Opportunity knocks: Promoting investment in South Asia
The South Asian region is facing formidable challenges today posed by the rising cost of non-cooperation among member countries and the adverse impact of globalisation. The seven member states of SAARC collectively have a population of 1.5 billion, approximately 22 percent of the world's population. It is also the region in which a large majority (around 43 percent) of the world's poor live. South Asia's Gross Domestic Product (GDP) is only 2 percent of the world's GDP, indicating the low level of per capita income in the region.

Lack of investment capital accumulation and regional cooperation are considered important reasons for the low level of economic dynamism in South Asia. Unlike East and Southeast Asia where regional cooperation initiatives have contributed significantly to the economic growth of the countries in these regions through an increase in inter-regional trade and investment, regional cooperation in South Asia remains weak. An opportunity for accelerated growth and further energizing the economies of South Asia does exist by increasing investment through regional cooperation. Therefore enhancing investment cooperation and facilitating investment among the countries in the region will be crucial for the development of the economies in the region.

There is considerable convergence between South Asian economies. Both theory and evidence suggest that regional integration arrangements may provide an important stimulus to foreign investment. Besides attracting more foreign investment, there are many areas, particularly the energy and transportation sectors, in which South Asia can benefit through increased regional investment cooperation given the existing complementarities. Regional investment cooperation can also help lower transport costs, generate more complementarities by expanding and diversifying the production base and trade structure, diversify comparative advantage, introduce appropriate technologies and encourage competition.

Investment Scenario
Most of the South Asian countries have undertaken far reaching economic reforms; they have adopted industrial policies that encourage foreign direct investment (FDI) resulting in an increase in FDI flows. However, the amount of inflows attracted by the region remains relative to East Asia and South East Asia quite insignificant. FDI to the region is predominantly from outside the region.

The sectors that have attracted most foreign investment vary between countries. In the case of Bangladesh and Sri Lanka, the textile and garment sectors account for 28 percent and 16 percent respectively of FDI, whereas 56 percent of FDI has gone into infrastructure projects in India. In the case of Pakistan 40 percent of all FDI has gone into the power sector. While FDI from outside the region has been far greater than intra regional investments, there are signs that intra regional investments are increasing. The major outward FDI flows are from Indian firms, which have started to expand FDI both within South Asia and beyond. Firms from other South Asian countries are also increasingly undertaking FDI within the region and investing in a range of sectors and activities.

There are two SAARC countries, Nepal and Bhutan, where FDI from India is the predominant source. On the other hand, none of the SAARC countries are significant investors in Pakistan though there is a very limited FDI flow from the other countries in the region. India is the largest investor among the SAARC countries in Sri Lanka, while Pakistan and Maldives are respectively second and third to India as investors. In the case of Bangladesh, firms from India, Pakistan and Sri Lanka have in recent years invested $418 million in 133 ventures covering a wide range of sectors. In spite of India's huge internal market, investments from other SAARC countries has been quite insignificant, both in relative and absolute terms, accounting for less than one percent of total foreign investment in India. Bangladesh is the largest investor in India from the region, followed by Sri Lanka, Nepal and Maldives.

Constraints to Investment
The enormous difference in size between the economies in the region, above all, the overwhelming size of the Indian economy in comparison to the other countries in the region has proved to be a psychological barrier, which needs to be overcome. The situation is further complicated as a result of the varying pace of economic reforms, as well as important policy differences. The many outstanding political problems have without question proved to be a major obstacle to regional cooperation and coordination on economic policies. The safeguard measures designed and adopted by some of these countries particularly to protect their respective domestic industries can largely be diluted by the strong presence of foreign direct investors who have literally a free command over regional natural resources in the same areas across the borders. There is no super regulatory framework and common competition law to safeguard against anti competitive practices of multinational companies and cross border mergers and acquisition. Trade barriers including tariff and non-tariff barriers such as different standardization and certification processes, subsidies on agricultural products and different customs rules and regulations, impede investment flows across the region.

The investment climate in the ASEAN region and in China is far more attractive than that of South Asia. A study conducted by the Bangladesh Enterprise Institute in 2002, which was supported by the World Bank found that poor infrastructure, electricity problems, corruption, excessive regulations and poor access to finance for SMEs were important factors that impede economic growth and development in Bangladesh; that the investment climate was also a major factor in influencing FDI flows in to the country. The very same problem in varying degrees was adversely impacting on the investment climate of all the other countries in South Asia.

