Indian Ocean Rim: Economic and Trade Issues

-Rajesh Mehta

 

Introduction

The recent years have witnessed the growth of "new regionalism," interfacing the global trading arrangements. Unlike the regional trading arrangement of the Sixties, newly formed blocs/agreements have given importance to preferential/free trading arrangements among themselves. The European Union (EU) apart from being a common market of 15 countries has a free trading arrangement with other countries of West Europe and an accessional agreement with East European countries. The North American Free Trade Agreement (NAFTA) is more than a preferential trading arrangement, and necessary steps are being taken which may lead to the extension of NAFTA to the Western Hemisphere Free Trade Arrangement (WHAFTA). The Association for South-East Asian Nations (ASEAN) which was formally launched in 1967, has recently signed an agreement on a scheme, with the ultimate objective of reducing the tariffs on intra-regional trade to less than 5 per cent, by the year 2003. Another notable development in the area of regional integration is the formation of Asia-Pacific Economic Cooperation (APEC) which may become a preferential trading arrangement in the near future.

Initiative for the formation of a regional bloc in the Indian Ocean was first mooted by the Foreign Minister of South Africa, Pik Botha, in 1993, and the thought was well received by a number of countries, including India, Mauritius and Australia. Later, other countries, namely Oman, Singapore and Kenya joined the forum in supporting the notion of forming regional economic cooperation in the Afro-Asia-Australia region. These seven countries including South Africa formed the "core" group which took the initiative in formalising an economic cooperation in the Indian Ocean basin.

In this paper, an attempt has been made to understand: (i) the present state of the Indian Ocean in the context of "new regionalism;" (ii) the economic and trade issues; (iii) the linkages of the region to global trade and level of intra-regional trade; and (iv) potential for enhancing intra-regional trade under the trade facilitation process and other forms of trading arrangements.

IOR and New Regionalism

The Nineties have witnessed significant changes in the world economic environment. A number of steps have been taken towards formation of mega blocs in Europe, Western Hemisphere and the Pacific basin. The countries in the Afro-Asian region, particularly those with low trade intensity areas, find it difficult to restore their national share in the world trade, and until and unless they operate under the cover of an effective forum, they will continue to lag behind their aggressive counterparts in other regional forums. Most of the countries in the Indian Ocean Rim (IOR) have, therefore, liberalised their economies to arrest persistent decline in terms of trade, widening of trade gap, exploding of inflationary situation, alarming level of debt servicing ratio, shrinking of export earning, etc. Although some of these countries initiated the reform process in the Eighties and others in the early Nineties, the formation of the World Trade Organisation (WTO) throws challenges and opportunities to member countries in the new global trading system.1 Acceptance by the WTO of regional trading blocs as effective institutions to facilitate global trade has made the situation vulnerable for those countries which do not belong to any effective pressure group (i.e., regional trade blocs). These factors endorse the need for the establishment of a comprehensive and effective regional forum in the IOR.

The process of formation and development of new trading blocs/arrangements in recent years, which is sometimes called "new regionalism" in the literature, has different characteristics from those of the Sixties. The new regionalism (a) does not originate from top to bottom, but is an evolutionary process; (b) is no longer restricted to specific objectives but is more comprehensive; (c) is not restricted to just enlarging markets with the principle of comparative advantages; (d) facilitates the process of unilateral liberalisation and gives emphasis on "open regionalism"; (e) has led to integration of sub-regional blocs with the umbrella of a mega-bloc; and (f) has made the countries with conflict (and even bitter memories of war) forge alliances, with economic issues as the main agenda. In addition, the regional groups are being formed which have a number of disparities. The Indian Ocean is a region of member countries: (a) with vastly different levels of development (per capita income ranging from around US$20,000 of Singapore to US $100 of Mozambique; (b) from different continents; (c) with different sizes of population; (d) with different levels of domestic economies; (e) with different structures of production; (f) with varying degrees of openness, etc. (Table 1). In a way, it can be called a region with countries that are developed, newly developed, oil-based, agriculture-based, etc. Apart from the above mentioned disparities, the language, culture and political structure, is not similar in most of the countries.

