saarc

Myanmar’s Trade Liberalization and Its Potential Impact on SAARC

08 Fall

To be Submitted to

Dr. Abu Yousuf Md. Abdullah

Course Instructor

International Marketing (M405)

Submitted By

Isham Ul Haque

ZR-09

BBA 17th

June 4, 2012

Institute of Business Administration

University of Dhaka

Table of Contents

Myanmar’s Open-‐Door Policy and Trade Performance ........................................... 4 Opening the Door ............................................................................................................................................... 4 Growth of Trade and the Economy’s Dependence upon Trade ..................................................... 4 Trade Structure and Import Controls in the 1990s ........................................................................... 5

Regionalization of Trade ........................................................................................ 7 Enhanced Trade Relations with Neighbors ............................................................................................ 7 China ........................................................................................................................................................................ 8

Foreign Direct Investment ................................................................................... 11 The Introduction of Foreign Capital ........................................................................................................ 11 Trends, Source Countries and Receiving Sectors ............................................................................... 12 Types of Foreign Business Enterprise .................................................................................................... 14

About SAARC ....................................................................................................... 15

SAARC and Regional Trade ................................................................................... 16

Analytical Framework .......................................................................................... 17

Trade Flows .......................................................................................................... 18 Factors Influencing Informal Trade ......................................................................................................... 20 Non-‐SAFTA Factors ......................................................................................................................................... 22 Current Status ...................................................................................................... 23 The Importance of India ............................................................................................................................... 23 Hindrances to Regional Cooperation ...................................................................................................... 24

Myanmar’s Potential Contribution to SAARC: Indo-‐Bangla-‐Myanmar Gas Pipe Line ............................................................................................................................ 25 A short history of the Myanmar-‐Bangladesh-‐India pipeline project ......................................... 25 South Asian Pipeline Projects ..................................................................................................................... 25 India’s approach to the Myanmar-‐Bangladesh-‐India pipeline project ..................................... 26 Bangladesh’s approach to the Myanmar-‐Bangladesh-‐India pipeline project ........................ 26 Indo-‐Bangladesh energy policies and the pipeline project ........................................................... 27

References ........................................................................................................... 30

MYANMAR’S TRADE LIBERALIZATION AND ITS POTENTIAL IMPACT ON SAARC 3

ABSTRACT

Myanmar’s transition toward a market economy began with a series of open-‐door policies. Soon after the military took power in 1988, the State Law and Order Restoration Council (SLORC), later re-‐constituted as the State Peace and Development Council (SPDC), allowed private sector businesses to engage in external trade and to retain export earnings, and started to legitimize and formalize border trade with neighboring countries, hitherto an activity that had been deemed illegal. Following this, in November 1988, foreign investment was permitted, by the enactment of a Foreign Investment Law (FIL). Myanmar’s economy was released from the isolationist foreign policy of the quarter-‐century long Socialist era and began to re-‐integrate into regional and world markets. Myanmar opened its doors to the rest of the world in the midst of a period of globalization and regionalization, and consequently, the open-‐door policy drastically changed Myanmar’s external sector. Myanmar’s foreign trade rapidly increased during the 1990s and up to 2005 and foreign direct investment flowed into the country, albeit with some ups and downs. As the volume of trade grew, Myanmar expanded its trade relations with neighboring countries, having become integrated into the regional markets. The commodity composition of both exports and imports also changed throughout the transitional period. In the context of advances in globalization and regionalization, an export-‐oriented and foreign investment-‐driven development strategy has become an orthodox and most promising policy for developing economies. Myanmar, which experienced a hostile international economic environment, did not follow such a development strategy and apparently failed to achieve rapid economic growth. Nevertheless in Myanmar too, the open-‐door policy and its attendant trade growth were the most powerful forces affecting the process of economic development and industrial change. The purpose of this chapter is to examine the development and liberalization of Myanmar’s external trade sector in its transition to an open economy, and to examine the relationship between overseas trade and economic performance and how it may benefit the South Asian Association of Regional Co-‐operation (SAARC). The state of progress toward an open and market-‐based economy in the sector is also evaluated. The first section reviews the open-‐door policy and trade performance, and evaluates the extent to which the economy of Myanmar depends on foreign trade. The second section discusses the trade practices of SAARC countries and it’s current predicament. The third section examines how Myanmar can have an immediate impact on the SAARC countries. In the conclusion, the authors summarize the discussion and outline some policy implications.

PART I

Myanmar’s Open-‐Door Policy and Trade Performance

Opening the Door During the socialist period, the Myanmar government for many years pursued self-‐reliance in both political and economic terms. The idea of self-‐reliance was, in reality, translated into a closed-‐door or inward-‐looking policy, which actually suited the control-‐oriented socialist economic system. So far as its economy was concerned, Myanmar cut itself off from the rest of the world. In the absence of inflows of foreign capital, agriculture was the most important, and indeed almost the only reliable resource available to the government for financing their industrial projects. As a result, agriculture was heavily exploited and lost its growth potential. From the 1970s onwards, the agricultural sector no longer earned a significant amount of foreign currency (Myat Thein [2004:73-‐81]). Against such a background, the socialist government started to accept foreign aid. Coincidentally, some western allies, Japan and West Germany in particular, were happy to provide considerable amounts of official economic assistance to this non-‐aligned nation, which the United States basically regarded as countervailing power against Communist China. As for the Myanmar socialist government, ODA seems to have come in the form of politically low-‐cost foreign capital rather than as private foreign investment (Kudo [1998: 161-‐162]). Between 1978 and 1988, ODA provision amounted to US $3712.3 million, a sum equivalent to 15.1% of Myanmar’s total imports for the same period. Most of the ODA, however, was suspended after the military government came to power. The international donor society took a critical stance toward the military regime on account of its poor human rights record and as a result, the newly born government encountered a serious foreign currency shortage. To obtain money quickly, the government provided timber and fishing concessions to Thai enterprises. In short, the government shifted its policy and opted for liberalizing international trade and for allowing foreign investments in the territory of Myanmar. The transition to a market economy in Myanmar inevitably and primarily has meant the adoption of an open-‐door policy as regards the international economy.

Growth of Trade and the Economy’s Dependence upon Trade Opening up external trade to private enterprises greatly increased the number of exporters and importers in Myanmar. While about 1000 exporters/importers had registered in FY 19891, the number increased to about 2700 in the following fiscal year, and reached nearly 9000 by FY 1997. Accordingly, the trade volume grew. Myanmar’s exports increased by 6.8 times between 1985 and 2003; during the same period its imports grew by 5.5 times (Figure 1). For the said period, GDP grew by only 1.8 times. However, despite this increase in the volume of foreign trade, the share of exports and imports in GDP constantly decreased, from 13.2 % in FY 1985 to 5.6 % in FY 1990 and further to 2.5 % in FY 1995, 1.1 % in FY 2000, and 0.4% in FY 2003.3 The external transactions are recorded at the official exchange rate, which has been fixed to about 6 Kyat per US dollar. As the disparity between the official exchange rate and the parallel market rate has widened, so the volume of external trade recorded at the official exchange rate has become underestimated. For this reason, it is difficult to measure the openness of the economy simply by the share of external trade in GDP. Trade volume per capita can be another indicator for measuring the openness of an economy. Myanmar’s trade volume per capita steadily increased from US $25 in 1985 to US $35 in 1990, US $85 in 1995, US $92 in 2000 and US $106 in 2003. Indeed, the increasing importance of imported goods in daily life has been palpable to anyone visiting Yangon since around the mid-‐1990s. A visit to City Mart, one of the biggest supermarket chains in Myanmar, reveals a very wide range of imported consumer goods, most of which lay well beyond people’s reach during the socialist period (Kudo [2001: 24]). Be that as it may, Myanmar’s trade volume per capita is still lower than those of the other new ASEAN members, including Cambodia, Laos and Vietnam, all of which launched their drive toward a market economy at almost the same time as Myanmar. Cambodia’s trade volume per capita was US $345 in 2003; Laos’s was US $ 140 and Vietnam’s was US $561 in the same year (ADB [KI 2005]). These figures reflect the underdevelopment of Myanmar’s external trade.


Trade Structure and Import Controls in the 1990s The open-‐door policy substantially increased Myanmar’s external trade throughout the 1990s and up to 2005, although exports and imports did not grow in parallel (Figure 1). Imports grew more rapidly than exports in the 1990s. Imported goods poured into the emerging markets for consumer goods, the demand for which shot up following the many years when daily commodities and durables were in short supply during the socialist period. Moreover the 1990s saw the emergence of preliminary import-‐substitution industries, which were heavily dependent on imported machinery and raw materials. During the 1990s, Myanmar’s exports consisted mainly of primary commodities. Among them, cash crops such as beans and pulses and sesame, and marine products such as fish and prawns occupied the lion’s share. After the late 1990s, however, the export structure apparently changed. Garment exports surged, followed by a rise in parallel market rate. It was 1320 Kyat per US dollar as of October 20, 2006 according to Irrawaddy Online News. An expansion in natural gas exports occurred afterwards. One major cause for the slow growth of exports is thought to lie in the government’s maintenance of a monopoly and restrictions on major export items. Teak exports, for example, have been monopolized and strictly controlled by the government. The extraction and export of teak is in the hands of a single state-‐owned enterprise, namely Myanmar Timber Enterprise (MTE) a company controlled by the Ministry of Forestry under the State-‐owned Economic Enterprises Law of 1989. For very many years up to the present, rice exports have been monopolized by Myanmar Agricultural Produce Trading (MAPT), a company run by the Ministry of Commerce.6 Since 1998, the government has also restricted the handling of sesame exports to state-‐owned and military-‐related enterprises. The relatively slower growth of exports combined with the rapid expansion of imports generated a huge trade deficit, which in 1997 reached US $ 1879.9 million, 1.7 times larger than Myanmar’s exports in that year. At the same time, the inflow of foreign direct investment dropped sharply because of the Asian Economic Crisis of 1997. Confronted by a severe shortage of foreign currency, the government reacted by applying a series of restrictions on trade and on the foreign exchange system. In July 1997, a newly-‐established extra-‐ministerial committee, the Trade Policy Council (TPC), was put in charge of strengthening controls on the private sector’s economic activities.8 The TPC imposed many severe restrictions on external transactions in particular. The most important policy change was to rescind the “import first” policy, and replace it with an “export first” policy, in which the importer can import only against export earnings. The purpose of the series of restrictions and controls was to reduce imports and particularly those imports that the government deems to be non-‐essential, including luxury goods. Essential goods are described in list A of the obligatory imports, the share of which should be more than 80% of total imports according the Ministry of Commerce (notice No. 15/98 of October 1998). On the other hand, the articles of non-‐essential and/or luxury goods are set out in list B of non-‐obligatory imports. The share of this category is not permitted to exceed 20% of total imports. The government has urged private traders to reduce imports of non-‐essential and/or luxury goods and to give priority instead to essential goods, which have been determined by the government to be necessary for economic development. Moreover in July 1997, the central bank set limits on the foreign currency transfers of private firms (transfers overseas) to US $50,000 per month. The Bank thereafter progressively tightened the limit, to US $30,000 per month in January 1999, US $20,000 per month in April 1999 and US $10,000 per month in August 2000. The private banks were also deprived of foreign transactions, which were afterwards monopolized by three government-‐owned banks, namely Myanmar Foreign Trade Bank (MFTB), Myanmar Investment and Commercial Bank (MICB) and Myanmar Economic Bank (MEB). As a result, Myanmar’s imports decreased from US $ 3010.6 million in 1997 to US $ 2469.9 million in 1998 and further to US $ 2285.9 million in 1999. From then until 2002, its imports stagnated around this level, albeit exhibiting some fluctuations. Even though the government intended to restrict its controls to the importation of non-‐essential items and/or luxury goods, figure 2 shows that the volumes of almost all imports decreased substantially. There were remarkable declines in imports not only of consumer goods such as food and beverages and automobiles but also in imports of machinery and industrial raw materials such as iron, cement and plastic resin. The government’s new trade policy deprived private factories of access to imported machinery and raw materials, which were indispensable inputs in the preliminary import-‐substitution industrial development stage.