Apart from the poor infrastructure in the countries in the region, the even poorer state of the cross border facilities was another major problem. Political factors, acute mistrust and lack of confidence, governance issues, lack of knowledge about each other's financial systems and capital markets and the reluctance to share information are also important factors retarding the progress and pace of regional-cooperation in South Asia. The banking network in the region is poorly developed; the level of co-operation between the central banks is all but absent. The relatively poor regulatory, fiscal, and legal systems have held back investment in South Asia by raising direct costs; by corruption bureaucratic delays, property disputes also create a sense of uncertainty.

Other constraints to investment in South Asia include: (1) low growth rates; (2) shallow credit markets; (3) financial market imperfections and weak creditor's rights that weaken the efficiency of the credit market and restrict financing for investment; (4) low levels of private savings and financial development and high levels of public expenditure; (5) identical comparative advantages; and (6) low levels of FDI that reduce investment by limiting access to an important source of finance and by forgoing the complementarity between foreign and domestic investment.

Energy Sector
Bangladesh, Bhutan, India and Nepal can develop and utilize a combination of thermal and hydropower more efficiently through a regional agreement. Such an approach would enable India and Bangladesh to use their coal and gas reserves more efficiently while allowing Nepal and Bhutan to develop their large untapped hydro-power potential. All four countries could benefit in the long term by optimally developing and scheduling their generation capacities, on an integrated basis through regional cooperation. This will help the countries to avoid building transmission grids across high mountains or major rivers. Trading of electricity would widen the market for electricity in the region and the resource base thereby leading to the least cost development of larger hydro projects.

More recently there is a proposal from the Tata group to invest two billion dollars in Bangladesh in three projects: a steel mill, a fertilizer plant and a power plant. A substantial part of the production from all the three projects will be exported back to India. Both the governments of India and Bangladesh have welcomed this investment at the highest level. However, much will depend on an agreement being reached between the Tatas and the government of Bangladesh regarding the terms and conditions for the supply of gas for the three projects. Should these projects be implemented they will provide an enormous impetus to both bilateral and regional cooperation.

Transport and Communication
For enhanced regional investment cooperation an integrated transport network is essential. Some of the recommendations for improved logistics are as follows: (1) opening up borders and improved border management (2) open sky policy for South Asian countries (3) opening up ports (For example, Chittagong port of Bangladesh can be used as a regional hub port to serve Eastern South Asia as well as land-locked South West China which is keen to have access facilities to a port in the Bay of Bengal, while Mongla port can be developed and modernised to take care of Nepal's exports and imports as well as those of Bangladesh, (4) constructing a Trans South Asian railway (5) building integrated roads and high ways, (6) integrating South Asia's road and railway network with that of the ASEAN countries and China, (7) developing coastal shipping and feeder networks in the region, (8) improving infrastructure for telecommunication and (9) developing a cross-country transport system linking Nepal, Bhutan, West Bengal, Bangladesh and the North Eastern States of India together.

Looking to the future
In order to create conditions favourable for promoting and protecting investments in South Asian countries both by regional investors and outside investors, a common investment platform should be formed based on a common investment framework and common approaches. A common investment strategy can help in building a common investment framework and in harmonizing and coordinating policies. The main focus of the common investment strategy within South Asia should be: (1) growth enhancement by increasing investment and capital accumulation; (2) fiscal, regulatory, banking, and judicial reforms, (3) FDI policies, and (4) improving infrastructure.

It is particularly important to have inter-SAARC bodies that will facilitate investments, improve banking links, and intensify the cooperation between the stock exchanges in the region with a view to sharing information, data, undertaking joint training programmes and eventually facilitating cross listings and joint issues. A key factor in encouraging investment cooperation will be the speeding up of the South Asian Free Trade Area (SAFTA).

Finally, it is important that the governments in the region become more pro-active on a whole range of issues relating to regional cooperation in general and SAARC in particular. It is extremely important to have strong institutional support in the way of close interaction and cooperation between governments, central banks, finance ministries, related government agencies and business people. Interaction, specifically between the private and public sectors, needs to be intensified in order to facilitate and encourage investment cooperation.