Ratnakar Adhikari South Asia Watch on Trade, Economics and Environment (SAWTEE) Aid for Trade, Regional/Global Value Chains and the Role of Trilateral Development Cooperation 9 July 2013

Status of regional integration and value chain in South Asia Major challenges for plugging South Asian LDCs into regional value chain Harnessing the potential of trilateral development cooperation Conclusion

Status of regional integration and value chain in South Asia

Essentially constraints to regional integration are also the constraints for development of regional value chain In a virtual hub and spokes model of regional integration in South Asia all the LDCs are heavily integrated with India than with rest of the region It is with India most LDCs would logically participate in the development of value chain – textiles and clothing value chain of Nepal being a case in point

Tariff barriers Sensitive lists in countries other than India Para-tariff barriers Countervailing, additional, special and supplementary duties, etc. Non-tariff measures Non-transparent and often arbitrary application of barriers Health, safety and certification requirements

Infrastructure Poor connectivity and deficiency in availability and quality of energy supply South Asian countries are placed at the bottom of the global competitiveness index on both the indices Poor state of standard-related infrastructure Thickness of border (Table 1) Deficiency in human capital Restricted access to finance

Table 1: Relative thickness of South Asian borders vis-à-vis ASEAN countries Detailed cost break up (Per container as percentage of 2011 GDP per capita) South Asian countriesASEAN countries AFBGBTINMDNPPKSLMSSGTH To export Document preparation Customs and technical control To import Document preparation Customs and technical control Source: Authors calculation based on Doing Business Report (World Bank 2012)

Harnessing the potential of trilateral cooperation

Adhikari (2013) identifies the following regional projects as from the perspective of integrating South Asian LDCs in the regional value chain Development of transport corridors to improve connectivity Construction of regional electricity grid for transmission of power Trade facilitation, particularly modernization of border management systems, to reduce thickness of border Construction of regional laboratories and testing facilities to meet relevant standards Regional training facility for skill development Creation of regional R&D facility

These are vindicated by the latest WTO study which analyzes potentials of the integrating LDCs into value chains (WTO 2013), according to which: LDC policymakers consider domestic infrastructure, access to finance and compliance with standards and other regulations as the biggest obstacles for their firms to connect to value chains Private sectors response in general were somewhat similar LDC supplier firms and lead firms, which were also asked where support would be most effective in connecting LDC firms to value chains, thought on similar lines

Although AFT funding to individual countries in the region has been growing, funding for regional public goods have been extremely limited representing 0.5 of total country- level funding Individual LDCs in South Asia have been receiving South- South-South support particularly from India, China and Gulf countries and/or Gulf-based organizations – mostly in two areas: Infrastructure by all South-South donors Training of human resources and providing scholarship for enhancing human capital profile of the LDCs by China and India

Pool funding such as LDC Integration Fund Direct provision of services (infrastructure – China; hydro-electricity – India) as grant, loan or on commercial basis Funding based on comparative advantage and a clear division of labour North-South multilateral funding for infrastructure North-South bilateral funding for building productive capacity and trade policy and regulations South-South funding for infrastructure and human capital development

Although financing of regional public goods is not easy, resource constraints can alleviated through trilateral aid for trade development cooperation Trilateral development cooperation framework could be a useful starting point, in which: Division of labour is clear Trade is fully mainstreamed in the development cooperation framework Recipients also contributes resources for the demonstration of ownership, commitment and to ensure sustainability

Thank you