Export Growth and Relaxed Import Controls in the 2000s Myanmar’s external trade sector dramatically improved toward the end of the twentieth century and in the early twenty-‐first century. According to a variety of sources, the trade account recorded a surplus and since 2001 has been more or less in balance (Figure 1). Both exports and imports have contributed to this outcome. Strict import controls no doubt contributed to the improved trade balance. However, the most important explanation of the improvement seems to lie rather on the export side, and must be sought in the rapid growth of garment and natural gas exports. Garment exports enjoyed a boom from 1998 to 2001 in response to strong demand from the American and European markets. However, the expansion of garment exports soon lost momentum as a result of the imposition of international trade sanctions. Particularly damaging were the American sanctions of 2003, which banned all imports of Myanmar products to the United States. However, the decline of garment exports was not only compensated for but was in fact surpassed by the increased natural gas exports from 2001 onwards.

Figure: Myanmar’s Export (85-‐05) Since the early 1990s, two large gas fields named Yadana and Yetagun in the Gulf of Martaban have been developed by consortia led by Total/Unocal and Texaco respectively and from 1998 onwards, gas from these fields was exported to Thailand by pipeline. In 2005, gas exports amounted to US $1497.4 million, a sum equivalent to more than 40% of total exports. Gas exports have greatly improved Myanmar’s foreign currency situation. Foreign reserves doubled from US $ 239 million to US $ 440 million in August 2001, when the export revenue was apparently paid in. By June 2006, they had reached US $ 939 million. All the revenue from the gas exports goes into the national treasury, and the inflow of funds must have significantly improved the foreign currency position of the public sector including administrative organizations and state-‐owned enterprises. According to government statistics, the public sector recorded a trade surplus of Kyat 7675.1 million, equivalent to US $ 1321.1 million for FY 2005 with the conversion at the official exchange rate. This must also have contributed to the stabilization of the local currency, the Kyat. The improved foreign currency position of the public sector may have weakened the government’s incentive to commandeer foreign exchange earned by the private sector for its own use by imposing import restrictions and controls on the private sector. After having undergone a period of stagnation between 1998 and 2001, imports steadily recovered up to 2005, according to data from twenty-‐six trading partners of Myanmar. In short, Myanmar’s external trade, both exports and imports, greatly improved in the early twenty-‐first century.


Figure: Myanmar’s Import (85-‐05) These facts seem to contradict the widespread impression that the government continues to impose import restrictions and controls. Indeed, many domestic manufacturers have complained that they have found it difficult to obtain imported machinery and raw materials. Moreover, government statistics show that Myanmar’s imports declined from Kyat 18377.7 million (equivalent to US $ 2734.5 million) in FY 2001 to Kyat 11514.2 million (equivalent to US $ 1981.9 million) in FY 2005. It is difficult to determine which of the statistics are accurate. It should be noted that the government’s rules and regulations, whether on economic or on other policies, are seldom changed or withdrawn once they are announced. For example, the import ban on such things as instant noodles and snacks that was announced in 1998 is still theoretically effective today. Nevertheless, it is possible to buy these “banned” imported items at any supermarket in Yangon, Mandalay or other local cities. In Myanmar, there is usually a big gap between the announcement of rules and regulations and their actual implementation. Moreover, quantitative controls are often preferred to tariffs and other rule-‐based policy measures as a means for curbing imports. Import licenses (I/Ls) have become a major instrument of trade control and are used arbitrarily. Careful observation is therefore necessary to identify the real effects of trade-‐related policies on trading activities in Myanmar.

Regionalization of Trade

Enhanced Trade Relations with Neighbors Since its inception in 1988, the open-‐door policy has drastically changed the geographical pattern of Myanmar’s trade. Myanmar has strengthened its trade relations with neighboring countries, in particular China and Thailand. During the socialist period, advanced countries such as Japan and West Germany constituted Myanmar’s major trading partners, mainly because of the trading activities related to the receipt of official development assistance from these countries. In response to the birth of the military government in 1988, however, western donors terminated their provision of ODA. Some western countries even went so far as to impose economic sanctions on the military government. A hostile international economic and commercial environment encouraged Myanmar to develop trading activities with its neighbors. In any case, it is perhaps natural that given the distances involved, Myanmar should trade with its immediate neighbors rather than with far-‐off western countries. Myanmar shares long borders with five neighboring countries, namely China (a border of 1357 miles), Thailand (1314 miles), India (857 miles), Bangladesh (152 miles) and Laos (128 miles). Myanmar is located close to East Asia (China), Southeast Asia (ASEAN) and South Asia (India and Bangladesh). Among these various countries and regions, there are differences in natural resource endowments and in industrial development stages. It is clear that various economic and industrial complementarities have contributed to the development of trade throughout the East, Southeast and South Asian regions.

For their part, neighboring countries also welcomed the emergence of an open-‐door policy in Myanmar toward the end of the 1980s. Just before the end of the Cold War, China departed from its traditional dual-‐track diplomacy that endorsed party-‐to-‐party relations between the China Communist Party (CCP) and the Burma Communist Party (BCP), in addition to state-‐to-‐state relations. The CCP’s covert and overt support of the BCP, which resorted to armed struggle against the Myanmar government just after independence, had long hindered the development of official relations between the two countries.11 Thailand also stopped its policy of letting ethnic armed groups, notably the Karen National Army (KNA), alongside the border to serve as a buffer area between the two countries. Following these events, Myanmar gave up its strictly non-‐aligned neutralism and joined in regional cooperation schemes such as the Greater Mekong Sub-‐region Economic Cooperation (GMS-‐EC) in 1992, the Association of Southeast Asian Nations (ASEAN) and the Bay of Bengal Initiative for Multi-‐Sectorial Technical and Economic Cooperation (BIMSTEC) in 1997 and the Ayeyawady, Chao Phraya, Mekong Economic Cooperation Strategy (ACMECS) in 2003. These developments have contributed to a continuation of the regionalization of trade. The trade share of the four neighboring countries of China, Thailand, India and Bangladesh occupied 56.5 % of Myanmar’s exports and 52.7% of its imports in 2003, compared with only 20.4% and 2.7% respectively in 1985 (Table 1). Within this group, China and Thailand are particularly important.

China Ever since 1988, when the Myanmar-‐China border trade, hitherto an activity deemed illegal, was legitimized and formalized, China has enjoyed an important position in Myanmar’s external trade and has constantly occupied a high ranking among Myanmar’s trading partners. Figure 3 shows trends in the trade between Myanmar and China based on two data sources, UN Comtrade and China Customs. The Figure clearly shows the unbalanced performance of Myanmar’s trade with China. While Myanmar’s exports to China increased by only 1.3 times for the period between 1988 and 2003, imports from China expanded by 7.1 times during the same period, resulting in 2003 in a huge trade deficit of US $797.7 million, some 4.4 times larger than Myanmar’s total trade deficit in the same year. Myanmar’s exports to China are mostly composed of timber, a commodity that contributed nearly 70% of exports to Chine by value between 2000 and 2003. Timber is exported mostly in the form of unprocessed logs or roughly squared ones whose preparation requires little human and technical input. Such a high dependency on timber has kept Myanmar’s exports to China somewhat stagnant, since exports of this commodity are constrained by the availability of the natural resource in question. Timber extraction and its export in the form of logs seems to have a weak impact on broad-‐based economic and industrial development, no doubt because exports of this kind fail to bring about an improved utilization of existing factors of production, and have very little impact so far as expanded factor endowments and linkage effects are concerned.


Figure: Myanmar – China Trade (85-‐05) By contrast, imports from China underwent rapid growth on two occasions: one in the first half of the 1990s and the other at the beginning of the twenty-‐first century. It follows that Myanmar has become more and more dependent on imports from China. The share of Chinese goods in Myanmar’s total imports rose from about one-‐fifth in the latter half of the 1990s to about one-‐third in 2003. The first phase of rapid growth of Chinese imports into Myanmar was caused by the unleashing of pent-‐up demand among the Myanmar population after the introduction of the open-‐door policy in 1988. China provided the main supply sources, and Chinese products poured into the emerging consumer goods markets in Myanmar. Just after the opening up of border trade with China, Chinese textiles, mostly yarn and fabrics, flooded the Myanmar markets. Textiles occupied nearly 40% of total Chinese imports for the period between 1988 and 1991. Subsequently, tobacco increased its share to 14% for the period between 1992 and 1995. Myanmar’s imports from China showed a second phase of rapid growth at the beginning of the twenty-‐first century. Imports grew at an average annual rate of 22.7% between 2000 and 2003. Textiles, road vehicles, power generators, electrical machinery and apparatus, and general industrial machinery increased their share of Myanmar’s total imports from China. Such an increase may well reflect the huge inflow of Chinese economic cooperation and the provision of commercial loans from China during the period in question. Chinese economic cooperation expanded toward the end of the 1990s, when successive economic and technical cooperation programs were initiated between the two countries.13 Most of these programs have been tied, whether legally or de facto, to Chinese companies, state-‐owned ones in particular, and have consequently led to an increase in imports from China. Trade between Myanmar and China is heavily dependent on day-‐to-‐day cross-‐border transactions. According to the district-‐specific China Customs statistics, border trade represents the lion’s share of China’s trade with Myanmar.14 In 2005, border trade accounted for 58% of China’s exports to Myanmar and 82% of its imports from Myanmar (Table 2). Moreover, in FY 2003, Yunnan Province’s share of Myanmar’s total border trade was 73%, whereas that of Thailand was 14% (Mya Than [2005:39]). Border trade is important for both Myanmar and Yunnan Province. The main route for border trade on Myanmar territory is the 460-‐kilometer-‐long road connecting Muse on the Chinese border, opposite Ruili in Yunnan Province, and Mandalay, the second largest town in central Myanmar. This road formed part of the old “Burma Road” that opened in 1936 to supply the Kuomintang (KMT) in Chongqing. The road was paved and expanded for truck transportation in 1998 on a BOT basis by Asia World Company, one of Myanmar’s biggest private business conglomerates, headed by the son of Lo Hsing-‐han, a former drug lord. Before the completion of the new road, it took two days, and during the rainy season sometimes even a week, to travel from Mandalay to Muse. Now it takes only twelve to sixteen hours by car.

