Encouraging private sector to play its due role

Despite efforts of the governments of South Asian countries towards regional economic integration in the last decade or so, at times on a bilateral basis, formal intra-regional trade has not risen above 5.0 per cent of the total trade. Experts believe that with right policies in place, trade could total at least US$100 billion annually.    
It is imperative to develop appropriate trade facilitation measures in each country of the region for improvement of intra-regional trade in South Asia. Its onus lies mainly on the governments, as it is their responsibility to create proper trade and investment-friendly facilitation infrastructure and policy regime. The policy regime should be an inclusive one having scope for private sector participation, where necessary.
The private sector cannot absolve itself from having to play its due role in this regard. The government's responsibility lies in developing physical infrastructural facilities like efficient ports, road, rail, water and air transportation systems and put in place necessary long-term fiscal and monetary policies with a view to encouraging the private sector players to play their due roles with less interference from the government's regulatory bodies.    
However, private sector could help develop such infrastructure either by itself or through public-private partnership (PPP). For this, it is vital that governments create appropriate policy frameworks.       
The definition of trade facilitation varies depending on the extent of measures to be included. In a narrow sense, trade facilitation simply addresses the logistics relating to movement of goods through ports or land customs stations (LCs) at national borders.
A broader framework for understanding trade facilitation and its impact on international commerce includes a number of interrelated factors. These include port reform and modernisation and streamlining of regulatory requirements and harmonising standards, as well as tariff regimes.
Common to all these areas is expansion of the use of information technology to lower trade transactions costs. This might involve, for example, compiling of a unique set of computerised information for each shipment entering a port so that consignments of cargo could be cleared speedily on arrival at ports.
Modern customs methods of profiling consignments or traders based on risk-assessment techniques can help expedite cargo clearance. The use of technology in services and business-to-business (B2B) e-commerce is also a rapidly expanding area of trade that broadens markets while significantly reducing logistics and transaction costs. In order to realise the benefits of improving transport or customs administration 'at the border', regulatory and institutional reforms are essential. These 'inside the border' measures play a crucial role in trade transactions costs.
Domestic regulatory procedures and institutional structures based on best international practice models can improve transparency and professionalism in customs clearance procedures. Streamlining regulations to remove technical barriers and liberalising transport and telecommunications regimes can also facilitate trade.
Privatisation and de-regulation in the transport sector can also increase competition and thereby improve efficiency.
Security is also an important part of trade facilitation in modern-day commerce. Terrorism and threats to security can disrupt supply chains across borders and impact economic progress.
Initiatives to reduce non-tariff barriers associated with trade facilitation have also been affected by the multilateral trade agenda in the World Trade Organisation (WTO) disciplines.
During the Singapore Ministerial Conference of the WTO in 1996, trade facilitation was added to the agenda for explicit discussion. The Cancun Ministerial Conference of the WTO failed to launch the negotiations on trade facilitation. This was due, in part, to disagreement over the merits of starting talks on trade facilitation, including increased transparency and streamlined administrative requirements.
MEASURING IMPACT OF TRADE FACILITATION: A critical question of direct relevance to trade facilitation is to what extent do factors affecting trade transaction costs matter? This question drives the need for measuring the impact of trade facilitation on economic growth. Yet, quantifying the gains of trade facilitation is complex and challenging.
The Organisation for Economic Cooperation and Development (OECD) summarises available studies, most of which are limited in their definition of trade facilitation or use of data collected many years ago.
There is a number of other empirical studies which have addressed specific policy changes related to trade facilitation. A study by APEC (1999) finds that 'shock' reduction in trade costs from trade facilitation efforts vary from one per cent of import prices for industrialised countries and the newly industrialising countries of Korea, Chinese Taipei and Singapore to two per cent for other developing countries.
A study by Maskus, Wilson, and Otsuki (2001) evaluated the gains of trade facilitation related to harmonised regulations and standards.
Moenius (2004) looks at how bilaterally shared standards and country-specific standards impact on trade respectively, and found that the former standards raise trade volume, and therefore, harmonisation of standards promotes trades. Against the author's hypothesis, the results show that country-specific standards also promote trade on an average.
To be specific, country-specific standards promote trade in the manufacturing sector while they have negative impacts on trade in non-manufacturing sector. This is so because institutional standards like ISO lowers information-gathering costs which are particularly high in the manufacturing sector.
By employing a general equilibrium model, several studies assessed the impact of reduced transaction costs on trade flows. For instance, Baier and Bergstrand (2001) examined the impacts on transport-cost reductions, trade liberalisation, and income convergence.
Studies found that 8-9 per cent of the average growth in real bilateral trade flows among 16 OECD countries during the late 1950s to the late 1980s is explained by transport-cost reductions. A study by United Nations Conference on Trade and Development (UNCTAD) in 2001 shows that a one per cent reduction in the cost of maritime and air transport services could increase Asian GDP by some US $3.3 billion.