A number of benefits are certainly going to emerge by the formation of an economic forum in the Indian Ocean. The regional formation is, indeed, intended to promote and strengthen collective self-reliance through joint action among member countries. It is very likely that the new regional arrangement will enforce strict discipline to liberalise the economies of member countries at a faster pace than they might in the absence of such an agreement. It may also lead of convergence in economic thinking about the macro-economic policies, output-oriented strategy, strong tripartite support from policy-makers, business and academics. The structure of the forum has to be loose like the principles of APEC which can accommodate heterogeneity and pluralism among the countries. The regional forum will also lead to: (i) accelerating the goals of multilateral trade liberalisation; (ii) exchange of information and communication among the countries of the region; (iii) promotion of sub-regional/mini blocs/growth triangles; (iv) stressing their collective view in the complexity of the global village; and (v) accelerate in achieving the domestic development process.

The Initiatives

The concept of a regional forum was discussed in detail during the visit of the Foreign Minister of South Africa to India. The conceptualisation of an economic forum was jointly mooted by India and South Africa in early 1993. Since then, several attempts were made towards evolving a viable economic area among the countries in the vast stretch of the Indian Ocean. The support at the formative stage of various governments to the idea of the formation of the forum had provided impetus to various organisations and institutions in the countries of the region in holding seminars, consultative meetings and initiating studies to gauge the potentials of the proposed economic area. In this process, two "tracks" came into existence: the "first" being initiated by Mauritius, while the main initiator for the "second track" was Australia. In these meetings of both these two tracks, various contentious issues were discussed, and the consensus approach was adopted to resolve some of the outstanding issues. Among others, the membership issue figured prominently in these meetings. While some of the participating countries pleaded for giving a relatively wider coverage to the regional forum, others had favoured a smaller group to start with. It was argued that a bigger group (of countries) would create a large market which might facilitate voluminous flow of goods and services, and attract inflow of investment from within and outside the region. On the contrary, the opposite view stressed that a large economic group is not only operationally unmanageable but also capable of making the organisation a non-starter even before its inception. Therefore, the group should be small and economically viable to start with, and others may join the forum later when the group starts yielding positive results. The "first track" initiatives have resulted in formal launching of a new bloc: the Indian Ocean Rim Association for Regional Cooperation (IOR-ARC) in March 1997, while the "second track" has concluded its last summit-level meetings in Durban.

The details about the recent initiatives for the formation of the regional bloc in the Indian Ocean have been covered in Mehta (1996), Burrows (1997) and others. Irrespective of different tracks, or different approaches/methods, it is clear from these meetings that the economic issues will be the focus of the regional group. Some of the issues which have emerged from these initiatives are: (a) the main objectives of the regional bloc should be the sustained growth and balanced development of the region and of member countries, by formulating and implementing programmes for economic cooperation; (b) the region should seek to build and expand understanding and mutually beneficial cooperation through a consensus-based, evolutionary and non-intrusive approach; (c) the focus of a regional bloc is economic cooperation, and the region should formulate and implement projects relating to trade facilities, promotion and liberalisation; promotion of foreign investment; scientific and technological exchanges; tourism; movement of natural persons and service providers on a non-discriminatory basis; and development of infrastructure and human resources; (d) economic stabilisation and economic growth of individual countries must precede economic cooperation in the Indian Ocean region. The other issues which figured prominently in the initiatives relate to the form of the regional arrangement; business facilitation issues, specifically the regulatory environment, visa, taxes, currency convertibility, trade promotion, regional business directory, the specific role of economic association, cooperation in specific high-priority sectors, including technology transfer, telecommunications, transport, human resource development, financial services, research and development, environmental issues affecting the region, maritime cooperation on existing structures and cooperation to combat maritime natural disasters. These meetings also highlighted other issues which are of direct relevance to the region, such as the issue of literacy, legal rights, health and economic opportunity for women in the region. In these deliberations, the need for a comprehensive security approach and its applicability in the Indian Ocean region was also discussed.