Border trade between the two countries has been legitimized, regularized and institutionalized since the adoption of the open-‐door policy by Myanmar’s present government. The first border trade agreement was signed in August 1988 by Myanmar Export and Import Services (MEIS) and Yunnan Machinery Import Export Corporation and allowed bank transactions between the Myanmar Foreign Trade Bank and the Kunming Branch of China Bank. MEIS established border trade offices in Lashio, Muse, Kyukok, Nantkam and Koonlon. According to the Ministry of Commerce (notification No.7/91), an allegedly new border trade system has been administered by MEIS since October 1991. The Myanmar and Chinese governments signed a further border trade agreement in August 1994. Under this agreement, a Border Trade Office was established in Muse in August 1995 and “one-‐stop services” were introduced on a trial basis. In August 1996, the office was transformed and upgraded into the fully-‐fledged Border Trade Department of the Ministry of Commerce. In January 1998, the Muse (105 mile) Office was expanded and started to function as a “one-‐stop services” border gate. Both regularization and institutionalization of cross-‐border transactions and road infrastructure development contributed to boosting border trade between the two. We regard the commodities that are cleared and recorded at the Kunming Customs as “border trade”. Since Yunnan Province is a land-‐locked province, commodities exported to or imported from Myanmar through Kunming, capital of the province, are most likely transported by land through border gates such as Muse, Lwejel and Laiza. The Myanmar government also promoted all border trade not only with China but also with Thailand, India and Bangladesh to compensate for economic sanctions imposed by the West, and trade across the border with China became significantly successful, so much so that cross-‐border trade with China has become a main artery of Myanmar’s economy. Thailand Thailand also occupies an important position in Myanmar’s external trade. In 2003, Thailand accounted for 33.0% of Myanmar’s total exports and ranked as the single most important destination for exports from Myanmar. On the other hand, Thailand supplied 16.1% of Myanmar’s total imports in the same year and ranked second as a source of Myanmar’s imports. As was pointed out in the previous section, natural gas exports by way of a pipeline greatly augmented Myanmar’s exports to Thailand in the early twenty-‐first century (see Figure 4). The gas exports to Thailand increased from US $ 114.2 million in 2000 to 1497.4 million in 2005, and accounted for more than 80% of Myanmar’s exports to Thailand in 2005. The Petroleum Authority of Thailand (PTT), the sole purchaser of Myanmar gas at present, has agreed to increase its imports from the Yadana offshore gas field from 525m cu ft per day to 565m cu ft per day, effective from September 2006. High oil prices also caused an increase in Myanmar’s gas exports to Thailand to US$ 1871.2 million in the first 11 months of 2006, an increase of 39 % from the same period in the previous year. The new large offshore gas fields, known as blocks A1 and A3, are expected to go into production by around 2009 and 2010, ensuring that Myanmar’s gas output and exports continue to rise over the medium term (EIU [2006:29-‐30]). Myanmar’s external sector has become increasingly dependent on gas exports and the revenues from those exports. By contrast, Myanmar’s exports to Thailand other than natural gas did not keep pace with its imports from Thailand. Exports of other primary commodities such as wood, copper and fish and prawns have stagnated. Contrary to this trend, between 2002 and 2005, imports from Thailand increased from US $315.1 million to US $696.7 million. Imported goods from Thailand consist mainly of petroleum, plastic resin, food and beverages, electrical machinery, general machinery, and fertilizer. Myanmar exports its natural resources, and imports a range of necessary goods including consumer goods, intermediate materials, capital goods and so on. Such a trade pattern implies that Myanmar has yet to be integrated into the production and distribution networks that have developed in East and Southeast Asia, a region that includes Thailand. As has been the case with China, trade with Thailand seems to have contributed little to the Myanmar’s broad-‐based economic development.


Foreign Direct Investment

The Introduction of Foreign Capital Soon after it seized power in September 1988, the military government changed its policy on foreign investment by enacting the Foreign Investment Law (FIL) in November 1988. This law, which permitted 100% ownership by foreign companies, was a considerable novelty for Myanmar. In December 1988, the Foreign Investments Commission (FIC), an administrative body for accepting FDI similar to the Board of Investment (BOI) of Thailand was established, with the Minister for Planning and Finance as its chairman. In April 1992, further organizational reinforcement was achieved and as a result, two vice premiers assumed the offices of chairman and vice-‐chairman respectively, while the Minister for Planning and Finance took the position of Secretary-‐General. Moreover, fourteen ministers became members of the commission. In April 1994, SLORC adopted the Myanmar Citizens Investment Law (MCIL) and then established the Myanmar Investment Commission (MIC) to take over the role of the FIC in supervising domestic investment issues in line with the MCIL. MIC’s main function is to vet proposed investment plans by examining their financial soundness, their economic and financial validity, and their technical aptitude. Under further organizational changes that were introduced in 2000 the number of committee members was reduced to four and the Minister for Science and Technology was appointed chairman of the committee. It is thought that real authority in this field has mostly shifted to the Trade Policy Council (TPC), leaving MIC to function merely as a committee for the examination of documents submitted in the first stage of investment proposals. Myanmar’s foreign investment policy is a key component in the restructuring of the whole economy as well as an important element of development policy, and incorporates three main pillars, namely the adoption of a market-‐oriented system for resource allocation, the encouragement of private investment and the promotion of an entrepreneurial spirit while opening the economy for foreign trade and investment. In this way, encouragement of foreign investment can be seen as a development strategy with private initiatives, and one that is dependent on foreign capital. The basic aims underlying the introduction of foreign capital are export promotion, the development of natural resources which requires a large sum of investment capital, introduction of various types of high technology, the promotion of capital-‐intensive industries, the expansion of job opportunities, the saving of energy consumption and regional development. Of these aims, it is the introduction of foreign capital that is our main concern, but among the objectives of the policy the most important is probably that of export promotion. As has already been noted, the main exports of present-‐day Myanmar are primary commodities such as agricultural, timber, marine and mining products including natural gas. Because full-‐scale exploitation has not yet been achieved, the export volume of these products is currently small except for natural gas. One of the sectors in which there are high expectations of foreign capital investment is the development of natural resources, a field that requires large amounts of investment. As for natural gas, promising gas fields such as Yadana and Yetagon have been found, and these have made a substantial contribution to export growth. Commercially valuable mines and oil fields have not yet been discovered. While Myanmar urgently needs to diversify and increase its output of primary products for export, another important issue is the promotion of labor-‐intensive industries capable of producing goods for the export market. In the light of the experience of Malaysia and Thailand, an export shift from primary products to labor intensive ones, and the promotion of manufacturing industry will be vital prerequisites for the economic development of Myanmar. Manufacturing labor-‐intensive products suits the resource endowment of Myanmar, and in this regard, the garment industry seems to be a promising sector. As was discussed, however, this industry was severely damaged by the imposition of economic sanctions by the United States in 2003.

Trends, Source Countries and Receiving Sectors (1) As Table 3 shows, the average amount of investment on an approved basis before the Asian Economic Crisis was approximately one billion US dollars with considerable fluctuations from year to year. In 1996 in particular, investment jumped to US $ 2.8 billion. However, investment fell sharply between 1998 and 2004 as a result of the economic turmoil caused by the Asian financial crisis and by the Myanmar government’s strengthening of controls on foreign capital. In 2005, the situation improved following the approval of a big hydroelectric project to be developed by Thai companies along the Salween River. This boosted the amount of cumulative investment as of March 2006 to US $ 13.8 billion. (2) Source Countries In terms of the amount of investment by the countries shown in Table 417, the leading investor is Singapore, followed by the UK, Thailand, Malaysia, and the United States. Each of the leading three countries is responsible for investment of over one billion US dollars and the combined amount of investment of the three leading countries accounts for nearly half of the total amount of foreign investment in Myanmar. Western countries such as the United Kingdom, the United States, France, and the Netherlands are among the top ten investors, the others being mainly Asian countries. While these Western countries have criticized the Myanmar government because of its delay in introducing democracy and its abuses of human rights, the amount of foreign investment from them has been larger than investment from Japan. The main Asian sources of investment are the Southeast Asian countries that are located close to Myanmar, including Singapore, Thailand, Malaysia, and Indonesia. These countries were severely affected by the Asian Financial Crisis, which caused them to drastically reduce their foreign investment, a trend that had a negative impact on Myanmar. In Table 4, Japan, Korea and Hong Kong figure among the Asian sources of foreign investment in Myanmar but the amount of investment from each of these countries is relatively small, ranging from 100 to 200 million US dollars.

In terms of the number of companies, Singapore leads with 70 companies. Next to it, Thailand is also a country, which invests actively in Myanmar. The investment of Singapore is concentrated in hotel construction and tourism, as well as in real estate and so on, and accounts for about 70% of the whole. Some Singaporean investment has also gone into light industries, logistics, the wholesale trade, education, ports and industrial estates. Thailand has invested mainly in light industries (rice milling, jewelry, food, timber processing, and the processing of agricultural products), hotels and tourism, fisheries, and mining. A striking feature of the overall pattern is that as regards new investments, American and European countries have refrained from investing because of their imposition of economic sanctions, while


the ASEAN nations, willing to engage constructively with Myanmar, have increased the level of their investments. Another notable development is that foreign investment in Myanmar decreased sharply because of the serious dislocation by the Asian Financial Crisis of 1997. (3) Receiving Sectors As regards investment by sector, oil and gas, manufacturing, hotels and tourism, real estate, and construction are the top five categories (Table 5). Since oil had been produced for many years in Myanmar, it was thought following independence that promising oil fields might exist. Exploration for new oil fields began in 1971, and a large gas field was found in the Gulf of Moattama in 1982. The Ministry of Energy, which was founded in April 1985, invited foreign oil companies to carry out oil and gas exploration in 1989. Suffering as it did from a shortage of foreign currency, the military government had high expectations for the future development of oil and natural gas. The amount of about US $2.36 billion was invested for this sector. This amount, invested by a total of 52 companies, accounts for 30% or more of total investment. The gas field of Yadana has been jointly explored by Total of France, Unocal of the US, PTTEPI of Thailand and MOGE (Myanmar Oil and Gas Enterprise) of Myanmar, while the Yetagon field has been opened up by PPML (Premier Petroleum Myanmar Ltd.), Peptronas Calgary, PTTEPI, Nippon Oil, and MOGE. The amount of capital required for the development of energy and mineral resources is so large that the involvement of foreign capital has probably been inevitable. Next to oil and gas, some US $1590.9 million (149 cases) has been invested in manufacturing. Under the Foreign Investment Law, the minimum amount of capital investment permissible in the case of manufacturing is US $500,000 and in fact most manufacturing ventures set up by foreign investors have been started with comparatively small amounts of capital. Garments have been Myanmar’s leading export since 2000, and this perhaps suggests that the promotion of labor-‐intensive export-‐oriented industries should be given a high priority in the economic development of Myanmar. The reason why the ASEAN countries could sustain high economic growth over a long period was a successful transition from primary products as main exports to exports of manufactured goods. In Myanmar, foreign capital could play an important role in just such a transition. Myanmar is still basically an agricultural country producing a substantial quantity of farm-‐based and forestry-‐based products. Industries relating to the processing of these products, as well as hotel development and tourism, real estate and construction are all promising fields for future investment. The present military government decided to promote the tourist industry and hotel development soon after it came to power. Roads in Yangon city were considerably improved and many cities were cleaned up so as to give a good impression to foreign visitors. Moreover, modern multi-‐floor hotels were constructed one after another, and the number of hotel rooms

increased rapidly. The Foreign Exchange Certificate (FEC) system was introduced in 1993 partly with the purpose of avoiding the inconvenience to foreign tourists of exchanging their dollars at the official rate. Moreover, with the aim of attracting tourists from abroad, 1996 was designated as "Visit Myanmar Year Despite these initiatives, the annual average number of tourists has stayed at the level of about 300,000 since the latter half of the 1990s The number of the tourists in the tourism that was officially admitted accounts for about 30-‐40% of the entire number of tourists. In expectation of a growing demand from foreign business visitors, office accommodation for rent as well as condominiums for leasing mainly to foreigners have been constructed in the city of Yangon in recent years.

Types of Foreign Business Enterprise Investing in Myanmar As of 31 March 2002, the total of foreign enterprises investing in Myanmar, based on the Foreign Investment Law, was 362 (Table 6). The numbers of enterprises in the form of sole proprietorships, joint ventures and production sharing ventures were 154, 138 and 70 respectively. The reason why so many of the enterprises are wholly foreign-‐owned is probably related to the problem of exchanging the dollar into Kyats at the official rate, which is extremely disadvantageous to foreign investors. The majority of cases that involve foreign companies exploring for natural resources such as oil, gas and minerals take a form of production sharing. Most of the Myanmar partners of foreign capital ventures are state economic enterprises (76 examples), followed by 36 examples involving private companies and 19 joint ventures with Myanmar Economic Holdings Ltd. (MEHL). The Ministries that are in charge of state economic enterprises relating to manufacturing and processing are the Ministry of Industry-‐1 and the Ministry of Industry-‐2. There are currently 10 joint ventures under the Ministry of Industry-‐1, which invested nearly Kyat 700 million including US $14.62 million as a foreign portion. There are five joint ventures under the Ministry of Industry-‐2. They are as follows:

• Myanmar Fritz Werner Company Limited • Myanmar Daewoo Company Limited • Myanmar Suzuki Company Limited • Myanmar Ekarat Transformer Company Limited • Myanmar Matsushita Company Limited

The fact that among the Myanmar partners of foreign companies there are almost twice as many state enterprises as there are private companies may perhaps indicate a major characteristic of the Myanmar economy. The fact is that for foreign investors seeking Myanmar partners, it is more advantageous to work with state economic enterprises rather than with private companies. As a striking example, MEHCL is an institution established by incumbent and retired military officers and is frequently chosen as a tie-‐up partner, probably because as an influential state enterprise, it receives considerably more preferential treatment than private companies.


