary (SPS) measures in

the subregion and reduce related technical barriers to trade (TBT) that make up the vast

majority of non-tariff measures.

SDG 2 and the regional cooperation agenda for food security outline elements in

which targets should be set and policies developed for ensuring food security by 2030.

SAARC countries at the 19th

SAARC Summit in Pakistan have an important opportunity to

take the initiative in establishing priority actions for meeting SDG 2 and ensuring food

security for all.

Regional cooperation for Disaster Risk Reduction in South and South-West Asia

In the last 45 years, almost one third of the world’s deaths caused by disasters

occurred in South and South-West Asia. With the highest mortality risks from natural shocks,

the subregion is second worst affected subregion in Asia and the Pacific based on economic

losses incurred by disasters. It is estimated that between 2 to 16% of the South Asian GDP is

wasted yearly due to natural disasters.

Floods and earthquakes are among the most devastating natural shocks.

Approximately 45% of the world population that is affected by floods lives in four countries

of South Asia: India, Bangladesh, Pakistan and Afghanistan. Total damage losses from

disasters are rising faster than the GDP growth in South Asia. Metro cities and river basins

are the most disaster risk-prone areas and yet they continue to attract migrants in search of

better socio-economic opportunities. The hasty infrastructure development that is being built

to meet this demand is only increasing the number of affected people and exposed assets to

future disasters.

Most of the economic impact is the result of poor infrastructure. The major

earthquakes in Nepal in 2015 did not cause deaths and damage losses but the buildings and

poor infrastructure did. Benefits of marginal investments in resilience measures outweigh the

costs. Every $US1 invested in resilience, will save between $US4-$US7 in post-disaster

recovery and reconstruction. If countries of South Asia were to reduce the future annual

losses by 50%, they would have to invest between $US1 billion to $1.85 billion yearly in

prevention and building resilience. Least Developed Countries will face significant

challenges in financing for resilience and yet will remain the most in need for disaster

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prevention and mitigation. The slow and hard-earned development progress is at high risk of

being reversed and leaving countries in the underdevelopment trap.

Therefore, building resilience to disasters is at the core of achieving SDGs in South

and South-West Asia. SDGs strongly recognized the importance of reducing disasters risks

through specific targets of Goal 1 (ending poverty in all its forms everywhere), Goal 11

(making cities and human settlements inclusive, safe, resilient and sustainable), Goal 13

(taking urgent action to combat climate change and its impacts). It is also mainstreamed in

many sector-related goals such as Goal 2 (ending hunger, achieving food security and

promoting sustainable agriculture), Goal 9 (building resilient infrastructure) and Goal 15

(combating desertification and halting land degradation).

Most disasters impacting South and South-West Asia are trans-boundary in nature.

Managing and reducing risk is thus a task that frequently goes beyond national borders and

requires stronger regional cooperation. The SAARC has a critical role to play in this regard.

UNESCAP can facilitate strategic partnerships and promote the pooling of resources and

sharing of expertise, infrastructure and resources for a multi-hazard early warning system in

the region through South-South cooperation and regional cooperation. UNESCAP could also

serve as a facilitator for network of early warning systems for information sharing and

analysis of multi-hazards in the Asia and the Pacific. The network would build on the

achievements of the systems set up by the UNESCAP Multi-Donor Trust Fund for Tsunami,

Disaster and Climate Preparedness and the services that could be provided by the Regional

Integrated Multi-hazard Early Warning System (RIMES). The establishment of Asian and

Pacific Centre for the Development of Disaster Information Management (APDIM) is an

important initiative to promote South-South and regional cooperation in SSWA.

Global partnership for Least Developed and Land-Locked Countries in South

Asia

The international community has renewed calls for stronger global partnership for

implementing the 2030 Agenda on Sustainable Development. The intense series of

intergovernmental processes resulted in the 2030 Sustainable Development Agenda, the

Addis Ababa Action Agenda, the Istanbul and Vienna Programmes of Action, and the

SAMOA Pathway. The documents unanimously call for significant increase of ODA,

innovative financing for development, removal of trade and transit barriers, development of

infrastructure and productive capacity. The international community made a series of

commitments, yet the impact of their pledges, even if fulfilled, would be negligible unless

major changes are introduced in the way resources are allocated. Some developing countries

and LDCs in particular are not only aid-dependent but are also adversely impacted by a range

of fragmented and uncoordinated aid programmes.

Major challenges facing least developed countries include low levels of productive

capacity, poor infrastructure and extremely low investible base. The Infrastructure Composite

Index developed by UNESCAP shows that South Asian LDCs continue to have the least

developed infrastructure among Asian economies in transport, energy ICT, and banking.

Almost all LDCs showed declining levels of productive capacity, based on UNESCAP’s

Productive Capacity index. Most countries experienced a decline in agriculture’s contribution

to the GDP, while the sector still remains the largest employer. The economic shift away

from agriculture did not translate into the expansion of manufacturing but mainly service

sector that remains vulnerable to informal transactions, low pay and lack of social security.

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Despite the existing hurdles, UNESCAP’s analysis found a series of potential

products each South Asian LDC could focus their efforts in developing. Development of

these products would require building countries’ productive capacity, which would not only

cause structural transformation but also diversify exports and contribute to higher growth.

The success of socio-economic transformation in least developed countries will hinge

on the ambitious structural transformation called for in the new 2030 Agenda for Sustainable

Development. The critical component of the framework is the Goal 17 that pleas for

strengthened means of implementation and revitalized global partnership for sustainable

development. Within these renewed and expanded commitments, the international

community has agreed to be monitored on assistance provided through finance, technology

transfer, capacity-building, trade and systemic issues such as policy and institutional

coherence, multi-stakeholder partnerships, data, monitoring and accountability. All these

components are essential for developing countries, and particularly for LDCs, to achieve

structural transformation and to set them on the path to graduation from the category of least

developed countries.

Another critical factor in achieving LDCs structural transformation is harnessing the

potential of regional economic cooperation and integration, as discussed earlier. By fostering

efficiency-seeking industrial restructuring and regional value chains, regional trade and

investment liberalization can foster productive capacities in LDCs. Beyond the subregional

mechanisms, one of the most promising strategies for development is South-South and

Triangular Cooperation. The strategy is seen as a complement, rather than a substitute for

North-South cooperation.

****

In summary, the SDGs offer South Asia, that represents nearly a quarter of the

humanity, a unique transformative opportunity to provide a life of dignity and sustainable

prosperity to all its people. The SDGs can help South Asia realize its potential to emerge as a

powerful locomotive of the world economy as the largest centre of sustainable consumption

with its growing middle class and with its youthful population also able to bridge the global

skills deficit. In this transformation, regional economic cooperation and integration will serve

as critical means of implementation. UNESCAP as the regional development arm of the

United Nations stands ready to assist the region with its analytical support and policy

advocacy, technical support and its convening power to provide a forum to all overlapping

groupings and other stakeholders to take the regional cooperation agenda forward. The

SAARC Leaders at their 19th

Summit to be held in Islamabad in 2016 may have an

opportunity to consider some of the proposals made in this Report and take them forward to

provide a sustainable more prosperous future to all their people!