Until now, the member countries have yet to evolve a consensus position on the question of the format of the economic bloc in the region. For an economic bloc which is mostly represented by developing countries with asymmetric levels of economic development, "economic cooperation" is preferred to "economic integration" in order to optimise the regional welfare. Among various approaches discussed in different forums, preferential trading arrangements, sectoral preferences, non-tariff concessions, commodity approach, etc., have attracted the attention of policy-makers, businessmen and academicians.

Economic and Trade Issues

In this section, an attempt is made to understand the trend and growth of important variables relating to macro-economics and trade, for the countries of the IOR, alongwith the growth pattern of intra-regional flow between the countries of the IOR-ARC and other countries in the IOR. It also outlines the issues related to these aspects.

(1) The countries of the IOR have around 2 billion population (one-third of the world) and produce goods and services worth US$1 trillion (around 8 per cent the world production), creating a large market in the world economy. The ocean is rich with precious minerals and metals, marine and other natural resources, and has very vast potential of tidal energy. It carries more than half of global container ships. The countries of the Rim have significant human resources and technological capabilities. They are becoming internationally competitive in the global market and hence important in international trade.

(2) External assistance has played an important role in the economic development process of a large number of the countries of the region. In fact, a major portion of the financial flows to the countries of the region had been coming in the form of overseas development assistance (ODA) grants as well as concessional loans. During the last ten years or so, a large number of the countries of the region have undertaken economic reforms and adopted the liberalisation process, and the scope of concessional assistance is showing a declining trend. The recent trend shows that the scope of the economic cooperation in terms of other financial flows like foreign direct investment (FDI) has widened in the countries of the region. Although the amount of financial flows in terms of FDI or financial institutions is not significant at present in the region, it has been showing an increasing trend. To be precise, the countries of the IOR account for around 13 per cent of total FDI inflow during 1992. Now, a large number of countries have opened their economies and are giving incentives for financial inflow, joint ventures and technology transfers. The formation of the bloc will not only increase intra-regional investment flow but will provide a large market for investment in the region by non-member countries. To quote an example, the unilateral liberalisation process of India has increased the amount of approved FDI by almost 60 times during the first five years of the Nineties and a significant growth has been noticed from the Asian member countries of the region.

(3) The countries of the IOR have increased their share in the global market at a very fast rate. The share of the region in global trade has increased from 9.6 per cent in 1988 to more than 11 per cent in 1994. In terms of volume, the trade has doubled between 1988 to 1994. The region has shown adverse balance of trade with the rest of the world; however, the trade gap of the Indian Ocean Rim was negligible--less than 2 per cent of its trade. The Middle East is the only sub-region in the IOR which maintained favourable balance of trade during this period. Among various sub-regions in the group of "other IOR," trade deficit continues to be alarming for Asian and African countries. If appropriate measures are not taken to arrest the grouping trade deficit, the countries, particularly, in the African segment, may plunge into serious macro-economic crises. The trade pattern of the IOR region shows that these sub-regions have more trade with developed countries than developing ones. Moreover, each segment of the IOR has favourable balance of trade with developing countries and adverse trade balance with developed countries. The countries in the region are relatively more dependent on developed countries' imports than exports. The details are given in Tables 2A and 2B.

(4) The growth performance of the region and its sub-regions indicates that both exports and imports have increased at a faster rate with developing countries as compared to similar indices for the world as a whole. The IOR-ARC region has not only shared the major segment of the total trade of the IOR but grew at a rapid rate during the period 1988-94. This trend is equally applicable to both exports and imports of the sub-regions. The growth performance of the "Middle East" in the whole of the IOR region is sluggish as compared to other sub-regions of the IOR. One of the noticeable features of the regional trade is that all the sub-regions of the IOR region have maintained a high growth rate of exports and imports with countries of Asia.