PART II

About SAARC THE post-‐cold war phase in international relations has witnessed a distinct trend towards regionalism. With the growing strength of this trend, a large number of states from different parts of the world are constituting themselves into regions to give fresh impetus to a wide variety of cooperative ventures based on regionalism. Regionalism in general, has proved to be an effective device to serve economic and commercial objectives of these states. In the process, old organizations are being re-‐casted and new organizations are being created to suit the changing global political context. The proliferation of diverse regional organizations like the European Union (EU), North Atlantic Free Trade Agreement (NAFTA), Association of South-‐East Asian Nations (ASEAN), Asia Pacific Economic Co-‐operation (APEC), Association of Caribbean States (CARICOM), Economic Co-‐operation Organization (ECO), Economic Community of West African States (ECOWAS) and Southern African Development Community (SADC) offer adequate evidence of this proposition. As a viable response in a rapidly globalizing world, the trend towards regionalism is being espoused by developed as well as developing countries. In the light of this trend towards regionalism, it can as well be argued that India will be unable to perform its role as a global player without weaving a web of durable co -‐operatives with its immediate neighbors. But the prospects of regional co-‐operation in South Asia would continue to be bleak unless constant constructive efforts are made to resolve differences among south Asian states. Keeping the imperative of regional co-‐operations as the backdrop, this article would attempt to relocate India in the context of South Asia. Initially, such an exercise would take a critical overview of some of the major political problems between India and its neighbors and later proceed to assess the significance of India's initiatives to promote a co-‐operative ambience in south Asia. The south Asian region includes India, Pakistan, Bangladesh, Sri Lanka, Nepal, Maldives and Bhutan. Before proceeding further, it would be useful to make some preliminary observations regarding India's status in this region in order to appraise the trajectories of interstate relations in the south Asia. It has often been easier to conceive south Asia as a region because of its colonial past. In fact, all the major states of this region including India, Pakistan, Bangladesh and Sri Lanka were under British imperial rule. Britain also controlled Myanmar while Afghanistan was a buffer state between British imperialism in India and the former Czarist Russia as also the Soviet Union. After establishing political control over almost the entire south Asian region, Britain opted to integrate the south Asian countries within its well spread out network of trade and commercial ties. It was a vertical link between the metropolitan power and the states in south Asia that created a notion of the south Asian region during colonial times. In contrast the post colonial states in south Asia would like to conceive a qualitatively different notion of south Asia as a viable region. Imperialism invariably signifies an asymmetrical relationship of interdependence between the materially advanced and backward societies [Harshe 1997:10]. During colonial times, the colonies in south Asia were vertically integrated in to the international division of labor under the British imperial system. With the termination of British colonial rule, it is the sovereign independent states of south Asia, which are seeking to work out horizontal forms of interdependence amongst themselves in the process of constructing their notion of south Asian region. Any movement towards regional cooperation in south Asia is inconceivable without India's active participation because South Asia is predominantly an Indo-‐centric region. India can easily identify itself with the religious, social and cultural systems of its neighbors due to obvious similarities between them and India. To give some examples, Hindu religion is common between Nepal and India. Like Pakistan and Bangladesh, India has a sizeable Muslim population. The people of Tamil ethnic origin constitute a major ethnic minority in Sri Lanka. Furthermore, in addition to Bengali language the people of Bangladesh and those from the state of West Bengal in India are bound by common cultural ethos. Likewise the people of Pakistan share Urdu language with Urdu speaking people of India and culturally there is much in common between Pakistani and Indian Punjab. In a word, India has something in common with all its immediate neighbors but the neighboring states of India do not share similarities of any magnitude or depth among themselves. South Asia can also be characterized as an Indo-‐centric region due to India's overwhelmingly superior power in relations to its neighbors. A combination of some of the principal elements of national power including vast geographical size, huge population, abundant natural and mineral resources, wide and reasonably well developed industrial base, an impressive reservoir of trained manpower, size of the economy, capacities to produce nuclear weapons and a vibrant democracy have made India a regional hegemon. The dominant position of India in south Asia became obvious after the disintegration of Pakistan and the emergence of Bangladesh in 1971. Such dominance has contributed towards divergence of

perceptions about India's policies between India and its neighbors. For instance, the strategic community in India tends to construe India's military interventions in neighboring countries in defensive terms. However, all the smaller and weaker neighbors of India have viewed such interventions in terms of the outward projection and demonstration of India's military might. To put it more sharply, India's military interventions in Bangladesh (1971), Sri Lanka (1987-‐90) and Maldives (1988) have only added to the insecurity as well as fear of Indian hegemony among India's neighbors. And nowhere is this more apparent than in trade between the SAARC countries.

SAARC and Regional Trade Any worthwhile project of regional co-‐operation requires certain basic pre-‐requisites. To begin with, countries, which aim at co-‐operation, must have the will to pursue peaceful ties. Even die-‐hard enemies like France and Germany had to enter a phase of rapprochement before working out an arrangement towards the establishment of the then European Economic Community (EEC) in 1957. Politically, factors such as the threat of US dominance as well Soviet expansion had brought France and Germany closer. In the process, they chose to promote mechanisms of interdependence through European unity movements to consolidate and further strengthen their respective positions in world politics. However, unlike the successful experiments of regional co-‐operation such as the EEC or the EU, the SAARC countries lack a peaceful environment. They are constrained to build notions of cooperation in the shadow of protracted conflicts between India and Pakistan. The ambition of both these states to build nuclear capabilities has further aggravated tensions in the region. Moreover, the economies of the SAARC countries are competitive and not complementary. In substance, all these countries produce and export primary goods and import sophisticated manufactured products from the advanced industrialized countries. Obviously, the vertical trade and commercial links between the advanced industrialized countries of North America and west Europe and the SAARC countries are far stronger than the horizontal links within the SAARC states [Kushwaha 1995-‐96]. For instance, the US, countries of the European Union and Japan together are the largest trading partners of the SAARC countries ac-‐counting for more than 50 per cent of total trade. Furthermore, a substantial proportion i.e. 40 percent, of the trade of SAARC countries is with the APEC region, including China. In contrast the South Asian countries formally do not trade with each other. As a share of total exports of south Asia, intra-‐regional trade amounts to no more than3 percent [BankA rindam, 1998]. In view of these trade figures within the south Asian region, efforts at the 10th SAARC summit, concluded at Colombo in July 1998, to promote South Asian Free Trade Area (SAFTA) could be perceived as a welcome step. A free trade area would offer the benefits of economies of scale and induce producers from individual countries to be more competitive and efficient. Moreover, the formation of free trade area is quite likely to prompt outsiders to set up production facilities within the region to avoid discriminatory trade barriers imposed on non-‐union products [Bank Arindam 1998]. India played a positive role towards promotion of regional trade in the south Asian region at the Colombo summit. It took a bold step of removing quantitative restrictions on 2,000 commodities. India also is keen on promoting an investor-‐friendly environment in order to improve its overall economic performance. In fact if India and Pakistan are able to reduce tensions in their bilateral interactions through a process of a sustained dialogue as well as fruitful negotiations the entire south Asian region will be able to concentrate its attention on developmental activities. In this context the Gujral doctrine might appear increasingly relevant. The Gujral doctrine consists in following a policy of non-‐reciprocity towards neighboring states with the idea of accommodating their interests. It has been premised on the fact that being the most powerful state in south Asia, India needs to playa conciliatory and accommodative role vis-‐a-‐vis its neighbors in the larger interest of maintaining peace and stability in the region. Such a policy, in its turn, can provide a viable base to promote diverse co-‐operative endeavors at the bilateral as well as multilateral levels among the south Asian states. During Gujral's tenure as a foreign minister as well as the prime minister (1996-‐98), the Gujral doctrine became the basis to promote co-‐operative ties between India and its neighbors. We shall proceed to highlight some of India's achievements during that period. To start with, a 30-‐year Ganga water sharing treaty between India and Bangladesh took effect from January1, 1997. The Ganga water began to flow from four sides [Asian Recorder 1997a]. Likewise India signed Mahakali river water treaty with Nepal in 1996, which will be operative in the near future. The projects of sharing river waters as well as development of barrages between India and its neighbors would link them in the network of interdependence to pursue developmental objectives in the area of agrarian production. Apart from linkages through the rivers, India supported an initiative to establish road link between Nepal and Bangladesh through one 61 km transit route. The route goes from Kakarbita in Nepal to Phulbari in India into Bangladesh. This would allow Nepal to trade through the Chittagong area of Bangladesh. Similarly, India, since long, has been looking for transit facility via Bangladesh towards its northeastern states. Such transit routes would drastically reduce transport costs. However, such routes can be made operative, effectively, only through cordial interstate


and inter-‐societal ties. Being a landlocked state, Nepal has always been dependent on the transit routes provided by India. Taking advantage of such dependence, India could also control the activities of the ISI agents operating from Nepal. It also needs to be underscored that linkages through infrastructure between India and its neighbors can give a boost to intra-‐regional trade. In its own way, India took constructive measures to promote intra-‐regional trade. For instance, in order to promote the idea of South Asian Preferential Trade Area (SAPTA) India offered tariff concessions on 500 consumer goods from least developed countries. Consequently Bangladesh was able to sell its goods like textile or leather items with a decreased duty of almost 50 per cent. Thus increasing the exports from Bangladesh was an important step towards trade liberalization [Asian Recorder 1997b]. Like Bangladesh, India also ventured to pursue cordial economic relations with Sri Lanka. To start with, India signed an investment promotion and protection agreement with Sri Lanka on January 21, 1997. Furthermore, Gujral regime unilaterally reduced tariff to remove all non-‐tariff barriers on 70 to 80 products exported from Sri Lanka to India. And finally India also offered financial assistance to Sri Lanka to rectify the trade imbalance between the two countries and to rehabilitate the Sri Lankans who have been the victims of civil war in Sri Lanka [Asian Recorder 1997c]. The current efforts between India and Sri Lanka to promote free trade area are consistent with the Gujral doctrine. The Gujral doctrine was quite successful in promoting a co-‐operative environment in south Asia. What is more, the Gujral regime had initiated a dialogue with Pakistan on all the important issues, including Kashmir, to bring about an atmosphere of cordiality between the two countries. The network of co-‐operative ties among south Asian states has to spread much wider to encompass a wide range of issues including trade, joint ventures, investments, rural development, sharing of information technology, prevention of environmental degradation, spread of basic education and population control. In addition, the countries in south Asia will be constrained to combat, collectively, the problems related to cross-‐border terrorism and the flow of arms and drugs. People-‐to-‐people contacts at the socio-‐cultural level through democratic regimes in all the south Asian states could, plausibly, facilitate a desperately required co-‐operative environment in the region. In view of the growing imperative of regional co-‐operation, India will be constrained to curb tendencies to adopt hawkish stances that bring about an inevitable discord among the interstate ties within the region.

Analytical Framework The SAFTA implies elimination of both tariff and non-‐tariff barriers. To the extent that high tariffs in the south Asian region encourage the use of informal channels, SAFTA would induce a shift of illegal trade flows from the illegal to legal trade channel. Similarly, the south Asian countries impose non-‐tariff barriers – particularly in the form of quantitative restrictions, which obstruct the flow of trade through formal channels. Again, SAFTA would mean abandoning such barriers and a consequent shift of such trade to official channels could reasonably be expected to occur. While such Free Trade Agreements (FTA) seek to enhance trade flows within a region through removal of trade barriers, they require rules of origin to ensure that goods from third countries passing through another member country of the FTA before arriving at the final market for consumption, meet minimum processing requirements to benefit from duty free entry. Commodities that fall beyond the rules of origin will continue to be smuggled. Such rules of origin can be complex and sometimes provide the excuse to block trade, operating in effect as a non-‐tariff barrier [Krueger 1993]. There are several factors influencing informal trade flows that do not come under the domain of SAFTA. Firstly, informal trade also takes place due to domestic policy distortions. Such distortions are evident in different fiscal regimes in the south Asian countries. In order to meet domestic policy objectives governments have different tax regimes and also employ subsidies and administered price mechanisms. The government also plays an active role in the distribution of some commodities. These factors cause prices to differ across borders, and make informal trade profitable. The important point about domestic policy distortions is that they are not addressed either by SAFTA or by the WTO commitments.

