November 23, 2017

Getting Regional Trade Right in Central Asia

One golden opportunity for ECO member countries to increase trade and investment is in the road and rail development projects under the China–Pakistan Economic Corridor.

Posted on 04/17/17
By Nasir Iqbal and Saima Nawaz | Via East Asia Forum
Containers at Karachi port. Sheryaar Jivani. (photo by Sheryaar Jivani, CC license)

Containers at Karachi port.  (Photo by Sheryaar Jivani, CC license)

The Economic Cooperation Organization (ECO) was founded in 1985 to provide members with a platform to discuss ways to improve development as well as promote trade and investment opportunities. Around 462 million people — 6.2 per cent of the world’s population — live within the 10 member states of Afghanistan, Azerbaijan, Iran, Kazakhstan, Kyrgyz Republic, Pakistan, Tajikistan, Turkey, Turkmenistan and Uzbekistan. But at a time when the world trading system is moving towards regional economic integration, ECO remains one of the least integrated trade organizations in the world, making up only 2.1 per cent of world trade.

 

In March 2017, the 13th ECO summit was held in Pakistan under the theme of ‘connectivity for regional prosperity’ with the broad agenda of reiterating ‘political will and strong commitment for realizing the aims and objectives of the Organization’. The Islamabad Declaration that grew out of the summit envisages doubling intra-regional trade — which currently sits at 8.7 per cent of total trade — in the next three to five years.

 

The Islamabad Declaration also suggests that member states ‘develop, operationalize and commercialize the ECO intra-regional transit networks as well as corridors connecting ECO region with other regions in line with the ECO rail and road development plans’.

 

But in order to materialize the lofty aspirations of the Islamabad Declaration, a number of policy challenges facing member states need to be overcome. A study conducted by the Pakistan Institute of Development Economics shows that trade among ECO states could increase by a factor of eight if the ECO Free Trade Agreement (ECOTA) can be successfully implemented. The study also argues that the ECO regions holds great potential for increasing trade in services as the majority of ECO member countries have huge construction, telecommunication and financial service demands. There is therefore an enormous opportunity for member countries like Pakistan and Turkey to step up and become major suppliers of these services.

 

The success of regional trade agreements like ECOTA depends on three fundamental pillars: a conducive business environment, an institutional framework and physical infrastructure.

 

Conducive business environments can attract foreign investment and enhance competitiveness not only regionally but also at the global level. But ECO’s ‘ease of doing business’ indicators are concerning. According to the World Bank’s Doing Business Report 2017, most of the ECO member countries have highly restrictive and cumbersome business environments and fall towards the bottom of the list — Afghanistan is ranked 183, Kyrgyz Republic 144 and Pakistan 128 out of 190. Performance of member countries remains poor in dealing with trade across borders and the average cost of imports and exports in terms of administrative compliance is very high.

 

ECO members’ performance in key institutional indicators is also concerning. According to the World Bank’s Worldwide Governance Indicators, Afghanistan is in the lowest 14th percentile for regulatory quality, Iran in the lowest 7th and Tajikistan in the last 2 percentile. The situation is similar for rule of law, corruption, political stability, and violence and terrorism indicators. At a regional level, ECO ranked in the bottom 27th percentile for regulatory quality. In comparison, the South Asian, Europe and Central Asia, and OECD groupings sit in the 30th, 70th and 87th percentiles respectively. As an result of this low institutional quality, ECOTA’s implementation has remained stagnant since it was signed in 2003. Without integrated institutional frameworks in which governments can develop and enforce their own regulations, ECOTA will fail to generate regional welfare.

 

The role of physical infrastructure in promoting trade and development is well documented. High quality infrastructure reduces transaction costs and increases production efficiency and competitiveness. Despite ECO’s steps to enhance infrastructure quality, it remains one of the major obstacles to boosting trade among member countries. Projects like the Turkmenistan–Afghanistan–Pakistan–India (TAPI) pipeline, for example, are languishing behind schedule. The Global Competitiveness Report 2016-17 shows that most ECO member countries rank low in infrastructure quality.

 

So to improve regional trade, member countries need to implement two types of reform: physical reforms to improve trade logistics and soft reforms, such as institutional development and investor friendly policies, to boost trade and investment confidence.

 

One golden opportunity for ECO member countries to increase trade and investment is in the road and rail development projects under the China–Pakistan Economic Corridor (CPEC). All ECO member countries should participate in CPEC projects, which will provide a network to eventually connect all of Central Asia.

 

Despite knowing and understanding these hindrances, why do member countries fail to implement these reforms? One answer is that political will is absent. Political will provides the basis for implementing reforms. Simply signing a trade document does not produce tangible results. For example, despite sharing a common border, culture and language as well as various bilateral and regional trade agreements, Pakistan and India still fail to reach their potential in terms of bilateral trade.

 

In broad terms, ECO member countries need to look closely at their domestic investment and trade environments and implement necessary reforms, such as reducing tariffs and removing non-tariff barriers, to create a more conducive setting for trade with their ECO neighbors.

 

Nasir Iqbal is Research Director at Benazir Income Support Programme (BISP) and Saima Nawaz is Assistant Professor at COMSATS Institute of Information Technology, Islamabad.

This article first appeared at the East Asia Forum. Click here to go to the original.


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