(5) The Indian Ocean Rim has substantial potential to become a zone of economic cooperation, and the advantages of making it a trade bloc would be manifold. A significant part of trade flow from the countries of the Indian Ocean is destinated towards the region itself. It has been noticed that a large number of countries have shown a higher growth in the region itself than to the rest of the world. In fact, the intra-regional trade accounts for one-fourth of its total trade and the extent of intra-regional trade is increasing over the last few years. The extent of intra-regional trade flow in the IOR is presented in Table 3. In 1994, the amount of intra-regional trade in the whole of the IOR was $233 billion. Of the IOR, the IOR-ARC alone contributed $153 billion in 1994.

(6) The 14 countries of the IOR-ARC account for 65 per cent of the regional trade. The intra-regional trade of the IOR-ARC maintained a growth rate of more than 26 per cent during this period, which shows that the region is emerging as the most dynamic segment of the IOR region in the 1990s. In this context, it should be noted that the trade of the IOR grew at the rate of more than 19 per cent during the period 1988-94.

(7) The contribution of Singapore, Malaysia, Australia, Indonesia, India and South Africa is substantial in the total trade of the region. These six countries account for 97 per cent of the IOR-ARC countries' trade flows to the countries of the Indian Ocean. The share of India and South Africa in the total exports of the member countries to the region is 6.5 per cent and 4 per cent, respectively. A substantial part of India's as well South Africa's trade is destinated toward the countries of the IOR. Approximately, 41 per cent of India's exports (with Indian Ocean Rim countries) and 49 per cent of South Africa's exports (with Indian Ocean Rim countries) are destinated toward IOR countries. Although, South Africa has trade surplus with countries of the Indian Ocean, the amount of India's export with the region is less than the amount of imports.

Alternative Trading Arrangements: A Case Study of Estimation of Trade Diversion from Non-Member Countries of the IOR to Member Countries of the IOR, for the Indian Market

One of the pressing issues before the IOR has been the issue of identification of the most appropriate form of economic arrangement that the IOR will make in due course of time. In various forums, alternative forms of regional cooperation have been discussed. Among the various forms of economic cooperation discussed, some arrangement like trade and investment facilitation process, preferential tariff arrangement (PTA), a simple form of regional arrangement with mutual investment and technology to reduce cost of tradable products within the region, etc. assume much importance for the formation of the IOR. In the case of a PTA type of arrangement, the nations have to rationalise their domestic tariff structure for imports from other member countries in the region. In a regional bloc where many traded commodities enjoy absolute cost comparative advantage, a simple form of regional economic cooperation with rationalisation of trade policies and systematic elimination of trade impediments will create new avenues for trade. In a comprehensive regional cooperation in trade, investment and technology, the level of cooperation is much wider in its scope, and the central objective of the arrangement will be to reduce the cost of tradable products through scale economies and expansion of the market. The commodity approach to regional cooperation refers to an arrangement in which certain important tradable commodities in the region are chosen for tariff cuts by the participating countries. In the sectoral approach, regional cooperation is made in certain priority sectors which are considered to be vital for the region as a whole.

In a recent paper, Mehta and Mohanty (1996) have analysed the possibilities of trade diversion to the Indian market, under three forms of regional arrangement in the countries of the IOR, taking import data of India for the year 1994-95. The study has taken DGCIS data series at 8-digit level, and has covered 6,600 commodities in the analysis. The study reveals that India is depending largely on the countries of the Indian Ocean Region for her import requirements to the extent of 41 per cent of total imports in 1994-95. From the list of 6,600 items imported, India's exclusive import basket constituted about 265 commodities from the IOR region and 2,931 items from the rest of the world (non-IOR). The value of exclusive imports from the IOR constituted 14.4 per cent of India's total imports or 35 per cent of India's total imports from the IOR. Although many exclusive items were imported from the rest of the world, they formed a negligible portion of value of India's total imports and also imports from the rest of the world. While a significant amount of exclusive imports from the IOR covers a broad range of items like mineral products, chemicals, electrical machinery and base metals, similar imports from the rest of the world include only vegetable products (Table 4).