Second, it has to be kept in mind that the economies of south Asia are in many ways quite different from other developing economies that have formed in the past or are presently contemplating preferential trading blocs. Unlike most of them, prior to the 1947 partition of the subcontinent, Bangladesh, Pakistan and India were in fact a single country politically, economically and monetarily. This historical fact continues to be relevant since a large part of the informal trade flourishes because of traditional, historical, economic and ethnic links. Third, if we compare formal and informal trade in an institutional framework then whatever may be the real cost associated with smuggling, there are as great or greater costs associated with formal trade. These costs arise because of inefficiencies introduced by government interference in markets and do not enter directly the physical process of production of a good [Exim Bank 1999]. Smuggling may not be an outcome of taxes but rather an attempt to circumvent the cumbersome web of government regulations and controls that often make trade through formal channels very difficult. More specifically, the transaction costs of operating through the formal channel may exceed those of informal channels. Thus as long as transaction costs are high, exporters will prefer to use unofficial channels. Fourth, a related aspect is that of transportation costs in the region. A distinctive feature of the south Asian countries is the inadequate transit and transport systems. This often results in high transport costs in the region and creates a strong incentive for trade to take place through informal channels. It can be seen that transport costs both direct and indirect are not quite related to the trade and industrial policy environments of the region and informal trade of this nature may remain even if liberalization policies of the countries continue.

Trade Flows In order to examine how India's trade balance with the south Asian countries on the official and unofficial accounts will alter with the implementation of SAFTA, we begin with an empirical documentation of the magnitude and composition of trade flows in the south Asian region. We need to examine how large the official trade flows are and how they are related to unofficial trade flows. Various studies have estimated the size of unofficial trade that India has with its neighboring countries in the south Asian region. It has to be kept in mind that unofficial trade estimates for different SAARC countries have been made at different points of time. In order to understand the nature of informal trade and its relationship to formal trade we have used figures of formal trade corresponding to the years for which estimates of informal trade are available. Bangladesh unofficial trade estimates are available for the year 1992-‐93 [Chaudhary 1995]. Estimates of informal trade were made using the 'Delphi' technique, which is essentially used for gathering and processing the opinions of informed individuals. The iterations are repeated till broadly converging responses are received. For the field survey 18 important smuggling centers were selected. Relative shares of different smuggling centers were assessed in order to estimate the total volume at the district level.' State level volumes were then estimated by aggregating district level volumes. Two features emerge; first, the magnitude of formal and informal trade is roughly the same. Second, both on the official and unofficial account India has a trade surplus with Bangladesh again, of the same magnitude. The pattern of India's official and unofficial trade with Sri Lanka follows a different pattern. Unofficial trade estimates between India and Sri Lanka are available for the year 1991. We first begin with the method of estimation. Unofficial trade is carried out both by air and sea. Of the total contraband trade, 65 per cent is carried out by air and the rest is carried out by sea. While there is hardly any passenger traffic by ship between India and Sri Lanka, a number of regular boats ply between India and Sri Lanka purely for contraband purposes. Estimates have been made on the basis of a survey where the traffic by air and by sea is taken into account, the proportions of traffic involved in contraband trade, and the amount of goods carried by such persons [Sarvanathan 1994]. India's official trade with Sri Lanka is similar to that with Bangladesh on one count, viz, India has had a trade surplus with Sri Lanka. However unofficial trade account with Sri Lanka is more or less balanced. India's unofficial trade with Sri Lanka has certain features. Firstly, the contraband trade between India and Sri Lanka is a two-‐way operation. That is goods are smuggled from India to Sri Lanka and vice versa. The value of such trade in both directions seems to be only marginally different (unlike the official trade gap, which is enormous). In fact India's unofficial imports are


almost 10 times greater than the official imports. In contrast, the contraband trade between Sri Lanka and almost all other countries are one-‐way operations where goods are smuggled from abroad to Sri Lanka and not vice versa. Secondly, the total two-‐way contraband trade between India and Sri Lanka is more than the official trade between them. Thirdly, the two-‐way contraband trade between India and Sri Lanka is the largest contraband trade between Sri Lanka and any single country. Estimates of informal trade between India and Nepal have been placed at 8 to 10 times that of formal trade. While there are no formal estimates, it is believed in some quarters that during a number of years between 1978 and 1989: value of goods smuggled between India and Nepal may be 8 to 10 times that of officially recorded bilateral trade (Table 1). While separate estimates on informal exports and imports are not available it is believed that informal trade is largely in one direction, namely, from Nepal to India. In other words India has a trade deficit with Nepal on the unofficial trade account. This growth has been facilitated by the complete freedom of currency movement between the two countries. Information on Indo-‐Pakistan unofficial trade is quite scanty. Islamabad estimates that Indian goods worth $1 billion are smuggled annually across the Indo-‐Pak border. Formal trade through third countries, mainly Dubai is placed at another 1 billion (The Economist, January 1996) (Table 1). In particular machineries used in the production of textiles and those used in tanneries are exported to Pakistan indirectly through Dubai, CIS countries and Afghanistan. Although the operation is circuitous it is cheaper than imports from Europe, USA and Japan. Estimates for unofficial trade with Bhutan are available for 1993-‐94 [Rao etal 1997]. Almost all of unofficial trade was in the form of exports to Bhutan with very little informal imports (Table 1). It can be seen that while India had a trade surplus with Bhutan on the official account it had a trade surplus of a much larger magnitude on the unofficial trade account. What appears from the above analysis is that on the official trade account India has a trade surplus with all the south Asian countries. On the unofficial trade account it has a surplus with Bangladesh, Pakistan and Bhutan; a deficit with Nepal and an almost balanced trade with Sri Lanka. Essentially one needs to examine how different official trade flows are from unofficial flows. Information gathered from field visits along the Indo-‐Bangladesh border areas revealed that among major commodity groups, food and live animals (cattle being the single largest item) as a group account for a lion's share of nearly 59 per cent of the total informal exports from Indian borders to Bangladesh. Commodities making up non-‐food consumer items like textiles (mainly sarees), bicycles and bicycle parts, cosmetics, plastic items, razor blades, medicines, kerosene and diesel account for 40 per cent of the next largest share of smuggled out volume. The rest, only a small magnitude was accounted for by machinery and equipment and industrial raw materials. Among smuggled-‐in goods only three major items, namely, synthetic fabrics, spices and Hilsa fish are brought in from Bangladesh apart from electronic goods like calculators, rechargeable emergency lights as well as some VCRs and VCPs. Clearly these are goods where import duties have been high in India and the unofficial channel is used to evade tariffs. An interesting feature is that these goods are not manufactured in Bangladesh but are of third country origin. It is noteworthy that as much as 44.3 per cent of incoming items represent exchange payments towards costs of informally exported goods. These items are mainly in the form of gold, silver, Bangladeshi taka and Indian rupee. The official exports are dominated by industrial manufactures (63.2 per cent) among which textiles are major consumer items. India's official imports from Bangladesh comprise largely of crude raw materials (42 per cent), chiefly jute, and chemical related products (40 per cent), mainly fertilizers. India's unofficial exports to Sri Lanka consist of sarees, sarongs and stainless steel. Unofficial imports from Sri Lanka consist of two types of goods (i) traditional and (ii) non-‐traditional goods. While unofficial trade has been a historical phenomenon, the trade has undergone some changes. Prior to 1977 traditional goods like spices, coconut products and gold were smuggled from Sri Lanka to India. Due to liberalization of the Sri Lankan economy in 1977, many goods were imported from third countries into Sri Lanka and then smuggled into India where import duties on such items were as high as 300per cent. These non-‐traditional goods (mainly consumer durables) provided great stimulus to contraband trade between the two countries. India's official exports to Sri Lanka comprise of a wide range of goods, bulk of which are a variety of manufactured goods (36 per cent), dominated by textile fabric, machinery and transport equipment (24 per cent), dominated by motor vehicles and food items (26 per cent) the largest items being sugar and vegetables. India's official imports from Sri Lanka consist overwhelmingly of primary products and raw materials (67 per cent). India's informal exports to Nepal comprise of live cattle, rice and medicines. India's unofficial imports from Nepal comprise mostly of consumer goods, raw material and intermediate goods almost all of which is of third country origin. While officially, India exports transport equipment and machinery (29 per cent) mainly motor vehicles, chemicals (24 per cent) chiefly medicines and manufactured goods (22 per cent) mostly

building materials to Nepal, official imports consist of food items (38 per cent) the important items being animal feed, spices and live animals and manufactured goods (29 per cent) the main item being textile fabric. Unofficial exports to Pakistan comprise of alcoholic beverages, chemical products, steel utensils and machinery (though technically legal) through third countries. Informal imports from Pakistan consist of food items, synthetic fibers and some chemical products. Thus a large part of trade, both exports and imports takes place in food items, through both official and unofficial channels. But the important point is that trade is carried out in different commodities within the same classified category. India's official exports to Pakistan consist largely of food items (36 per cent) the main item being animal feed stuff, primary products (21 per cent) mainly iron ore and crude vegetable materials, and manufactured goods (19 per cent) the main item being building material. Official imports comprise of food items (72 percent) mainly sugar and dry fruits. Unofficial exports to Bhutan comprised of a wide range of goods the major ones being yarn, rice, sugar and aluminum goods. Official exports consisted of products including spirit and beverages, residual chemical products, etc. Official imports from Bhutan consisted mainly of wood products and inorganic chemicals while unofficial imports from Bhutan were almost negligible. It can be concluded from the above analysis that the commodity baskets being traded officially and unofficially are different. Also important is the fact that while a large part of informal imports into India comprise of third country goods, informal exports to the south Asian countries consist of essential goods (both food and nonfood) and mass scale consumer items.

Factors Influencing Informal Trade Factors influencing informal trade can be classified into two categories -‐ (i) factors under the realm of SAFTA and (ii) non-‐SAFTA related factors. By its very definition SAFTA implies removal of trade barriers. The extent, to which such barriers restrict official trade flows, a removal would imply a shift in trade flows from informal to formal trade channels. By the same logic, if informal trade is driven by factors that do not fall under the purview of SAFTA then even with the formation of SAFTA informal trade will persist in the region. SAFTA-‐Related Factors

1. Tariffs: High tariffs within the SAARC region encourage informal trade across borders. High tariff rates create a strong incentive to avoid the formal channel in order to evade tariffs. It can be seen that tariffs on both primary and manufactured goods are high for India, Bangladesh and Pakistan (Table 2). The informal channel is particularly attractive for exports of mass consumer goods that are being exported informally from India to the other south Asian countries. Large firms are not producing such products. Tariffs form a significant proportion of final prices for such firms and evading them makes informal trade profitable. It needs to be mentioned that a movement from SAPTA to SAFTA would mean gradually moving to zero tariffs and informal trade occurring due to high tariffs, that automatically accrue in formal channels. We have already mentioned that progress under SAPTA has been very slow. In the last few years India has signed free trade agreements with Nepal, Bhutan and Sri Lanka in order to move on a faster track to achieve free trade. With these developments a large part of informal trade is likely to shift to formal


channels. Tariff reduction would particularly be effective for informal exports from India to the other south Asian countries and not so much for informal imports into India since they consist largely of third country goods.