If trade facilitation is considered in a broader sense to include an improvement in wholesale and retail trade services, a one per cent improvement in the productivity of that sector would lead to a significant additional gain.
With respect to the impacts of improved customs clearance, Hummels (2001) concludes that each day saved in shipping time in part due to a faster customs clearance is worth 0.5 per cent reduction of ad-valorem tariff. In order to analyse the significance of border delays in measuring the welfare impacts of trade liberalisation, Cudmore (2004) compares results of a conventional equilibrium model with the one that incorporates border delays.
While the former model shows that trade liberalisation would result in a welfare gain by 0.044 per cent, the latter model indicates that trade liberalisation would cause a welfare loss by 0.13 per cent.
This implies that reducing border delays is critical in order for trade liberalisation to have positive impacts on welfare.
An increasingly important policy question in international trade and development concerns estimation of gains from capacity building in trade facilitation and the relative impact of specific reform measures and investments.
Wilson, Mann, and Otsuki (2005) found that enhanced capacity in global trade facilitation would increase world trade of manufacturing goods by approximately $ 377 billion, an increase of about 9.7 per cent.
This is based on a scenario in which capacity building is raised half-way to the global average across 75 countries. The authors specifically examine four areas-- port efficiency, customs, regulations and standards, and information infrastructure. They found that the improvement in customs environment results in about $107 billion or 0.8 per cent gain.
The gain from improvement in regulatory environment is $ 83 billion. The largest gain comes from improvements in services sector infrastructure and e-business usage i.e. $ 154 billion or 4.0 per cent.
Given the recent introduction of security as a new dimension of trade facilitation, studies that measure economic gains from improving security are also relevant. Leonard (2001) estimated the new security-related costs at 1-3 per cent of the value of traded goods. An analysis by the OECD (2002a, 2002b) suggests a more modest impact.
Walkenhorst and Dihel (2002) quantify the impact on welfare of frictional trade costs resulting from the implementation of new measures to tighten security after the 9/11 happenings, and found that a one per cent ad-valorem increase in frictional costs to trade would lower world welfare approximately by $ 75 billion per year.
In relative terms, such welfare loss is greater in South Asia, North Africa, and the Middle East than in North America, because these regions are heavily dependent on international trade.
Trade facilitation in South Asia has become increasingly important as the region has adopted more open trade policies since the late 1980s.
In 1985, India, Pakistan, Bangladesh, Sri Lanka, Maldives, Nepal, and Bhutan formed the South Asia Association for Regional Cooperation (SAARC). The Association started with the SAARC Preferential Trading Agreement (SAPTA). The SAARC member- countries signed the South Asian Free Trade Area (SAFTA) pact in Islamabad, Pakistan. The free trade area came into effect on January 01, 2006.
The significance of SAFTA with regard to trade facilitation is that Article 3 of the accord states members' commitments to trade facilitation reform. This includes plans to integrate transport systems more closely and harmonise standards in the region, among other steps. India has specifically indicated interest in providing the 'main technical support and other trade facilitation steps in the field of harmonisation of customs procedures and standards for products of trade interest to the region'. Some experts expect the SAFTA to be 'a step towards better physical, industrial and communication infrastructure development in the region'.
There are also sub-regional and bilateral initiatives aimed at liberalising trade among SAARC countries and promoting trade and investment facilitation efforts. Among the important sub-regional initiatives are Bangladesh-Bhutan-India-Nepal (BBIN) Growth Quadrangle Initiative and Bangladesh-India-Sri Lanka -Thailand Economic Cooperation.
With respect to bilateral initiatives, South Asian countries have also shown interest in promoting trade through mutual cooperation arrangements including initiatives such as the India-Bhutan Economic Cooperation, India-Nepal Economic Cooperation, Pakistan-Nepal and also free trade agreements between Pakistan and Sri Lanka, and the Sri Lanka and Maldives FTA.
More efficient trade logistics and facilitation policies are recognised as essential for economic growth and success in the SAFTA. However, South Asia continues to face critical constraints to trade and the need for coordinated programs to address common goals. For example, Subramanian and Arnold (2001) provide examples of continued impediments along a logistics chain in the South Asia sub-region, consisting of Bangladesh, Bhutan, Nepal and eastern India and the seven northeastern Indian states.
A recent study on 'the Research and Information Systems for the Non-Aligned and other Developing Countries' (2004) examined transport infrastructure for road, rail, air, and port networks in South Asia. The study identified the potential for regional cooperation in improving the conditions in each area.
In order to highlight conditions in South Asia, it is necessary to compare the region's performance with others. This includes in particular East Asia, given its geographic proximity and emergence of China as an important economic actor, among other factors.
The writer is Secretary & CEO
India-Bangladesh Chamber of
Commerce and Industry.
[email protected]