India imported 3,404 items from countries of both IOR and non-IOR regions, and the value of these commodities constituted around 85 per cent of India's total imports, during 1994-95. From the total imports of these commodities, about 27 per cent of these items were imported from the countries of the IOR worth Rs. 766 billion and goods worth of Rs. 524 billion were imported from the countries of non-IOR. These items could have been imported from any of the regions or from both because they are the suppliers of these items. In the case of effective arrangement, the results show that India can offer an additional market of more than Rs. 524 billion (at 1994-95 base) to the countries of the IOR, depending upon the form of regional cooperation and competitiveness of the region in different lines of products. The study finds that under different forms of regional arrangement, 86 per cent of the potential import diversion (Rs. 524 billion) can be effectively diverted to the IOR. In total, the study conceptualised three alternative scenarios. In the first scenario, the trade diversion may be taking place because of absolute cost comparative advantage of the region over the non-IOR countries. Trade facilitation policies, such as improvement in trade infrastructure, policy of "equal level playing field," credit facilities at par with non-IOR countries, liberal and harmonised trade policies, etc., may enhance import to the tune of 46 per cent of the total potential import diversion. In value terms, Rs. 244 billion of imports may be diverted to the IOR from the rest of the world.

In the second scenario, countries of the IOR may agree to have a PTA kind of regional cooperation. In such an arrangement, each member country has to reduce its tariff rates to zero level from imports of other member countries of the region. In a PTA type of arrangement in the IOR, the trade diversion is likely to be around 20 per cent of the potential import diversion.

The last scenario assumes a situation in which there is intensive trade cooperation between countries in the areas of trade, investment and technology to reduce cost of products which originated from the region. The arrangement is likely to enlarge the market through scale economies in the region. In this scenario, the study assumes that the cost of products will decline by 50 per cent (including the reduction in tariff rates due to PTA), and some previously uncompetitive products will become competitive. Then another Rs. 103 billion worth of imports can be diverted to the IOR from non-IOR, for the Indian market. Such amount of trade diversion will be equal to another 20 per cent of the potential import diversion of India.

However, the study has cautioned that these numbers are indicative figures, and the scenarios are drawn on the basis of a number of assumptions, which have little relevance in the present day complexities of the world. But the fact remains that the region has tremendous amount of capability for enhancing intra-regional trade. In order of preference, the member countries will gain more from a simpler form of regional arrangement than PTA or any other intensive form of regional arrangement. If such a simpler form of arrangement is effectively implemented, there is every possibility that India's import will increase by two-thirds of its present level of trade with the IOR.

Since a formal bloc, the IOR-ARC, has been launched in the region; Mehta (1997) has extended the results of the above exercise to a case study when the members of the regional bloc are restricted to 14 member countries of the IOR-ARC. Although, the main objective of this study was to identify the potential of trade cooperation among the members countries of the IOR-ARC for the mining sector, the results show other interesting insights. The mining and mineral sector was chosen because it has the maximum potential of trade cooperation for the Indian market in the Indian Ocean region. The trade statistics for 1993-94 show that India imported around 55 per cent of mineral and mineral products from all the countries of the Indian Ocean, while the corresponding share for the countries of the IOR-ARC is only 7 per cent of India's total imports (Table 5). It concludes that the distribution of India's imports by broad commodity groups from the countries of the IOR-ARC do not follow the same pattern as compared to the distribution of India's imports from all the countries of the Indian Ocean. The study reveals that the major suppliers of the mineral and mineral products to the Indian market are the member countries of the IOR but not the members of the proposed IOR-ARC. Further, the amount of trade diversion which will take place from the non-member countries of the IOR-ARC to the member countries of the IOR-ARC, for the Indian market, is significantly different from the corresponding scenarios of alternative trading forms considered for the IOR (44 countries). In case the Indian Ocean takes the form of a regional economic association, the amount of potential trade increment for the countries of the Indian Ocean to the Indian market of mineral and mineral products is Rs. 2.1 billion; while the corresponding estimated value is Rs. 7 billion in case the regional forum of the Indian Ocean is restricted to the IOR-ARC. Similarly, the application of PTA will increase the Indian market of mineral and mineral products for the countries of the IOR-ARC by Rs. 4.5 billion in case the arrangement is restricted to 14 countries. The corresponding figure, for the amount of trade diversion from non-member countries of the IOR to member countries of the IOR is Rs. 0.4 billion in case the forum consists of 44 countries. In this context, the results of this study also reconfirm the hypothesis that the member countries will gain from a simpler form of regional arrangement, irrespective of the number of countries included in the regional association.