2. Non-‐Tariff Barriers: The abysmally low performance of intra-‐SAARC trade is not due to higher tariffs alone, but due to the presence of non-‐tariff barriers (NTBs), mostly in the form of quantitative restrictions. Such barriers give rise to informal trade in the region. In the early 1990s India and Bangladesh had the highest non-‐tariff barrier coverage ratio for both primary and manufactured goods; in fact India had an NTB coverage ratio of 72 per cent on primary goods and a ratio of 59 per cent in manufactures. Bangladesh had an NTB coverage ratio of 55 per cent and 47 per cent for primary and manufactures respectively (Table 4). Moving towards SAFTA would mean a removal of non-‐tariff barriers and to the extent that trade in the region is obstructed by NTBs, a shift to formal channels is likely to occur. We have seen earlier that India has a large amount of official export to Bangladesh. On scrutinizing Bangladesh's list of banned and restricted items under the Import Policy Order (IPO) 1995-‐97 it was found that items like sugar, salt, cement, petroleum products, baby food, fertilizers and antibiotics were covered [Mukherjee 1998]. These are products that are exported informally to Bangladesh in significant quantities. In India, NTBs are mostly in the form of Quantitative Restrictions (QRs). On August 1, 1998, India unilaterally removed QRs on imports from SAARC countries, viz. Bangladesh, Bhutan, Nepal, and Maldives, Sri Lanka or Pakistan subject to the condition that they comply with the rules of origin principles as stated in the SAARC agreement. It has been estimated that Sri Lanka would be the largest beneficiary of India's unilateral removal of quantitative restrictions on 2000 items because in value terms its NTB (QRs)-‐coverage ratio is 24.08, followed by Nepal with a coverage ratio of 10.5 per cent [Bhattacharya 1990]. Pakistan and Bhutan will benefit equally with QR-‐coverage ratios of these two countries being around 2 per cent. The removal of quantitative restrictions is particularly significant for informal trade between India and Sri Lanka. India has been importing a large volume of agricultural commodities, particularly spices from Sri Lanka. With the removal of quantitative restrictions on imports of commodities informal trade is likely to shift to formal channels. However unless the other SAARC countries reduce their nontariff barriers simultaneously, official trade expansion will continue to be slow in the region.

3. Rules of Origin: While free trade arrangements require abandoning both tariff and non-‐tariff barriers, they also require rules of origin to ensure that goods from third countries do not enter the low tariff country legally to be smuggled informally into the high barrier country. While all the SAARC countries have reduced their tariff levels in the early 1990s the speed at which such reduction has taken place differs amongst countries. The un-‐weighted tariff average for manufactures was highest for Bangladesh at 85 per cent followed by Pakistan 64 per cent. Tariffs on manufactures were the lowest for Sri Lanka -‐ 26 per cent and Nepal 19 per cent. Clearly there is an incentive for Nepal and Sri Lanka to import manufactured goods at lower tariffs from third countries and export them to India through informal channels. It has to be kept in mind that such trade is informal only if the commodities do not meet the rules of origin principles. Thus, products eligible for preferential concessions have to be certified by a certificate of origin, which is to be issued by an authority designated by the government of the exporting member state and notified to the other states in accordance with certification procedures. However the importing member state can refute the certificate and the settlement could be very time consuming, thereby affecting trade adversely. SAPTA defines the rules of origin criteria of eligibility of products under preferential trading. Under the agreement the value of raw materials originating within the territory of the contracting states must be at least 50 per cent of the f o b value of the product. However, such requirements can rarely be met by both Nepal and Sri Lanka from where informal trade in goods from third countries takes place. The problem of informal trade from third countries is closely linked to the issue of leakages in transit. Nepal is a land-‐locked country and India provides transit facilities to Nepalese imports. Importers in Nepal misuse this transit facility. Goods imported if India gives transit facilities. Such consignments reach India as air cargo in Calcutta and are then loaded onto trucks to be transported to Nepal. However at this point the consignments are deflected into the Indian market and the trucks either do not reach their destination, viz. Nepal or are replaced with commodities that are required by the Nepalese economy, viz. rice and medicines. In the latter case consignments reach Nepal through the formal or authorized channels but are miss-‐declared at the customs check points. Costs for informal traders are higher since they pay hefty bribes to the border and check-‐post authorities. It is for this reason that large traders and sometimes big business houses engage in this kind of trading activity. It has been mentioned earlier that India does not have a trade surplus on the unofficial account with Nepal and Sri Lanka. Both countries are involved in exports of third country goods to India unofficially which contributes to a more balanced trade on India's unofficial trade account with the south Asian countries. Thus if the rules of origin requirements are relaxed such trade will automatically shift to formal channels.

Non-‐SAFTA Factors

1. Domestic Policies: Even if countries in South Asia abandon both tariff and nontariff barriers unless domestic policies are synchronized in, formal trade will continue to take place. Thus tax structure amongst the SAARC countries differ to quite an extent. For instance indirect taxes are much lower in Nepal. A number of industrialists have survived on the business of opening up new industries which are made more attractive by the fiscal policies of Nepal and the high demand of these items across the border viz. India [Lama1 999]. These entrepreneurs tend to wind up their operations as soon as the lure brought about by the fiscal measures lasts and market demand dwindles. The consequent trading that takes place with India becomes possible and profitable due to the liberalized provisions of the Indo-‐Nepal trade treaty. Indian investments in Nepal in products like stainless steel, synthetic fibers etc. have been carried out in this manner. Yet another distortionary policy prevalent in India is the reservation of 800 items for the small-‐scale sector. Thus large firms that are already in existence producing these commodities cannot expand or create new capacities beyond the levels that were established at the time of policy implementation. Such large Indian firms have resorted to creating capacities in Nepal and Sri Lanka. Data on 61 Indian joint ventures in Nepal revealed that2 7 percent were producing items reserved for the small-‐scale sector in India [Taneja 1997]. Since most of the reserved products can be imported freely into India, the firms in Nepal and Sri Lanka can export the same products to India. This points to the inextricable linkage between domestic policies, investment patterns and informal trade. Another example of domestic policy distortion is the public distribution system where prices are administered. A large number of agricultural products and essential commodities are sold under a dual pricing policy in India. Thus these items can be sold through the open market and through the public distribution system (PDS). The government obtains supplies for the public distribution system, which are then sold at administered prices much lower than the free market prices. The PDS outlets in the states neighboring Nepal and Bangladesh in India get their supplies from the PDS in excess of their local needs. A unique system of licensing for purchase of food grain, fuel, kerosene, cement, rice and sugar helps to maintain stocks close to border points. This enables traders to bring in commodities disproportionate to the legitimate needs of the local population, which are then exported informally to Bangladesh and Nepal [Chaudhury 1993]. The authority for such policies rests with individual countries and clearly lies outside the domain of SAFTA.

2. Transaction Costs: The multiplicity of rules and regulations stringent administrative procedures coupled with bureaucratic practices or infrastructural facilities and lack of institutional support may generate transaction costs, which may discourage official trade even if trade policy distortions are corrected under SAFTA. In the south Asian context the informal channel becomes an attractive channel simply because the transaction cost of operating through this channel is lower than that of operating through t he official channel. Given t he nature of commodities being exported informally from India to the other south Asian countries it can be inferred that it is largely small exporters who are engaged in informal trade. Transaction costs would be high for such traders and they may prefer to trade informally.

3. Transport Costs: The inadequate transport and transit systems that have been in existence in between India and her neighboring countries have led to high transportation costs in the region. One major hurdle in road transport between India and Bhutan is the temporary blockages due to landslides. In the case of trade between India and Nepal the terrain in Nepal makes building and maintaining roads not only difficult but expensive as well. Even with respect to transit modalities several bottlenecks have been identified: port congestion, excessive documentation, delays, slow movement of goods, non availability of equipment and railway wagons, transshipment and other indirect costs. For example, the ratio of insurance and freight paid on total exports of goods and services is 11 per cent for Nepal as against the corresponding ratio of 6 per cent for all developing countries [UNCTAD 1995]. A large part of trade therefore takes place informally. Thus traders use the informal channel in order to save on transportation costs. Particularly in the case of perishable commodities, it is more cost effective to trade informally. For small traders transportation costs form a significant proportion of the total cost and unauthorized channels are used in order to minimize transportation costs.

Given its geographical location and the size of its market, the bulk of informal trade takes place between India and other SAARC countries. An analysis of trade flows in the region reveals that India has a trade surplus with all the south Asian countries on the official trade account. However on the unofficial trade account India has a trade surplus only


with Bangladesh, Pakistan and Bhutan. What can be concluded is that India has a relatively more balanced trade with its south Asian partners on the unofficial account than it does on the official account. To what extent SAFTA would bring about a change in these trade balances will depend on the extent to which informal trade flows take place due to tariff and nontariff barriers. An analysis of the nature of trade flows reveals that a significant proportion of India's informal exports to south Asia take place because of tariff and non-‐tariff barriers. With SAFTA such goods would automatically shift to the formal channel and consequently India's official exports to south Asia will increase. However, since India's unofficial imports from south Asia consist largely of third country goods they will not be affected by removal of trade barriers in the region envisaged by SAFTA. Thus informal imports into India may not shift to formal channels. The net result of SAFTA can be expected to worsen the existing trade imbalance that India has with the south Asian countries on the official account. However a more balanced trade can be expected on the unofficial account. Such a situation where India's trade surplus with the south Asian countries increases may be a cause for concern amongst member countries. Thus step should need to be taken to reduce the trade imbalance. One way to do so would be to relax the rules of origin so that trade that takes place through flouting of such rules shifts to official channels. While a customs union would be a preferred arrangement to take care of informal trade of this kind, till such time as a common tariff wall is established, certain steps could be taken. This could be achieved by narrowing down the list of items that would have to meet the rules of origin to those where (i) external tariffs are high and (ii) where quantitative restrictions need to be continued. All other commodities should be eligible for preferential trading without having to meet the rules of origin. While SAFTA could be effective in bringing about a shift from informal to formal channels when official trade flows are arrested by tariff barriers, there are other factors notably high transport costs and domestic policy distortions where SAFTA would be ineffective in bringing about a shift from informal to formal channels and other measures would have to be taken to enhance flows through official channels. The inadequate transport and transit systems that have been in existence between India and her neighboring countries have been a major constraint in enhancing trade through formal channels. Unless infrastructure development is undertaken on an urgent basis unofficial trade will continue to be more attractive. Also important, the domestic policies of countries in the region will need to be harmonized for a shift from informal to formal channels to occur. Significant volumes of informal trade are occurring because of distortions in domestic policies. The absence of synchronized fiscal policies and the presence of domestic subsidies may continue to make informal trade remunerative. Countries in the region will have to male a concerted effort towards synchronizing both trade and domestic policies in order to convert informal trade flows to formal flows.

Current Status On 8 December 2010, the South Asian Association for Regional Cooperation (SAARC) celebrated its twenty-‐fifth Charter Day. Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan and Sri Lanka established SAARC in 1985 ‘with the objectives of promoting welfare of the peoples of South Asia and improving the quality of their lives through acceleration of economic growth, social progress and cultural development’. Afghanistan joined SAARC as a member in 2007 and Myanmar applied for membership in 2008. Recent SAARC summits have attracted observers as diverse as the United States and Iran. More recently, SAARC was accepted as an observer at the United Nations Climate Change Conference in Cancun (2010). In short, not only is SAARC growing, but it is also being accepted at multilateral forums as a representative of its member states. But unfortunately, unlike its older cousins the European Union (EU) and the Association of South-‐East Asian Nations (ASEAN), SAARC has never managed to take off fully and continues to be a nominal entity. The slow progress on the SAARC Free Trade Area (SAFTA) is a case in point. Even more serious is SAARC's inability to galvanize action on the rapidly deteriorating ecological situation in the region, which is home to around half of the world’s poor. While it is common to lay the blame at the door of Indo-‐Pak rivalry, the reasons for SAARC’s failure are, in fact, deeper and structural in nature. A constellation of geographical, ethnic, historical and political factors has gridlocked SAARC, as discussed below.

The Importance of India A key reason for SAARC’s failure is that one of its members is much larger than all of SAARC’s other members put together. India accounts for at least three-‐fifths of SAARC’s area, population, GDP (on a purchasing-‐power parity basis, or PPP), foreign exchange (forex) and gold reserves, and armed forces. The enormous resource and power differentials naturally translate into an acute sense of insecurity in the neighborhood. Unsurprisingly, smaller countries seek to ally themselves with ‘outsiders’. Furthermore, SAARC’s second largest country—Pakistan—is not that small either, which results in polarization instead of

regional harmony. Pakistan, in fact, is among the world’s most populous countries and a nuclear-‐weapon state. India’s central location within SAARC also accentuates the effect of its size. Given its enormous geographical expanse, India shares a land and/or maritime boundary with all other SAARC countries, while they (except

for Pakistan and Afghanistan) do not share boundaries with each other and have India as their sole South Asian neighbor. International borders in South Asia are still not all settled beyond dispute, and conventional conflicts are not decreasing in shared border areas. India, as the largest SAARC country, finds itself entangled in conventional conflicts with almost all other SAARC countries, which accentuates their sense of insecurity and pushes them to ally themselves with outsiders.

Hindrances to Regional Cooperation Geography severely limits regional cooperation in South Asia and, in fact, promotes conflicts. The insecurity of smaller countries engenders demand for external intervention in South Asian conflicts. South Asia’s strategic location in the middle of South-‐East, Central and West Asia, and at the centre of the Indian Ocean, ensures an adequate supply of such intervention.

Figure: SAARC Members

But geography is not the only culprit. Differences in political systems also make regional cooperation difficult. Except for India, none of SAARC’s members have a stable, secular democracy. Unfortunately, the convergence of political systems is unlikely in the near future. The problem was aggravated in the past because of India’s pro-‐democracy rhetoric. In recent times, however, this problem has to some extent changed, because on the one hand India has toned down its rhetoric, and on the other democracy has begun to put down roots in SAARC countries such as Bangladesh, Bhutan and Nepal, while Sri Lanka is actively encouraging its Tamil minorities to participate in the democratic process. Furthermore, historical differences add to the intractability of disputes among SAARC’s members. Countries that came into existence after the bloody Partition of British India continue to define their relationships in terms of the unfortunate formative experiences and unresolved Partition disputes. Inter-‐state conflicts in SAARC are relatively unmanageable, also because the majority ethnic community in each of India’s neighbors is a minority in India. The problem is aggravated by the Islamic rhetoric of Pakistan’s foreign policy.


PART III

Myanmar’s Potential Contribution to SAARC: Indo-‐Bangla-‐Myanmar Gas Pipe Line

A short history of the Myanmar-‐Bangladesh-‐India pipeline project In 1997 a Bangladeshi private firm called Mohona Holdings first proposed the construction of a pipeline that could transport natural gas from the gas fields of Myanmar into India traversing through Bangladesh. By early 2000s, with major Indian oil and gas companies such as GAIL, ONGC Videsh and Essar having invested considerably in the Myanmar hydrocarbons sector, the country began to actively pursue the feasibility of such a project. Following negotiations with Bangladesh and Myanmar in early 2005, an agreement between all three countries for constructing the pipeline was reached. The expected cost of US $1 billion was to be mostly borne by India and private sector partners, whereas Bangladesh would receive US $125 million in annual transit fees. While gas would mostly be fed to the Indian market, Bangladesh would also be able to make use of gas imports from the pipeline should its own indigenous sources become scarce. Indo-‐Bangladesh bilateral negotiations fell through in 2005 however as additional conditions laid down by Bangladesh were unacceptable to India. At the same time, Myanmar also entered into negotiations with China regarding another bilateral pipeline project. By mid-‐2005, the pipeline project looked to be shelved indefinitely. Khondkar Saleque, one of Bangladesh’s government-‐appointed pipeline negotiators stated that “gas from Myanmar can be available to India and Bangladesh only if the political governments of India and Bangladesh can resolve any other bilateral issues.” M. K. Dhar, a former Indian intelligence officer, blamed the Islamist ideology of the Bangladesh government and the prevalence of strong anti-‐India perceptions for blocking any policies beneficial to India. By mid-‐2007 however, the Bangladesh government performed an about-‐face in expressing its intent to negotiate with India over the pipeline project, and in 2010, the project received approval from the government but as of today the project has yet to be implemented.

South Asian Pipeline Projects

Source: Energy Information Administration

India’s approach to the Myanmar-‐Bangladesh-‐India pipeline project India’s energy security policies have often been criticized for their incoherence and lack of planning; however the Integrated Energy Policy (IEP) released by the Indian government in 2006 highlights two underlying principles in India’s energy policies: diversification of energy imports, and climate change mitigation. While energy independence remains a long-‐term aim, import and diversification of supply sources is emphasized in the IEP. Considering the limited energy resources in the country, there seems to be a tacit recognition in India regarding the impracticability of energy self-‐sufficiency. Since the oil crisis of the mid-‐1970s, India has sought to avoid an over-‐reliance on oil from the volatile Middle East by increasingly pursuing active diversification in obtaining energy sources such as oil, gas and even hydroelectricity from diverse regions. India is also a growing power with rising energy demand – at an annual rate of 3.5% between 1990 and 2005. It is therefore under increasing international pressure to contain greenhouse gas emissions: India is a signatory to the Kyoto Protocol, and has also incorporated the National Action Plan on Climate Change (NAPCC) in 2008 with environmentally friendly development as its stated aim. In 2010, natural gas contributed to 9% to India’s primary power generation. Natural gas is viewed as an essential component of India’s energy mix as it corresponds largely to India’s energy security policies by the fact that it has a minimal effect on climate change unlike indigenous low-‐grade, carbon-‐producing coal; indigenous natural gas reserves are limited but these resources can be imported from diverse sources relatively economically. Therefore India’s natural gas demand has unsurprisingly grown at 6.5% yearly in recent times faster than demand for any other fuel; its growth increasingly driven by the power sector. However, the underdevelopment of indigenous reserves and growing demand by mid-‐2000s forced India to seriously consider importing gas. Indeed, its reserve: production ratio as of 2006 was calculated at 38, meaning that gas reserves in India are expected to effectively be depleted in 38 years, thereby increasing the importance of other sustainable sources of gas supply. The option of developing natural gas pipelines goes back as far as the late 1980s but only in the mid-‐2000s did India consider pipelines seriously as endogenous gas supply failed to meet demand as previously noted. The policy of gas imports led India to actively explore the option of several multilateral gas pipelines by 2005 including the Iran-‐Pakistan-‐India (IPI) pipeline, Turkmenistan-‐Afghanistan-‐Pakistan-‐India (TAPI) pipeline as well as the Myanmar-‐Bangladesh-‐India pipeline.

Bangladesh’s approach to the Myanmar-‐Bangladesh-‐India pipeline project Like India, Bangladesh does not have a tradition of concrete energy security policies. The government released a National Energy Policy (NEP) in 1995 and again in the 2004. Its three main policy aims may be discerned as exploitation of indigenous energy sources, diversification in energy type and tapping into the lowest cost fuels available The 2004 NEP draft emphasizes what it calls “optimal development of all indigenous energy sources.” A significant issue for Bangladesh is its untapped and underdeveloped coal, oil and natural gas reserves. On the power side it seeks to augment the limited number of power plants in operation due primarily to a lack of finance and technical expertise. Bangladesh has therefore, since 1990s, collaborated with international oil corporations for oil and gas explorations and extraction. As late as 2010, exploitation of its indigenous resources still remains a primary goal for the Bangladesh government. In addition the importance of cheap power generation for Bangladesh cannot be understated; most of the indigenous resources have been left untouched due to the relatively high cost of extraction. Collaboration with international oil corporations and Indian private enterprise in oil and gas exploration, coal extraction, and construction of power plants is driven primarily by economic considerations.


As of 2005, Bangladesh’s commercial energy sources were comprised of approximately 64% natural gas, 26% oil and 10% coal as a result natural gas is the overwhelmingly largest fuel source for commercial power generation in Bangladesh. The 2004 National Energy Plan (NEP) draft and the 1994 NEP outline exploitation of several indigenous energy sources, especially natural gas, but also include coal, oil and hydroelectric power, yet nowhere do they emphasize natural gas imports – let alone through gas pipelines. The reason is because Bangladesh has traditionally had considerable domestic energy sources; one analyst described the country as ‘floating on gas’. However, from 2005 onwards Bangladesh has consistently suffered from a shortage of gas, mainly because its available reserves have not been tapped to its full potential, and fewer additional reserves have been discovered due to a severe lack of funds and investment. Only by the late-‐2000s has this precarious situation of depleting gas reserves gained recognition in Bangladeshi policy circles. Wood Mackenzie reported in 2006 that Bangladesh’s available domestic gas reserves could be depleted as early as 2020. More researchers and state officials began to openly advocate gas imports through pipelines. In 2010, the Bangladesh government had finally given its approval of a potential Myanmar-‐Bangladesh-‐India pipeline.

Indo-‐Bangladesh energy policies and the pipeline project One of the primary reasons for the failure of the 2005 pipeline negotiations between India and Bangladesh was the lack of convergence in the energy policies of the two countries – India’s energy policies then pointed naturally towards the pipeline while Bangladesh’s policies did not feature it. This was because while India was able to recognize the importance of gas imports to meet domestic demand, Bangladesh did not realize an impending crisis in its regional energy security in the form of depletion of gas reserves. Both Bangladesh and India traditionally emphasized a socialist-‐inspired policy of energy autarky. By early 2000s however, it was clear that indigenous sources – including gas sources, could not keep up with the high demand of a rapidly growing Indian economy. In addition, the pressure of using climate change-‐mitigating energy sources precluded excess usage of India’s coal reserves. This led to India seriously considering the possibility of importing gas through pipelines, whether originating from Iran, Turkmenistan or Myanmar; India would enter into negotiations on all three projects in 2005. Throughout the early-‐2000s Bangladesh’s energy policies emphasized new investment into its domestic energy complex while considerations of substantial gas imports remained a fringe issue. For this reason even though Bangladesh was promised an annual transit fee as well as the option to import some of the gas from the pipeline during the 2005 negotiations, the proposition did not meet Bangladesh’s energy policy requirements. The Bangladesh government was thus not prepared to be part of the project in the absence of additional incentives. It placed additional conditions during these bilateral negotiations – the facilitation of importing hydroelectricity from Bhutan being one of them (which incidentally was in line with the then policy of diversifying energy sources beyond gas) and in addition to the reduction of tariff barriers and its trade deficit as other preconditions. India refused for project for two reasons. First, it was strategically unviable for the Indian government to accept Bangladesh’s additional conditions fearing that this would set a precedent in all future bilateral negotiations. Second, India at the time was also exploring other options, including the possibility of a Myanmar-‐India pipeline bypassing Bangladesh and other pipeline projects such as the Iran-‐Pakistan-‐India (IPI) project. Alternative options for India fell through by 2006 however – the IPI project became mired in complications and a Myanmar-‐India pipeline bypassing Bangladesh was considered too expensive. Meanwhile in Bangladesh during the 2000s exploration into indigenous gas sources presented bleak results prompting the Bangladesh government to consider pipelines seriously for the first time in late 2000s. Even after this recognition of the need to rethink energy policy, the Bangladesh government had not automatically pursued energy collaboration with India; instead, in 2008, Bangladesh first considered the feasibility of importing gas through a Myanmar-‐Bangladesh pipeline alone – excluding India from the picture. The high cost the project would entail however dissuaded the Bangladeshis, and they once again had to consider alternatives