Table 5. India's Import of Mineral & Mineral Products by Region/Countries, 1994-95

(Rs. million)

Country/Region Value

TOTAL 232,038

I. Non-IOR 27,256

II. IOR 204,782

A. Non-IOR-ARC 205,815

B. IOR-ARC 26,223

B.1 Australia 19,889

B.2 South Africa 279

Source: Same as in Table 4.

Concluding Observations

In this paper, an attempt has been made to understand; (i) the importance of the Indian Ocean Region in the world economy and international trade; (ii) the trade linkage of the region with the rest of the world; (iii) the level and the growth of intra-regional trade among the countries of the Indian Ocean; and (iv) the potential of intra-regional trade under alternative forms of trading arrangements. The following paragraphs give some observations which emerge from this note.

(a) The countries of the Indian Ocean Rim have around 2 billion population (one-third of the world) and produce goods and services worth US$1 trillion (around 8 per cent of world production), creating a large market in the world economy. The ocean is rich with precious mineral and metals, marine and other natural resources, and has very vast potential of tidal energy. It carries more than half of global container ships. The countries of the Rim have significant human resources and technological capabilities, and are becoming internationally competitive in the global market.

(b) The countries of the Indian Ocean Rim have increased their share in the global market, at a very fast rate. The volume of trade has doubled within six years, i.e. from 1988 to 1994. The share of the region in global trade has increased from 9.6 per cent in 1988 to more than 11 per cent in 1994. Further, both exports and imports have increased at a faster rate with developing countries as compared to the world as a whole. The region has shown adverse balance of the trade with the rest of the world; however, the trade gap of the Indian Ocean Rim was negligible--less than 2 per cent of its trade.

(c) The Indian Ocean Rim has substantial potential to become a zone of economic cooperation, and advantages of making it a trade bloc would be manifold. A significant part of trade flow from the countries of the Indian Ocean is destinated towards the region itself. It has been noticed that a large number of countries have shown a higher growth in the region itself than to the rest of the world. In fact, the intra-regional trade accounts for one-fourth of its total trade and the extent of intra-regional trade has been increasing over the last few years.

(d) The fourteen countries of the IOR-ARC account for 65 per cent of regional trade. The contribution of Singapore, Malaysia, Australia, Indonesia, India and South Africa is substantial in the total trade of the region. These six countries account for 97 per cent of the IOR-ARC countries' trade flows to the countries of the Indian Ocean. The share of India and South Africa in the total export to the countries of the region is 6.5 per cent and 4 per cent, respectively. A substantial part of India's as well as South Africa's trade is destinated toward the countries of the IOR. Approximately, 41 per cent of India's exports (with Indian Ocean Rim countries) and 49 per cent of South Africa's exports (with Indian Ocean Rim countries) are destinated toward IOR countries. Although South Africa has trade surplus with countries of the Indian Ocean, the value of India's export with the region is less than the value of imports.

(e) The different fora of the IOR have been discussing the possible format of the regional cooperation. Although it is difficult to predict the extent of economic gains due to the formation of alternative trading arrangements in the Indian Ocean Region, an attempt has been made to estimate the amount of possible trade diversion under three possible scenarios of regional arrangements: (a) Regional Economic Association; (b) Preferential Tariff Arrangement; and (c) Free Trade Area. This has been conducted using the trade information of 44 Indian Ocean Rim countries to India for 6,600 commodities, using a simple method of cost comparative advantage. The results show that the intra-regional trade can be increased to an extent of 22 per cent, in case a regional economic association is formed by the countries of the IOR. The intra-regional trade can be further enhanced by 11 per cent if the countries follow preferential tariff arrangements. Further, increase in intra-regional trade is possible by an additional 11 per cent due to scale economies created by a large market.

 

NOTES

1. See, for example, WTO (1995).