–the Myanmar-‐Bangladesh-‐India pipeline being one of them. By 2009, elections in Bangladesh had heralded a more India-‐friendly government. The new government, lead by the secular and pro-‐India Awami League party had long-‐standing ties with the Congress-‐led government, and this lead to a gradual improvement in Indo-‐Bangladesh bilateral relations. Such an improvement served to facilitate bilateral energy security collaboration, and thus enabled Bangladesh to seriously consider participating in the Myanmar-‐Bangladesh-‐India pipeline project; by 2010 the Bangladesh government finally approved the project. As of mid-‐2012 however, the pipeline project has still not been implemented, despite renewed energy policy convergence between India and Bangladesh. The primary reason for the inability in implementing the pipeline project is the competition from China. As early as 2007, Janardhan Reddy of the Ministry of Petroleum and Natural Gas, India stated that “(Myanmar’s) growing closeness with China” had already hampered the Myanmar-‐Bangladesh-‐India pipeline project from taking-‐off. Myanmar had concomitantly been pursuing bilateral negotiations with China regarding a potential gas pipeline since 2004 – at around the same time as with India and Bangladesh. China’s energy security policies had long been geared towards large-‐scale imports of energy sources including natural gas, and by 2009, China and Myanmar had reached an agreement on a joint pipeline project. By mid-‐2010, Myanmar in collaboration with China had commenced construction of the Myanmar-‐China gas pipeline. Both Myanmar-‐China and Myanmar-‐India-‐Bangladesh pipeline projects potentially relied on gas reserves from the Shwe Natural Gas Fields in Myanmar. Following the successful implementation of the Myanmar-‐China gas pipeline deal, the Myanmar government has shown considerable reluctance in going ahead with the Myanmar-‐Bangladesh-‐India pipeline not least due to limited gas reserves within the Shwe Gas Fields. Dr. Badrul Imam, writing in 2009, states that Bangladesh’s interest in the Myanmar-‐Bangladesh-‐India pipeline had come too late, so that “Myanmar decided not to waste further time on these partners and signed an agreement with China.” Therefore, the inability of India and Bangladesh to initially find convergence in their energy security policies had contributed to China’s successful pipeline deal with Myanmar. Myanmar’s concerns about the finiteness of its gas reserves have meant that, even after Bangladesh’s agreement to the project in 2010, the Myanmar-‐Bangladesh-‐India pipeline could not be effectively implemented. However, recent convergence in the energy security policies and needs of India and Bangladesh has pushed Bangladesh to seek other accommodations with India including participation in the Turkmenistan-‐Afghanistan-‐Pakistan-‐India (TAPI) pipeline project. The proposal to include Bangladesh within the TAPI project has been under discussion by energy experts in the South Asian Association for Regional Collaboration (SAARC) since mid-‐2011. At the same time negotiations on the Myanmar-‐Bangladesh-‐India pipeline have also continued – this time with India and Bangladesh working with rather than against each other. Perhaps it may require new discoveries of natural gas reserves in Myanmar to once again revive the Myanmar-‐Bangladesh-‐India pipeline project. Initially, the proposed Myanmar-‐Bangladesh-‐India pipeline did not reflect the energy security policies of Bangladesh while it substantially benefited India. This lack of convergence, combined with less-‐than-‐stellar Indo-‐Bangladesh relations, led to a breakdown of bilateral negotiations in 2005. In intervening years, new research which has pointed towards an impending crisis in the availability of indigenous gas reserves in Bangladesh has prompted an energy policy rethink and lead to the 2010 agreement with India for project implementation. Clearly Myanmar-‐Chinese relations which have resulted in a Myanmar-‐China pipeline project have reduced the amount of gas reserves available for export to Bangladesh and India. Energy security policy convergence, among and between South Asian nations is important for regional development, but obviously in and of itself insufficient to move the Myanmar-‐India project off the page and into the field.


Conclusion Myanmar has observer status in SAARC since 2010. Myanmar shares a long land boundary with two SAARC members – India and Bangladesh – as well as a long maritime boundary with them. Geographically, it is part of the extended subcontinent and connects South Asia to Southeast and East Asia. Its geo-‐strategic location has made Myanmar part of six regional and sub-‐regional groupings, including Association of Southeast Asian Nations (ASEAN), Bay of Bengal Initiative for Multi-‐Sectoral Technical and Economic Cooperation (BIMSTEC), Forum for Regional Economic Cooperation among Bangladesh, China, India and Myanmar (BCIM). Some SAARC countries and Myanmar are members of the Ganga-‐Mekong Cooperation and all these groupings have provided platforms for member countries to interact with each other. Historically, interactions were never absent between SAARC member countries and Myanmar. Commercial and cultural links between Myanmar and SAARC members particularly India, Bangladesh and Sri Lanka had existed for centuries. Buddhism had gone to Myanmar from India and cultural and economic linkages had existed between eastern communities of India and Bangladesh with people of North-‐western parts of Myanmar. During the kingdom of Ava, Myanmar invaded the kingdoms of Manipur and Ahoms in Assam. In the colonial period, Myanmar was part of British India for over hundred years. Myanmar’s interactions with SAARC members, however, declined in the Cold War period owing to several factors both internal and international events. In the late 21st century Myanmar renewed its ties with the region and found favorable response from individual SAARC members, leading to the growing ties with individual countries of the region with Myanmar. In the changed geopolitical environment in Asia, particularly after the end of the Cold War and the rise of China-‐Myanmar’s relations have altered Myanmar’s geo-‐strategic importance. This politico-‐security environment necessitated regional countries to reorient its relations with Myanmar’s military regime. The regime also soon took advantage of its renewed importance and rich natural resources particularly oil and gas by expanding its engagements with the region. One major consideration of ASEAN to include Myanmar in its grouping was prompted by the concern of China’s increasing influence over Myanmar. This factor is present and will play a role in SAARC as well. Myanmar appears to see two main advantages in joining regional groupings. One is its desire to diversify its foreign policy to lessen its dependence on China and secondly, the advantages through economic benefits, diplomatic supports and strategic leverages vis-‐à-‐vis its perceived hostile countries particularly the West. This is indicated in the Myanmar-‐ASEAN relations. Greater Mekong Cooperation and BIMSTEC have so far served as economic advantages. This factor seems to be the prime reason behind Myanmar’s desire to join SAARC with the hope that SAARC would also provide support and opportunities it has been getting from other groupings. China is already an observer in SAARC and therefore the argument that Myanmar’s membership may increase China’s influence in the regional grouping may not hold much water. Myanmar, today, does not have any major contentious issue with any of the SAARC members except with Bangladesh. The Rohingyas’ issue has been a major irritation between the two countries since the birth of Bangladesh in 1971 and remains unresolved. Maritime boundary issues have occasionally emerged to affect the friendly relations with the two countries with claims and counter-‐claims over maritime waters of the Bay of Bengal. However, in the recent past the two countries have been cultivating cordial relations with the leaderships of the two countries showing increasing interest in cooperation in agricultural and hydropower sectors. India’s relations with Myanmar have been rapidly growing over the past decade. A confirmation to this was India’s quick response to back Myanmar’s membership in the regional grouping. Pakistan has maintained a low profile relation with Myanmar yet an important one in so far as the two have military cooperation with reports of Pakistan supplying arms to Myanmar. Myanmar has not only been absent from most of the regional governments’ outlook but also from the public imagination of South Asia for long. However, recent developments have shown that there is a need for Myanmar and SAARC to work more closely. For instance, Cyclone Nargis that devastated Myanmar in May 2008 or Tsunami that destroyed much coastal life in the littoral countries in 2004 indicates that Myanmar and SAARC are intrinsically tied together even in times of disaster. A realization of the need to broaden the scope of exploration in the academic field particularly in issues related to illegal drug smuggling, HIV/AIDS, refugees, internal displacement, environmental issues, border development and management studies, security and maritime studies have already begun. This was a result of the recognition that transnational issues have to be examined with a holistic approach, if solutions were to be found. Prospects of energy trade between Myanmar and SAARC members also remain to be tapped. A World Bank’s study on cross-‐country trade of electricity and natural gas in South Asia suggests that Myanmar could export gas to India and possibly to Nepal and Bhutan. All these factors suggest that Myanmar and SAARC would both benefit by working together and the inclusion of Myanmar in SAARC may prove to be a win-‐win situation for SAARC and Myanmar.

References Bakht, Zaid (1994): 'BIDS Study on Illegal International trade in Bangladesh, 1990: An Update', Bangladesh Institute of Development Studies, Dhaka (mimeographed). Bhattacharya, S K (1999): 'Non-‐Tariff Barriers to SAARC Trade: Can India's Unilateral Removal of QRs Promote Intra Regional Trade?', Telegraph, Kolkata. Chaudhari, S K (1995): 'Cross Border Trade between India and Bangladesh', NCAER, Working Paper 58, New Delhi. Exim Bank (1999): 'Transactions Costs of Indian Exports: An Analysis'. Jha, H B (1995): Duty Free Border Trade and Special Economic Zone between India and Nepal, Centre for Economic and Technical Studies and Friedrich Ebert Stiftung. Krueger, A (1993): 'Free Trade Agreements as a Protectionist Device: Rules of Origin', NBER Cambridge, Massachusetts, Working Paper, No 4342. Lama, M (1999): 'Foreign Direct Investment in Nepal', Macmillan, New Delhi. Mehta, R and S K Bhattacharya (1997): SAPTA I, SAPTA II and SAFTA: Impact on India's Imports, South Asian Survey, Sage Publications, New Delhi. Mukherjee, I N (1998): 'Non Tariff Barriers in the SAARC Region', Background Paper for Federation of Indian Chambers of Commerce and Industry, Delhi. Muni, S D (1992): India and Nepal: A Changing Relationship, Konark Publishers, Delhi. Naseem, S M (1996): 'Why Fear Trading with India', Mainstream, February 17. Rao, V L, S Baruah and R U Das (1997): India's Border Trade with Select Neighbouring Countries, RIS, New Delhi. Rahman, A and A Razzaque (1998): 'Informal Border Trade between Bangladesh and India: An Empirical Study in Selected Areas', mimeo, Bangladesh Institute of Development Studies. Sarvananthan M, (1994): 'Contraband Trade and Unofficial Capital Transfers between Sri Lanka and India', Economic and Political Weekly, India, July 23. Taneja, N (1998): 'Impact of Product Reservation', Report Prepared for the World Bank, New Delhi. UNCTAD (1995): 'Transit Transport Systems in Asia',UNCTAD/LDC/98, February 10. World Bank (1997): 'South Asia's Integration into the World Economy', Washington Asian Rcorder (1997a): Vol 43, No 7, February 12-‐18, pp 26239-‐40. -‐ (1997b): Vol 43, No 3, January 15-‐21, p 26188. -‐ (1997c): Vol 43, No 9. February 26-‐March 4, pp 26383-‐86. Bank Arandinam (1998): 'SAFTA: A Welcome Step', Economic Times, August. Biswas Soutik. and Ahmed Farzand (1993): 'Migrants Tinder-‐Box', India Today, New Delhi, May 15, pp 40-‐44. Bose, Sumantra (1994): States, Nations, Sovereignty: Sri Lanka, India and the Tamil Eelam Movement, Sage, New Delhi. Cheema, Parvaiz Iqbal (1991): 'Security in South Asia: An Approach', South Asia Journal, Vol 4, No 3, pp 281-‐92, Notes. Ganguly,S umit( 1996): 'UncertainI ndia',C urrent History, Vol 95, No 600, April, pp 145-‐50. -‐ (1997): 'An Opportunity for Peace in Kashmir', Current History, Vol 96, No 614, December, pp 414-‐18. Ghosh, ParthaS (1998): 'IllegalI mmigrationfr om Bangladesh -‐ I', The Hindu, August 11.


Gupta Sisir: Kashmir: A Study in India-‐Pakistan Relations, Bombay. -‐ (1981): 'Islam as a Factor in Pakistani Foreign Realations' in M S Rajan and Shivaji Ganguly (eds), India and International System, Vikas, New Delhi. Harrison, Sclig S (1997): 'The United States and South Asia: Trapped by the Past?', Current History, Vol 96, No 614, December, pp 401-‐06. Harshe. Rajen (1997): Twentieth Century Imperialism, Sage, New Delhi Kushwaha, G S and P K Sen ( 1995-‐96): 'Emerging Pattern of India's Trade in SAARC', Indian Journal of Nepalese Studies, Vols 5 and 6, special issue, pp 16-‐22. Sen Gupta, Bhabani (1998): India: Problems of Governance, Konark, New Delhi. Tanham, George (1996): 'Indian Strategic Thought: An InterpretativeE ssay' in Kanti Bajpai, et al (eds), Securing India: Strategic Thought and Practice in an Emerging Power, Manohar, New Delhi. Thakur, Ramesh (1994): The Politics and Economics of lndia 's Foreign Policy, Oxford, New Delhi.

Documents

saarc